News

SKPETRO announced the award of several contracts with a combined value of USD117.0m or c.RM503.0m.

Breakdown of contracts awarded as per below:

Engineering and Construction

- Malaysia: Provision of Hook Up & Commissioning (HUC) Works for KNPG-B Phase II, Kinabalu Non Associated Gas (NAG) Development Project from THHE Fabricators Sdn Bhd for 4 months commencing 1QCY16.

- Engineering, Procurement and Construction (EPC) of the Subsea Isolation Value (SSIV) Systems from Hess Exploration & Production Malaysia B.V. at Block PM302, North Malay Basin. The contract has a duration of 18 months and is expected to complete by 1QCY17.

Drilling

- SKD Esperanza: 18 months contract with an extension option of another 18 months from Sarawak Shell Berhad (SSB)/ Sabah Shell Petroleum Co. Ltd (SSPC), commencing in 3QCY16.

Comments

Although the respective contract values were not disclosed, we believe the bulk of the sum comes from the drilling contract which probably contributes up to 80% of the total sum.

Based on our back-of-envelope calculations, the implied DCR for SKD Esperanza is approximately USD165k, which is much lower than the rate of USD200k seen in better times.

Meanwhile, assuming the HUC and EPC contracts are worth c. RM100m, they are deemed within our expectations as we had expected SKPETRO to secure RM800m new contracts for E&C segment in FY17.

Margin-wise, both the HUC and EPC contracts should fetch slightly lower EBITDA margin than their typical rates of 25% and 18%, respectively, due to challenging operating environment.

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 and the renegotiated rates of new contracts may be under downward pressure (<10%) given the weakness in the rig market. The group also has to seek for contract renewals or new drilling contracts for T19 and T12 which contracts are expiring within 5 months from now.

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 operational from last year with an 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 this 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 the 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 in 2014.

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 in 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.

Forecast

Earnings and forecast are maintained as we have already factored in the new contracts secured.

Rating

Maintain OUTPERFORM

Valuation

We maintain our TP at RM2.38 pegged to an unchanged PER of 14x, which is in line with O&G big caps’ down-cycle valuation.

Risks to Our Call

Lower-than-expected margins for business segments.

Lower-than-expected contract replenishment.

Source: Kenanga Research - 15 Jan 2016