Actual vs. Expectations

2Q16 results are deemed to be as within expectations with 1H16 core net profit of RM697.5m making up 68.4%/66.4% of house’s/street’s FY16 estimate. This is because we are expecting a weaker 2H as more tender rigs were decommissioned recently and realised oil prices for its Energy division was lower compared to the 1H. Our estimated core net profit excludes RM540m provision for impairment on O&G assets and RM195m deferred tax liabilities released due to the impairment.

Dividends

No dividend declared as expected.

Key Results Highlights

2Q16 core net profit surged 27.5% YoY to RM449.1m from RM352.1m in 2Q15 due to both stronger E&C and Drilling business divisions on the back of higher T&I and Fabrication work done and contribution from additional rigs in the quarter under review. Sequentially, core net profit surged 80.8% due to significant stronger drilling and E&C divisions. Net margin improved to 16% from 11% in the preceding quarter due to better drilling and E&C margins.

1H16 core net profit registered slight improvement of 1.6% YoY to RM697.5m from RM686.4m last year due to stronger Drilling division contribution albeit being offset by weaker Energy division in light of significantly lower oil prices.

E&C: In 2Q16, the division registered increase in PBT both on YoY and QoQ basis (16.9% and 76.4%, respectively) due to significantly higher T&I works done (i.e. pipe-lay job in Indonesia, ongoing JDA for CPOC) while fabrication job completed remains relatively stable. For 1H16, however, PBT and revenue were flat YoY due to higher volume of international projects executed, which has offset lower local projects due to a slowdown in activity.

Drilling: The division registered YoY increase in both top line and PBT of 24.4% and 38.1%, respectively, in 2Q16 due to the commencement of new contracts of new rigs and higher drilling PBT margin of 28.4% compared to 25.6% last year due to cost-cutting measures and higher rig utilisation. Improvement in PBT margin has been evident with QoQ increase in PBT reported despite flat revenue growth. Cumulatively, drilling division has improved YoY on the back of additional rig contributions. (Refer to page 2 for more results highlights & outlook.)

Change to Forecasts

We maintain our earnings forecasts for now

Rating

Maintain MARKET PERFORM.

Valuation

We cut our TP for the stock to RM2.04 from RM2.55 previously, pegged to lower 12x PER from 15x as we factor in lower crude oil price scenario (USD50/bbl). Big caps are supposed to trade at 10.1x at USD50/bbl for crude oil according to our regression analysis. We have ascribed 2x higher PER to factor in its robust orderbook and competitive management’s ability of adapting swiftly to the plunge in oil prices.

Risks to Our Call

(i) Unexpected further sharp drop in oil price.

(ii) Unexpected delays of projects on hand.

Energy: In 2Q16, normalised energy loss stood at RM64m from profit of RM142.5m achieved in 2Q15, predominantly due to lower lifting price achieved (USD66/bbl in the quarter compared to >USD100/bbl last year) concurrently with the drop in crude oil prices and lower production volume due to lower infield drilling. Sequentially, profit contribution from this division is relatively similar due to similar lifting price achieved QoQ. Cumulatively, 1H16 Energy division’s normalised PBT was at RM123m, 76.2% lower YoY, which is in line with significantly lower lifting price of USD62/bbl.

Outlook

SKPETRO’s latest orderbook stands at RM23b, mainly comprising international T&I and fabrication jobs including Brazil.

For now, the drilling division Teknik Berkat, its tender barge has yet to win any contract. Besides, three other semi-submersible rigs (West Berani, West Menang and West Jaya) will have to seek new contracts in the market later this year and the renegotiated rates of new contracts may be under downwards pressure given the weakness in the rig market. More headwinds for the division are expected for FY17 as 4 more tender rigs are expected to come off charter next year coupled with challenging rig market outlook.

Two Petrobras PLSVs (Diamante and Topazio) is now working in Brazil’s deepwater oil basin. The assets are currently running at full utilisation at the moment and Petrobas see no sign of slowdown in its projects with payments from Petrobras still on time. Its 3rd PLSV (Onix), has been delivered and commenced operations recently, pointing to contribution in 2H16.

On its Pan Malaysia HUC contract, work orders have been secured from Petronas and other PSCs, keeping the group busy albeit at a lower rate until October, allaying near-term worries over significant slowdown in its HUC contract. Meanwhile, its E&C division remains strong with multiple international projects on hand.

Its Vietnamese upstream asset acquisition is still pending approval from the Vietnamese government. It still has until early 2016 to satisfy the conditions stipulated in the SPA signed last year. Economics of the field remain viable as its EBITDA breakeven is at c.USD15-17/bbl.

For newfield projects, gas discoveries in SK301 have been transformed into 2P assets. It is close to securing a gas sales agreement with Petronas (targeted to be signed end of this year) to monetise its gas assets, but significant earnings contribution is expected to be only seen post 2018. We believe it is prudent to delay the finalisation of terms for GSA as the economics of the field is significantly different under the current scenario compared to last year.

Source: Kenanga Research - 17 Sep 2015