Review

• SapuraKencana Petroleum Bhd (SAKP) reported 9MFY17 core net profit of RM378.1mn (+4% YoY), which was above our full-year expectations (RM216mn), and consensus forecast (RM245mn). The variance was mainly due to stronger-than-expected performance at the Engineering & Construction (E&C).

• YTD bottomline was boosted by:- 1) improvement at E&C due to higher work volume and fleet utilization, and 2) full-fleet contribution at Brazil. Recall that the 6th and final PLSV was delivered in Aug-16. Earnings growth was partially offset by: 1) lower oil lifting volumes, 2) weaker contribution from Sapura Acergy, and 3) lower drilling rates and fleet utilization.

• We expect sequential weakness in 4QFY17 due to:- 1) seasonally weaker monsoon season implies lower E&C activity, 2) two rigs come off-charter in 4QFY17, and 3) traditionally, lumpy costs are recognized in 4Q every year. Recall that the group reported 4QFY16 core net loss of RM80mn (4QFY15: -77% QoQ),

Key Takeaways from Conference Call

• General:

1) Group orderbook (Figure 3) continued its sequential decline to RM17.2bn (2QFY17: RM17.7bn). Orders secured FY to-date total RM4.2bn, whilst current tenderbook amounts to USD7.5bn. 2) Management maintained its FY17 guidance of breakeven to RM200mn profit. SAKP expects a weak 4QFY17 largely due to seasonality.

• Drilling:

1) In 3QFY17, there were 10 rigs (out of 16) working. However, in 4QFY17, fleet utilization is expected to drop to 50% following the expiry of two contracts (SKD Jaya & Alliance). Management guided that 2017 utilization rate will likely remain unchanged at 50%.

• Energy:

1) 3QFY17 lifting volume was lower at 800k boe (2QFY17: 1.3mn boe) due to timing and natural decline for oil fields. SAKP will conduct additional in-fill drilling in 1H17 to mitigate the latter. Meanwhile, 3QFY17 oil lifting price was slightly lower at USD46/bbl (2QFY16: USD47/bbl, 2QFY17: USD48/bbl). Nevertheless, on a bright note, oil EBITDA breakeven lowered significantly to USD30-35/bbl (2QFY17: ~ below USD50/bbl). 2) SK310 B15 field is currently 54% completed - on track for installation targeted in May-17 and 1st gas in Oct-17. Meanwhile, SAKP will commence GSA negotiations for SK408 Phase 1 in end-17.

• E&C

1) Contribution from Berantai for both its RSC and FPSO, was fully recognized in 2QFY17. However, operations were officially handed over to Petronas in end Sept-16. 2) We estimate losses of circa RM1.6mn for Sapura Acergy, in 3QFY17, bringing 9MFY17 contribution to RM5.4mn (9MFY16: RM52mn).

Impact

• We lower costs assumptions for the E&C and Drilling segment, which were too bearish previously. As a result, our FY16/17/18 forecasts are raised by 35%/4%/12%.

Valuation

• Following the upgrade in our forecasts, our TP for SAKP is raised to RM1.71 (previous: RM1.69) based on unchanged 0.8x CY17 P/B. Maintain Hold. We are keeping a close eye on SAKP, which is a direct proxy to an oil price upcycle. OPEC’s Dec-16 accord may boost oil prices if US shale producers maintain production discipline.

• However, we hold back at this juncture, as we await signs of a fundamental rally in oil price. This would catalyse a recovery in O&G capex spending, and thus enable SAKP to replenish its orderbook.

Source: TA Research - 9 Dec 2016