The cessation of Berantai RSC came as a surprise to us but we are slightly positive as SKEPTRO is able to recoup all its capex and opex by June 2017, which could be used for further re-investment or paying off borrowings. We cut our FY17E/FY18E core earnings by 23%/36% post termination of Berantai RSC earnings. All in, we retain our MARKET PERFORM call with unchanged TP of RM1.48 pegged to 0.7x FY18 PBV.

Mutual agreement to cease Berantai RSC. Yesterday, SKPETRO announced that its wholly-owned subsidiaries, Sapura Energy Ventures Sdn Bhd and Kencana Energy Sdn Bhd and their partner, Petrofac Energy Developments Sdn Bhd, have reached a mutual agreement with Petronas for the cessation of the Berantai Risk Service Contract (RSC) effective 30 September 2016. Recall that the contract was signed in January 2011 with a contract period of 9 years and SKPETRO owned 50% through its wholly-owned subsidiaries, Sapura Energy Ventures Sdn Bhd and Kencana Energy Sdn Bhd with 25% interest each. The remaining stake is held by U.K. oil-services provider, Petrofac Ltd through its Malaysian subsidiary, Petrofac Energy Developments Sdn Bhd.

More cash in hand. We were surprised but slightly positive on this news as it allows SKPETRO to conserve cash, which can be used for future reinvestment or lower its debt position (net gearing of 1.27x as at 1Q17). While the reimbursement amount is undisclosed, we estimate the total amount, including capex could be c.RM1.5b-2.0b as its partner, Petrofac Ltd disclosed the receivable due under the Berantai RSC at USD357.0m (c.RM1.4b) as at 31 December 2015.

Reimburse all outstanding capex and opex. Petronas will reimburse all the remaining capex and opex by June 2017 and the ownership of Berantai FPSO will be transferred to Petronas. Berantai field first commenced its gas production in October 2012. Currently, it is maintaining oil production of approximately 3,000-4000 bbl/day and gas production of 100m standard cubic feet per day (MMscfd). According to Petronas, the RSC cessation will allow the national oil major to optimise the development and production activities in Malaysia, in line with its efforts to reduce costs and increase the efficiency of its operations.

Cut FY17E/FY18E core earnings forecasts by 23%/36% post removal of Berantai RSC earnings from our forecast. However, we expect a oneoff gain from the reimbursement payment from Petronas which we estimate will be recognised in FY17 and FY18.

Maintain MARKET PERFORM call. Despite earnings adjustment, our TP is maintained at RM1.48, pegged to 0.7x FY18 PBV, higher than the current sector valuation of 0.6x PBV. We have not adjusted the utilisation of the reimbursement pending more details from the management.

Downside risks to our call include: (i) weaker-than-expected margins, (ii) lower-than-expected contract replenishment, and (iii) contract termination.

Source: Kenanga Research - 12 Jul 2016