The latest Upstream Weekly reported that Petrobras is renegotiating contract terms with PLSV suppliers but SKPETRO re-affirmed that there is no further rateadjustment on all the PLSV contracts. No changes to our earnings forecast. Reiterate MARKET PERFORM call with lower TP of RM1.65 (from RM1.93 previously), based on lower Fwd. PER of 12.0x, which is at -1.5SD to its average PER.

New wave of rate negotiations. The latest Upstream Weekly reported that Brazilian oil giant, Petrobras, is carrying out another round of contract renegotiation with its main suppliers of flexible pipelaying support vessels (PLSVs), in an effort to streamline its operations. It was also stated that Petrobras has no intention of terminating early any of its charters for Sapura Navegacao (the 50:50 JV company between SKPETRO and Seadrill)’s new vessels, but negotiations regarding contract terms are always ongoing with all suppliers.

No further rate adjustment for now. This is not entirely surprising to us as Petrobras is in the midst of restructuring. However, management guided that no further rate adjustment is agreed at this juncture. Furthermore, we gather that its fifth vessel, Sapura Esmeralda was successfully delivered last month and the last vessel, Sapura Rubi is on track for delivery in August this year. Note that this is not the first round of rate renegotiation. Earlier of the year, SKPETRO has given c.3% discount on some of the working PLSVs to Petrobras but earnings impact is expected to be insignificant.

Earnings certainty is challenged. Having said that, we believe the news is negative to SKPETRO as it implies an increase in earnings risk given its huge exposure to Petrobras, constituting 35% of its orderbook as of 4Q16. Petrobras currently has 16 PLSVs operating in Brazilian waters and has on order another seven newbuild vessels with delivery scheduled until late 2017. However, according to the reported news, industry sources estimate that Petrobras may now only require between 10 and 12 PLSVs to carry out pipelaying work off Brazil, which may lead to vessel terminations.

No changes to earnings forecast as SKPETRO is still able to deliver the vessels on time and no signs of slowing down for operating vessels. Note that earnings from these PLSVs contracts contributed 18%/23% of our FY17-18E net profit estimates.

Maintain MARKET PERFORM call with lower TP to RM1.65 from RM1.93 peg to lower CY17 PER of 12.0x (from 14.0x previously) to factor high earnings risk in view of prolonged challenging operating environment within the oil and gas industry. The valuation is inline with its -1.5SD to its average PER since 2012. Risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination. 

Source: Kenanga Research - 16

The latest Upstream Weekly reported that Petrobras is renegotiating contract terms with PLSV suppliers but SKPETRO re-affirmed that there is no further rateadjustment on all the PLSV contracts. No changes to our earnings forecast. Reiterate MARKET PERFORM call with lower TP of RM1.65 (from RM1.93 previously), based on lower Fwd. PER of 12.0x, which is at -1.5SD to its average PER.

New wave of rate negotiations. The latest Upstream Weekly reported that Brazilian oil giant, Petrobras, is carrying out another round of contract renegotiation with its main suppliers of flexible pipelaying support vessels (PLSVs), in an effort to streamline its operations. It was also stated that Petrobras has no intention of terminating early any of its charters for Sapura Navegacao (the 50:50 JV company between SKPETRO and Seadrill)’s new vessels, but negotiations regarding contract terms are always ongoing with all suppliers.

No further rate adjustment for now. This is not entirely surprising to us as Petrobras is in the midst of restructuring. However, management guided that no further rate adjustment is agreed at this juncture. Furthermore, we gather that its fifth vessel, Sapura Esmeralda was successfully delivered last month and the last vessel, Sapura Rubi is on track for delivery in August this year. Note that this is not the first round of rate renegotiation. Earlier of the year, SKPETRO has given c.3% discount on some of the working PLSVs to Petrobras but earnings impact is expected to be insignificant.

Earnings certainty is challenged. Having said that, we believe the news is negative to SKPETRO as it implies an increase in earnings risk given its huge exposure to Petrobras, constituting 35% of its orderbook as of 4Q16. Petrobras currently has 16 PLSVs operating in Brazilian waters and has on order another seven newbuild vessels with delivery scheduled until late 2017. However, according to the reported news, industry sources estimate that Petrobras may now only require between 10 and 12 PLSVs to carry out pipelaying work off Brazil, which may lead to vessel terminations.

No changes to earnings forecast as SKPETRO is still able to deliver the vessels on time and no signs of slowing down for operating vessels. Note that earnings from these PLSVs contracts contributed 18%/23% of our FY17-18E net profit estimates.

Maintain MARKET PERFORM call with lower TP to RM1.65 from RM1.93 peg to lower CY17 PER of 12.0x (from 14.0x previously) to factor high earnings risk in view of prolonged challenging operating environment within the oil and gas industry. The valuation is inline with its -1.5SD to its average PER since 2012. Risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination. 

Source: Kenanga Research - 16 May 2016