Actual vs. Expectations

SKPETRO reported 4Q15 core net profit (CNP) of RM192.9m, bringing FY15 CNP to RM1.2b. This made up 88.2% and 89.5% of our and consensus full-year FY15 estimates (RM1.38b andRM1.36b respectively), due to lower-than-expected earnings contribution from the upstream segment as a result of lower crude oil prices in 4Q15.

Our core FY15 net profit forecast excludes: (i) RM54.9m impairment on O & G properties, and (ii) RM214.8m revaluation gain from acquisition of subsidiaries.

Dividends

• No DPS declared as expected.

Key Results Highlights

In 4Q15, earnings plunged 42.9% QoQ mainly due to weaker contribution from OCSS and upstream business (SKEI) divisionsdue to lower work orders amid weaker crude oil price.

CNP declined slightly by 3.3% YoY largely dragged down by lower earnings from its upstream division due to lower crude oil prices and higher depreciation cost. The reason underpinning higher depreciation cost is higher upstream asset base due to additional recognition of 2P reserves on the group’s books.

In FY15, core NP surged 33.6% YoY primarily due to inclusion of upstream business (SKEI) acquired in early 2014. Both drilling and HUC divisions registered YoY increases while being partially offset by lower OCSS revenue due to lesser work done.

Outlook

SKPETRO’s latest orderbook stands at RM25.7b; whilst tender book now is lower at RM15.0b.

For now, the drilling division is still one contract short for one rig (Teknik Berkat) which has yet to win any contract. Contract renegotiations on existing contract are not mentioned for the time being, but management indicated that any renegotiation will only be agreed upon if it is profit neutral for the group.

Two Petrobras PLSVs (Diamante and Topazio) have been delivered and will see material contributions in FY16. The assets are currently running on full utilisation at the moment and Petrobas see no signs of slowdown on its projects related to these assets as pipelines are still required to maintain their oil production.

For Newfield projects, gas discoveries in SK301 have been transformed into 2P assets. It is close to securing a gas sales agreement with Petronas to monetise its gas assets, but significant earnings contribution is expected to be only seen post2018.

Additional 3 tcf gas reserve was discovered in SK408 last year, doubling its gas reserve asset base. The group is believed to be already in talks with several parties to monetise its asset.

Change to Forecasts

We cut our FY16E CNP by 25.8% from RM1.4b previously toRM1.0b to account for: (i) lower crude oil price assumption ofUSD57/bbl from USD70/bbl previously for its upstream division,(ii) lower fabrication revenue to RM1.5b from RM2.0b previouslydue to lower order replenishment.

FY17 forecast (RM1.3b) is introduced based on several assumptions, such as: (i) USD65/bbl crude oil price assumption,(ii) fabrication revenue of RM1.0b, and (iii) half-year contribution from its 2 PSLV vessel to be contracted to Petrobras on top ofits existing 2 vessels.

Rating

• Downgraded to MARKET PERFORM from OUTPERFORM.

Valuation

• Post earnings cut, TP revised to RM2.24 from RM3.03based onunchanged CY15 PER of 13.0x.
• The ascribed PER is in line with our big cap valuation in anindustry down-cycle.

Risks to Our Call

1. Higher-than-expected margins for business segments
2. Higher-than-expected contract replenishment.

Source: Kenanga Research - 25 Mar 2015