We are maintaining our OUTPERFORM call on SKPETRO following yesterday’s post-1Q14 results conference call with  a higher target price of RM4.72 (from RM4.57) based on an unchanged PER of 22x on higher CY14 earnings. Our target PER is based on 12% discount to peak valuations of 25x that large-cap oil and gas companies traded at during the boom cycle seen in 2007-2008.   Key points revealed in the conference call were: 1) confirmation that Seadrill’s tender-rig earnings will only be consolidated from 2QFY14 onwards; 2) all the divisions expect improvements in latter quarter with the exception of the fabrication and HUC division; 3) the Berantai field remuneration fee will only kick-start in by 4QFY14; and 4) the order book (as at 28 June) is still strong at RM27.5b. We have reduced our FY14 estimate (-7.4%) as we assume lower Berantai field contribution and higher borrowing costs; but have raised our FY15 estimate  (+4.0%) mainly due to expected contributions from the new assets (2 PLSVs and one tender-assisted drilling rig) and from the Berantai FPSO.  

Seadrill tender rig contributions to be only consolidated from 2QFY14 onwards.  As expected, management guided that Seadrill’s tender-rig earnings will only be consolidated from 2QFY14 onwards given that the acquisition was completed only by end-Apr. The guided merger expense amount is c.RM50m for FY14 (some costs had already been booked in FY13) and a portion of the cost will hit the share premium account. We expect to treat these as non-core costs when it appears in latter quarters.

Improvements expected for Offshore Construction & Subsea Services (OCSS), Drilling, Geotech & Maintenance Services (DGMS) and (Energy & Joint Ventures) EJV divisions but Fab and HUC division could continue to be sluggish. Earnings improvements are guided by management for the OCSS, DGMS and EJV divisions as: 1) installation and transport (T&I) activity increases; and 2) the two assets (that suffered earlier-than-expected docking and maintenance exercises in 1QFY14) are chartered out. However, the fabrication and HUC division is guided to be sluggish as contract awards have been slow thus far. While this may surprise the market, we believe that our FY14E revenue for the Fab&HUC division is already quite conservative and as such, we are leaving our estimate for the division unchanged. We suspect that any contracts here will only emerge by end- CY13. 

Berantai contribution is only expected by end-FY14. In contrast to our previous expectation of a full-year contribution from the Berantai field from FY14 onwards, management has guided now that its profits will only be booked by 4QFY14. 

FY15 to see new assets: 1 new drilling rig and 2 new PLSVs.  We understand that SKPETRO will receive its two Chinese-constructed PLSVs in 4QFY14 and 1QFY15 respectively while the KM-2 will be received by the end of CY14. This will be earnings-accretive for FY15 net profit. Given that these assets will be coming in, we have raised our FY15 OCSS revenue by c.RM552.6m as we have assumed the new PLSVs can be chartered out straight away after delivery at a daily charter rate (DCR) of USD280k per day, and our FY15 DGMS division revenue by RM135.6m as we have assumed that the KM-2 will be chartered out for a whole year at a DCR of USD120k. 

F1Y14 forecasts reduced but FY15 raised.  We have fine-tuned our FY14 earnings to reflect only one quarter of the Berantai field contribution and higher finance costs due to the additional borrowings for  Seadrill.  As mentioned for FY15, we have raised our OCSS and DGMS division revenue to factor in contributions of the new assets, which will mitigate the higher borrowing costs assumed for FY15. On the overall, we have reduced our FY14E net profit by 7.4% but have increased our FY15E earnings by 4.0%  to RM962.7m and RM1.3b respectively (from RM1.04b and RM1.27b previously).

Source: Kenanga