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SKPETRO – Fundamental Analysis FY15

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Fundamental Analysis of SapuraKencana Petroleum Berhad by L. C. Chong

https://lcchong.wordpress.com/
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SKPETRO – Fundamental Analysis FY15

  1. 1. SKPETRO FUNDAMENTAL ANALYSIS Financial Year 2015 (31 Jan 2015) 23 December 2015 L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)
  2. 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
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of SKPETRO.
  4. 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. 5. CHANGES • 22 Dec 2015 – First write up of SKPETRO in PowerPoint format
  6. 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. 7. 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.
  8. 8. BUSINESS PROFILE (CONT.) Source: TA Securities, 17 Dec 2015
  9. 9. OWNERSHIP SUMMARY INSTITUTIONS 43% CORPORATIONS (PRIVATE) 27% PUBLIC AND OTHER 21% CORPORATIONS (PUBLIC) 8% INDIVIDUALS/INSIDERS 1% Position Date: 2 Dec 2015
  10. 10. 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
  11. 11. 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.
  12. 12. 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
  13. 13. ECONOMIC MOATS (CONT.) 20.4% 20.0% 11.3% 8.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 2012-01-31 2013-01-31 2014-01-31 2015-01-31 ROIC 0 500,000 1,000,000 1,500,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 NOPAT 0 10,000,000 20,000,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 Avg. Invested Capital
  14. 14. 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.
  15. 15. ECONOMIC MOATS (CONT.) 7.2% 12.4% 8.1% 1.8% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2012-01-31 2013-01-31 2014-01-31 2015-01-31 CROIC 0 500,000 1,000,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 FCFF 0 1,000,000 2,000,000 3,000,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 Avg. Capex
  16. 16. 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.
  17. 17. SCALE 668,063 1,317,987 2,289,662 3,572,383 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 EBITDA
  18. 18. SCALE (CONT.) 4,219,765 15,196,691 26,614,491 34,562,784 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 2012-01-31 2013-01-31 2014-01-31 2015-01-31 Total Assets
  19. 19. 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.
  20. 20. PROFITABILITY 22.4% 15.3% 19.7% 23.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 2012-01-31 2013-01-31 2014-01-31 2015-01-31 EBIT Margin %
  21. 21. 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.
  22. 22. PROFITABILITY (CONT.) 13.6% 7.0% 6.2% 6.6% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2012-01-31 2013-01-31 2014-01-31 2015-01-31 EBIT/Assets
  23. 23. 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.
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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).
  28. 28. 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).
  29. 29. 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
  30. 30. 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.
  31. 31. 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.
  32. 32. 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).
  33. 33. GROWTH DRIVERS (CONT.) Source: TA Securities, 17 Dec 2015
  34. 34. 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.
  35. 35. 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.
  36. 36. 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.
  37. 37. 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.
  38. 38. 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.
  39. 39. 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.
  40. 40. 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
  41. 41. 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.
  42. 42. 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.

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