Period

3Q16/9M16

Actual vs. Expectations

3Q16 results is deemed within expectations with 9M16 core net profit of RM812.9m accounting for 79.8% and 79.5% of our and consensus forecasts, respectively, as we expect weaker 4Q16 results due to the monsoon season and lower average Brent crude prices. Our core net profit excludes: (i) RM232.7m forex gain, (ii) impairment of PPE and O&G properties worth RM857.2m, and (iii) deferred tax liabilities post impairment amounting to RM216.5m

Dividends

No dividends declared as expected.

Key Results Highlights

Sequentially, core net profit weakened by 20.7% to RM249.6m from RM314.9m in the preceding quarter due to both weaker Drilling and Energy divisions amidst the weak crude oil market. However, this was offset by stronger PBT QoQ from E&C division due to higher project billing and favourable FOREX movements.

9M16 core net profit declined by 20.6% YoY to RM812.9m due to weaker Energy division performance driven by plunge in crude oil prices. PBT dropped 79.6% YoY due to lower oil production and prices. On the other hand, other divisions improved YoY in general due to stronger USD and commencement of several new projects.

E&C: 3Q16 PBT surged 45.8% YoY to RM354.0m in line with 40.7% YoY increase in top line for the division. This is mainly due to higher contribution from newly executed international E&C jobs. As a result, its PBT margin also improved to 19.3% from 18.6% in 3Q16, also partially attributable to more favourable USD/MYR movement. QoQ, PBT also improved by 7.1% due to higher project billings.

Drilling: Excluding RM118.7m impairment on PPE, Drilling PBT improved 16.3% YoY in 3Q16 due to commencement of contracts for new rigs, which is not in full operation last year and favourable USD/MYR movement to the group. This also resulted in overall QoQ improvement in both its drilling division’s top line and PBT in the quarter.

Energy: Stripping out provision for impairment on PPE and O&G properties amounting to RM139.8m, the group’s Energy division registered a slight profit of RM6.9m, which is 94.3% lower than last year driven by lower average realised selling price/bbl in line with downward trend in crude oil prices. In addition, we believe lower bbls were lifted from its oil fields due to the absence of production-enhancing infill drilling done in the quarter compared to last year.

Outlook

SKPETRO’s latest order-book stands at RM21b, mainly comprising tenders for its E&C division.

For now, under 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 search for new contracts in the market this year and the renegotiated rates of new contracts may be under downward pressure (<10%) given the weakness in the rig market. Going into next year, the group also has to search for contract renewals or new drilling contracts for T19 and T12 which contracts are expiring within 6 months from now.

Outlook

Two Petrobras PLSVs (Diamante and Topazio) have been delivered and is currently contributing to the group. The assets are currently running at full utilisation and Petrobas see no signs of slowdown on its projects with payments from Petrobras still on time. Its 3rd PLSV, Onyx, is already in operations this year with utilisation rate at >98%. Sapura Jade has been delivered; expected to take 40-60 days to mobilise and start contributing to the group’s earnings next year.

On its Pan Malaysia HUC contract, work orders have been secured from Petronas and other PSCs, keeping the group busy, allaying near-term worries over significant slowdown in its HUC contract.

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.

For Newfield projects, gas discoveries in SK301 (B15) have been transformed into 2P assets. The field development plan has been approved by Petronas, in line with expectations for 1st gas 4QCY17. This is a positive to the group as it could provide recurring cash-flow streams to the group in the long run. However, profitability of the project hinges on the terms of the gas sales agreement with Petronas.

The group has again decided to impair its upstream assets with USD100/bbl scenario pushed back further to 2027, indicating that the low oil price environment could stay longer than anticipated.

Change to Forecasts

We maintain our earnings forecasts for now.

Rating

Upgraded to OUTPERFORM due to better risk-to-reward ratio post its recent share price slide from RM2.50 level to current levels this month, making its valuation more attractive than before. In addition, the approval of development plan for its SK301 gas project is also a long-term positive.

Valuation

We have decided to maintain our TP at RM2.38 pegged to unchanged PER of 14x, which is in line with Big Cap O&G’s down-cycle valuation. Its earnings are also resilient in the midst of low crude oil prices with its drilling and E&C business relatively intact compared with other players that have seen significant weakness in business.

Risks to Our Call

(i) Unexpected sharp drop in oil price.

(ii) Unexpected delays of projects on hand.

Source: Kenanga Research - 23 Dec 2015