News

SKPETRO announced the award of multiple contracts with a combined value of USD269.0m (RM969.0m based USD/MYR exchange rate of 3.60).

Breakdown of contracts awarded as per below: - Mexico: Installation of structures of fixed platforms, pipelaying and lifting of equipment in Bay of Campeche, Gulf of Mexico by Pemex valued between USD41.2m- RM98.1m. - Indonesia: Offshore and Onshore pipeline installation in respect of the construction of Kalija 1 Natural Gas Transmission Pipeline of Kepodang by PT PGAS Solution totalling USD97.5m. - Vietnam & India: Pipeline & Topside installation projects at Thai Binh and Te Giac Trang field, Vietnam by PTSC Offshore Service Joint Stock Company and Transportation & Installation (T&I) work in north-west of Mumbai, India by BG E & P India Limited worth USD73.5m.

Comments

The contract awards are not a surprise as there were already talks in the market of the group securing such overseas contracts weeks ago.

Nevertheless, we are positive as this indicates that the O&G industry is showing early signs of improvement in activities post the oil slump over the past few months while the Mexican job marked its first step into the Mexcian O&G industry which possesses huge opportunities in the long-term.

While the tenure of the contracts is not stated, we reckon the contract could span 1-2 years which will contribute positively for the group in FY16 and FY17 with EBIT margins in the range of 10%-15% based on historical performance.

Earnings recognition might not even be throughout the contract tenure as we believe the work orders could be on-call basis, which is the norm in T&I work. We have factored in the win into our forecasts with RM500.0m additional revenue assumed for both FY16 and FY17 in our financial model.

Outlook

Its deep sea pipe-laying division will be its key earnings driver with two Petrobras PLSVs out of total six (Diamante and Topazio) already delivered and will see material JV contributions in FY16.

Its upstream business, SKEI has a breakeven at USD60/bbl inclusive of non-cash expenses and we believe the business will still be generating positive cashflow at the current environment.

Its Tender rig business should handle the slump in oil prices better than its Jack-up rig peers due to the tighter demand situation in the tender rig segment which serves more fields that are already in production. We believe rate cuts for the division could be minimal in light of low oil prices.

Contract replenishment for its fabrication division could be weaker this year given the expected weaker fabrication industry in the midst of CAPEX cuts and project delays.

Forecast

Earnings and forecast are maintained.

Rating

Maintain MARKET PERFORM

Valuation

While TP is maintained at RM2.24/share, we are looking to review the overall O&G sector once the current reporting season is over with an upside bias.

The TP is based on PER of 13x, which is in line with Big Cap O&G down-cycle valuation.

Risks to Our Call

Lower-than-expected margins for business segments

Lower-than-expected contract replenishment.

Source: Kenanga Research - 12 May 2015