KUALA LUMPUR: Sapura Energy Bhd
’s core net profit of RM8mil in the first half ended July 31, 2017 was in contrast with its earlier RM8.6mil loss forecast but with the cycle still weakening, the results were below expectations, says CIMB Equities Research.
The research house had on Thursday raised its loss forecast for FY18F and cut the profit estimates for FY19-20F, as the soft drilling outlook forced it to lower its utilisation and rate assumptions.
“While we maintain Hold, our lower long-term discounted cashflow (DCF) estimates for the drilling segment result in a lower sum-of-parts based target price of RM1.63,” it said.
To recap, CIMB Research said Sapura Energy posted profit before tax (PBT) of RM34mil in 2QFY18, down 81% on-year, due mainly to the first-ever quarterly core loss suffered by the drilling arm (excluding impairment provisions made in prior periods). The quarterly PBT fell 68% against Q1.
With the benefit of tax writebacks, Sapura Energy delivered a 2Q core net profit of RM17mil, better than 1QFY18’s core net loss of RM9mil, but still 77% lower on-year.
“Drilling is at the forefront of Sapura Energy’s struggle to stay in the black. The drilling arm delivered a core pretax loss of RM85mil in the 2Q, from RM50mil PBT last year, and RM21mil PBT in Q1,” it said.
CIMB Research said this poor performance was not unexpected as utilisation rates had declined 19 percentage points on-year to 37%, and the expiry of earlier contracts resulted in average charter rates falling 21% on-year.
“Based on contracts secured to-date, we forecast the 2HFY18F drilling utilisation rate to drop further to 33% and for drilling losses to widen even more.
“For the full year FY18F, we lower our drilling utilisation assumption from 45% to 36%, and from 60% to 50% for FY19F,” it said.
CIMB Research said day rates continue to fall, according to Sapura Energy, and bids for work in FY19F are seeing strong competitive downward pressures on rates.
As a result, it cut its average rate assumption for FY19F from US$112,000 a day to US$104,000. The net result is a significant widening of its loss forecasts for drilling, which is the main reason for its forecast downgrades for the overall group.
The research house said that the engineering and construction (E&C) division may be sequentially weaker. The E&C remained in the black, but pretax margins have come under pressure, falling from 5.6% in 1QFY18 to 3.9% in the 2Q, though E&C revenue was flattish on-quarter.
The extant orderbook implies E&C revenue of RM1.7bil in 2HFY18F versus RM2.5bil in 1HFY18.
While Sapura Energy is bidding for more E&C work, additional contract wins are not likely to contribute in the current financial year.
“With only RM600mil of outstanding E&C work for FY19F, Sapura Energy is quite a distance from our RM4.3bil revenue forecast for next year,” it said.
The energy arm delivered sharply lower revenue in 2QFY18, as the Berantai RSC was terminated from 30 Sep 2016 and no longer contributed to the topline.
The revenue from the oil blocks also fell on-year as production declined by one-third due to natural well depletion.
Nevertheless, energy’s pretax profits rose on-year, on the back of a downward reassessment of the operating costs of two Petronas-operated blocks, and an extension of the expected viable production period leading to lower depreciation costs.
“Over the next few months, we expect 1) the B15 gas production to begin from late-Nov, and 2) for Sapura Energy to conclude the Gas Sale Agreement for the Gorek and Larak fields at SK408, which may start producing from CY19-20F.
“Neither of these two developments move the needle on our valuations, as we have already factored them in.
“Upside risks include a stronger rise in oil prices, which may open the spigots on drilling demand; downside risks include further weakening in drilling charter rates,” it said.
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