News

Last Friday, SKPETRO announced that the conditional sale and purchase agreements (SPA) on the proposed acquisitions of interests in oil & gas assets in Vietnam have been terminated by all parties by mutual agreement in accordance with the terms of the SPA.

Recall that SKPETRO proposed to acquire interests in Petronas Carigali Overseas’ and PC Vietnam Limited’s assets in Vietnam for USD400m in Nov 2014.

These assets are primarily located in shallow-water offshore Vietnam. Blocks 01/97, 02/97 and 46-CN are already producing while Block 10 and 11.1 are still at exploration stage.

Comments

We were not entirely surprised by the termination of the acquisitions as the deal (at an implied acquisition cost of USD23/mmboe) would be deemed no longer attractive to SKPETRO at current low Crude oil prices coupled with unfavourable forex changes.

Furthermore, it enables SKPETRO to conserve cash to weather the storm and provide breather to its balance sheet, which showed a net gearing of 1.27x as of 3Q16.

Having said that, these assets have a net 2P reserves base of 17.4mmboe and walking away from the deal will reduce the company’s reserves by approximately 10%.

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 and T- 19, its tender barge has yet to win any contract. Besides, two other semi-submersible rigs (West Berani, West Menang and) 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 West Jaya 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 in its projects with payments from Petrobras still on time. Its 3rd PLSV, Onyx, is already 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. (Refer Overleaf)

Forecast

We maintain our earnings forecasts as we did not factor in the proposed transaction previously.

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’ downcycle valuation.

Risks to Our Call

Lower-than-expected margins for business segments.

Lower-than-expected contract replenishment.

Outlook (Cont’d)

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.

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.

Source: Kenanga Research - 26 Jan 2016