2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
Stock analysis in this presentation may not neutral because I have incorporated my
risk appetite and principles in the analysis.
All figures in MYR and in '000s, except per share data
2
4. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.
5. CHANGES
• 22 Dec 2015 – First write up of SKPETRO in PowerPoint format
6. BUSINESS PROFILE
• One of the world's largest integrated oil and gas services and solutions providers
• Principal business include providing end-to-end solutions and services to the
upstream petroleum industry
• In Feb 2014, SKPETRO acquired the Malaysian operations of Newfield Exploration,
and became an upstream operator
• Full exploration, development and production capabilities as well as participating
interests in several production-sharing contracts and an alliance arrangement.
7.
8. BUSINESS PROFILE (CONT.)
Offshore Construction and Subsea Services
•installation of offshore platforms, marine pipelines and subsea services
Fabrication, Hook-Up and Commissioning
•Engineering, procurement, construction and commissioning services
Drilling and Energy Services
•Provisions of drilling rigs and services;
•Oilfield development and production, leasing of floating, production, storage and offloading; and
•Repairs and refurbishment of industrial gas turbines, supply, installation, commissioning and maintenance of point-of-sale systems for petrol stations and asset
management services for offshore installations.
11. TOP 5 SHAREHOLDERS
SAPURA HOLDINGS SDN.
BHD.
28%
EMPLOYEES PROVIDENT
FUND OF MALAYSIA
24%
KHASERA BARU SDN. BHD
17%
PERMODALAN NASIONAL
BERHAD
17%
SEADRILL LIMITED
14%
Position Date: 2 Dec 2015
12. OWNERSHIP ANALYSIS
• The group’s largest shareholder is Sapura Holdings Sdn. Bhd., with a 17% stake in
the group
• Following large shareholder is EPF, with a stake of 14%
• Institutional funds owned 42% of SKPETRO.
13. ECONOMIC MOATS
• Cost Advantage (Narrow)
• EBIT margin was volatile, ranged from 15.3% to 23% in the past four years
• Switching Costs (Wide)
• Contracts in O&G sector usually are for long term. Thus, it is unlikely upstream
companies simply switch contractors or suppliers
• Network Effect (Narrow)
• Increasing O&G projects will increase revenue of SKPETRO
• Poor oil prices will make upstream companies to cut down their E&P activities
• Intangible Assets (Wide)
• Technical knowledge – well-entrenched niche put SKPETRO in a strong position to
win contracts domestically and internationally
• Strong link with local E&P companies
• Efficient Scale (Wide)
• Oligopoly market as controlled by Petronas and Malaysia government
15. ECONOMIC MOATS (CONT.)
• ROIC of SKPETRO decreased from 20.4% (FY12) to 8.7% (FY15)
• Invested capital increased from 1,786,259 (FY12) to 14,636,634 (FY15) – 69% CAGR
• NOPAT increased from 364,289 (FY12) to 1,277,407 (FY15) – 37% CAGR
• Acceleration of invested capital was higher than NOPAT.
17. ECONOMIC MOATS (CONT.)
• CROIC of SKPETRO decreased from 7.2% (FY12) to 1.8% (FY15)
• Invested capital increased from 1,786,259 (FY12) to 14,636,634 (FY15) – 69% CAGR
• FCFF was volatile and capex has been increasing every year
• Efficiency of SKPETRO in generating cash was poor.
20. SCALE (CONT.)
• EBITDA increased from 668,063 (FY12) to 3,572,383 (FY15)
• Total Assets increased from 4,219,765 (FY10) to 34,562,784 (FY15)
• Larger scale can be an indicator for a company’s ability to withstand industry cycles
and competitive forces
• Strong ability to obtain financing to undertake major capital projects.
22. PROFITABILITY (CONT.)
• EBIT captures the impact of depreciation on the fixed asset base and the need to
invest in a company’s equipment
• EBIT margin of SKPETRO was improved (FY12: 15.3%; FY15: 23%)
• EBIT margin was 23% in FY15, which can rated as Baa.
24. PROFITABILITY (CONT.)
• To measure capital efficiency and return on investment, the ratio of EBIT to total
assets is used
• A higher efficiency ratio indicates an improved ability to maintain investment levels in an
oilfield services company’s fleet and equipment which often is an important
differentiating factor for customers
• EBIT to total assets was 6.6% in FY15 (ranged from 6.2% to 7%), which can rated as
Ba.
25. PROFITABILITY (CONT.)
1,435,801
3,705,171 3,788,338
3,014,672229,211
1,991,930 1,877,479
2,035,706
891,390
1,215,313
2,712,959
4,892,641
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2012-01-31 2013-01-31 2014-01-31 2015-01-31
Revenue by Operating Segment
Offshore Construction and Subsea Services Fabrication, Hook-up and Commissioning Drilling and Energy Services
26. LEVERAGE & COVERAGE
2.11 x
4.51 x
5.40 x
4.75 x
0.00 x
1.00 x
2.00 x
3.00 x
4.00 x
5.00 x
6.00 x
2012-01-31 2013-01-31 2014-01-31 2015-01-31
Debt / EBITDA
27. LEVERAGE & COVERAGE (CONT.)
12.77 x
5.79 x
5.16 x 5.36 x
0.00 x
2.00 x
4.00 x
6.00 x
8.00 x
10.00 x
12.00 x
14.00 x
2012-01-31 2013-01-31 2014-01-31 2015-01-31
EBITDA/Interest
28. LEVERAGE & COVERAGE (CONT.)
• SKPETRO’s financial leverage and coverage are at the high side
• Debt/EBITDA – 4.75x (FY15) (B)
• EBITDA/Interest – 5.36x (FY14) (Ba).
29. DEBT EXPOSURE AND FOREX
USD
82%
Others
18.16%
2015-01-31
USD
74%
Others
26.42%
2014-01-31
On debt exposure, total debt increased slightly to RM16.9b (FY15) from RM12.4b (FY14). The debt exposure to
USD denominated borrowings was increased to 82% (FY15) from 74% (FY14).
30. ORDER BOOK
• 23 Dec 2015 – SKPETRO’s current orderbook as at 31 Oct 2015 stood at
approximately RM21b.
2, 10%
13.7, 65%
2.7, 13%
2.6, 12%
Orderbook (RM billion)
Engineering &
Construction –
International
Engineering &
Construction – Local
Drilling services
31. GROWTH DRIVERS
• 4 Nov 2015 - SKPETRO has secured a Field Development Plan (FDP) approval from
Petroliam Nasional Bhd (Petronas) for the SK310 B15 gas field development project
in East Malaysia
• 3 Aug 2015 - SapuraKencana to engage in Brunei O&G projects via JV
• 14 Jul 2015 - SAKP secures US$273m ONGC Mumbai High South project
• 24 Jun 2015 - SKPETRO is said to be close to bagging a US$280 million (RM1 billion)
contract from India’s Oil and Natural Gas Corp Ltd (ONGC) for Phase 3 of the
redevelopment of the Mumbai High South oilfield
• 1 Jun 2015 - SapuraKencana to bag RM1bn ONGC job.
32. GROWTH DRIVERS (CONT.)
• 7 Dec 2015 – SKPETRO clinched two new projects and secured an extension for an
existing one. These contracts have a collective value of US$72 million (RM300
million)
• 7 Dec 2015 - In India, SKPETRO secured a subcontract for the Vasai East project
from main contractor L&T Hydrocarbon Engineering
• 7 Dec 2015 - SKPETRO also announced a five-month extension to an existing project
in Africa's Ivory Coast.
33. GROWTH DRIVERS (CONT.)
• 17 Dec 2015 – SKPETRO has identified 200-300 potential projects worth USD360bn
worldwide that are viable at oil price of USD55/bbl. Management expects these
projects to be rolled out over 2016-20. The most sizeable opportunities are in the
Middle East (USD82bn), followed by Western Europe (USD77bn) and North America
(USD49bn).
35. GROWTH DRIVERS (CONT.)
• 11 May 2015 – SKPETRO bags six contracts worth up to US$269m overseas in Gulf
of Mexico, Indonesia, Vietnam and India
• 25 Mar 2015 – Asset expansion in Vietnam. SKPETRO is expected to complete its
Vietnam’s business acquisition by FY16 onwards
• 6 Dec 2014 - SapuraKencana awarded awarded eight contracts collectively worth
RM1.58 billion (US$459 million)
• 20 Nov 2014 - SKPETRO is buying state oil firm Petroliam Nasional Bhd's entire
interest in 3 blocks offshore southern Vietnam for $400 million
• 20 Nov 2014 - SKPETRO, along with its consortium partners, was awarded two
production sharing contracts (PSCs) to develop two oil and gas (O&G) blocks –
Blocks SB331 and SB332 onshore Sabah.
36. ISSUES/RISKS/CHALLENGES
• Execution risk
• Escalation of vessel
• Fabrication costs
• Increased competition for growth markets
• Complexities of running a larger organization.
• Sharp and prolonged decline in global crude oil prices
• An unexpected slowdown in the global oil & gas activities
• Petronas’ capex cut
• Very highly leveraged
• Lower-than-expected new contract wins due to stiff competition, and operational
hiccups.
37. ISSUES/RISKS/CHALLENGES (CONT.)
• 16 Jun 2015 - SKPETRO may be seeing its fabrication yard utilisation rate drop up to
30% next year, according to its president and group chief executive officer Tan Sri
Shahril Shamsuddin
• Much of its borrowings are denominated in USD. From the most recent quarter
results, the amount of USD borrowings consist of around 78.8% where most of
borrowings are unsecured long term borrowings.
38. ISSUES/RISKS/CHALLENGES (CONT.)
• 19 Dec 2014 - Petrobras was curbing its refining and exploration spending in
response to the collapse in crude oil prices and difficulties in tapping debt markets
in a corruption probe
• 17 Dec 2015 – SKPETRO is largely shielded in the worst case scenario where Petrobras
defaults. This is mainly because SKPETRO did not provide a corporate guarantee for the
vessel loans (margin: 80%)
• As such, default risk would mainly impact the consortium of banks financing the PLSVs
• SKPETRO’s exposure is limited to its 50% equity investment in Sapura Navegacao, which
we estimate to be USD176mn (assuming JV has 20% equity in 6 PLSVs)
• Any cost overruns during construction of the PLSVs are also borne by the JV.
39. ISSUES/RISKS/CHALLENGES (CONT.)
• 17 Dec 2015 – Due to oil price volatility, auditors will now conduct quarterly reviews
(previous: annual) on oil price assumption and reserves for their O&G portfolio
• Given the oil price downtrend, we see enhanced risk of further write downs on
SKPETRO’s assets
• To recap, SAKP underwent two rounds of impairments (net) (2QFY15: RM345mn,
4QFY14: RM55mn) for its O&G assets
• It remains status quo that comprehensive impairment tests (including change in
assumptions for production cost, reserves, and discount rate) will be conducted at the
end of each financial year.
40. ISSUES/RISKS/CHALLENGES (CONT.)
• 17 Dec 2015 – O&G tenders have dropped significantly in this weak oil price
environment. Therefore, to replenish orderbook, SKPETRO is approaching oil
companies directly to propose lower-cost services and solutions
• This results in a win-win situation where SKPETRO clinches new orders, and clients derive
decent project returns
• However, despite bidding at lower rates, SKPETRO’s margins have remained resilient,
largely due to a leaner cost structure
• Nevertheless, we believe margin risks still abound as volume of orders slows down,
which would result in reduced economies of scale.
41. COST OPTIMIZATION
• Requested discounts from suppliers and service providers
• Lowered manpower costs (e.g. implemented Mutual Separation Scheme, pay cuts
for senior management, downsized Australian operations)
• Internalised assets (e.g. reduced external charters)
• Streamlined operations (e.g. each business unit handles own Human Resource
matters)
• Reduced operating costs (e.g. culled excess supply boats, cut frequency of offshore
trips)
Source: TA Securities, 17 Dec 2015
42. SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 21 Dec
2012
3.08 3,080 57 -1,370 1,767 -17%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 1.71 as of 22 Dec 2015
3. Unit purchased is 1,000.
43. GOING FORWARD
• 23 Dec 2015 – SKPETRO’s current orderbook as at 31 Oct 2015 stood at
approximately RM21b.
• Nevertheless, volume of orders slows down due to poor oil prices
• SKPETRO has taken some measures to optimize its operations and costs
• To replenish orderbook, SKPETRO is approaching oil companies directly to propose
lower-cost services and solutions
• Besides, SKPETRO conduct quarterly reviews (previous: annual) on oil price
assumption and reserves for their O&G portfolio. This shows a good corporate
governance
• I believe SKPETRO will be able to go through turbulence times.
Notas do Editor
Financial flexibility is crucial for midstream MLPs due to their heavy reliance on the capital markets. Financial leverage and distribution profile can provide an indication as to how well a company might cope through periods of industry weakness, its capacity to incur additional debt and its balance sheet flexibility. Because midstream companies’ generally exhibit high distributions that cause book equity to erode over time, coverage measures are more useful than capitalization measures in assessing their ability to service their debt obligations. We look at three ratios:
Interest coverage (EBITDA / Interest)
Leverage (Debt / EBITDA)
The amount of leverage with which management operates and its dividend payout profile are choices and a direct result of its financial strategy. Midstream issuers actively manage to these ratios. In addition, these ratios are often used by providers of capital in the form of specific covenant tests.
