News

Last Friday, SKPETRO announced that its 4th pipe-laying support vessel (PLSV), Sapura Jade has started work with Petróleo Brasileiro S.A (Petrobras) on 14 Feb.

The offshore operations for Petrobras in Brazil are being executed by its Brazilian 50:50 JV company- Sapura Navegacao Maritima (SNM).

Recall that these PLSVs are contracted for a period of eight years with an extension option of another eight years.

Comments

We are positive on the announcement as it demonstrates the contracts with Petorbras remained firm despite recent downgrade of Petrobra’s foreign currency bond rating to “BB” from “BB+” by S&P due to low crude oil prices as well as a corruption scandal.

Its previous three PLSVs, Sapura Diamante, Sapura Topazio, and Sapura Onix are still busy working at site, with an estimated utilisation rate of above 95%.

The remaining two PLSVs, Sapura Esmeralda and Sapura Ruby are expected to be delivered in April and August of this year, respectively.

Outlook

Overall, SKPETRO’s earnings are still backed by strong orderbook, mainly from its E&C division and long-term contracts with Peotrobras but likely to face weakness from its drilling and energy segment amid low crude oil environment.

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) will have to seek 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 in 2QCY16.

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 for the group as it could provide recurring cashflow 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

No changes to our current forecast as we have already imputed earnings contribution from Sapura Jade in our model.

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.

Source: Kenanga Research - 22 Feb 2016