Perisai Petroleum Teknologi Bhd TP: RM0.24 (-5.7%) Weathering the Storm

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: C O M P A N Y U P D A T E Thursday, January 28, 2016 FBMKLCI: 1, Sector: Oil & Gas Perisai Petroleum Teknologi Bhd TP: RM0.24 (-5.7%) Weathering the Storm THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Last Traded: RM0.25 TA Research Team Coverage ext abelgoon@ta.com.my SELL We recently met Perisai s management, represented by Datuk Zainol Izzet, MD, and Mr Lai Swee Sim, Head, Corporate Planning. Earnings headwinds and balance sheet risks arise from:- 1) Likelihood of asset impairments in 4Q15, that are not only limited to Rubicone and E3, but also to Perisai s entire portfolio of assets, 2) Upon completion of fixed platforms at North Malay Basin, there is a possibility that FPSO Kamelia may need to relocate. Hence, extension options may not be exercised, and 3) Drilling contracts have been delayed, and the number of working jackup rigs in Malaysia have halved to 7 units compared to 15 a year ago. On the bright side, earnings erosion is partially cushioned by:-1) Payment to Pacific 101 s drilling contractor, Hercules Offshore, is pegged to rates offered by end-clients, 2) Management plans to exercise E3 s put option by Dec 2016, and 3) Sales in USD and 15% of costs in MYR. Following our meeting, we lower FY16/17 earnings forecasts by 110%/118%. On the back of heightened impairment risk, we reduce our TP for Perisai to RM0.24 (previous: RM0.34) based on 0.3x P/B. This is a 33% discount to our target multiple for UMW-OG. We believe this is justifiable due to Perisai s smaller fleet and highly leveraged balance sheet. Maintain Sell. Pacific 102 and 103 on Track for Delivery At this juncture, management has no plans to further delay delivery of its two newbuild rigs. It was revealed that Pacific 102 s (PP102) earlier delay was due to execution of additional works. Therefore, no extra costs or penalties were incurred. To recap, PP102 and Pacific 103 (PP103) are due for delivery in March 2016 and 3Q16 respectively. However, securing a charter contract is prerequisite to procuring loans for both rigs. Currently, there are no firm financing plans for the rigs. Nevertheless, management does not discount the possibility of drawing down on its SGD700mn MTN program for this purpose. Meanwhile, management revealed that payment to Pacific 101 (PP101) s hired drilling contractor, Hercules Offshore, is pegged to rates offered by end-clients. Therefore, this cushions margin decline following lowered DCRs from farm-out of PP101 to Hess. Put Option for E3 to be Exercised Management plans to exercise E3 pipelay barge s put option by Dec To recap, EOC Ltd. granted Perisai the right to sell its 51% stake in E3 for USD37mn. We opine that this is a good move as the put option value approximates the asset s book value (2014: RM140.7mn). Also, E3 has been a drag on earnings given that it was idle since Oct Therefore, its disposal will strengthen Perisai s balance sheet, as sale proceeds will be used for working capital and to repay borrowings. Share Information Bloomberg Code PPT MK Stock Code 0047 Listing Main Market Share Cap (mn) 1,204.6 Market Cap (RMmn) Par Value (RM) wk Hi/Lo (RM) 0.73/ mth Avg Daily Vol ('000 shrs) 18,302 Estimated Free Float (%) 58.7 Beta 2.3 Major Shareholders (%) Ezra Group Tabung Haji Izzet Zainol Forecast Revision (%) FY16 FY17 Forecast Revision (%) (110) (118) Core Net Profit (RMm) (1.9) (9.8) Consensus TA/Consensus (%) (8.0) (26.4) Previous Rating Sell (Maintained) Financial Indicators FY16 FY17 Net Debt/Equity (x) ROE (%) (0.2) (1.0) ROA (%) (0.1) (0.3) NTA/Share (RM) P/NTA (x) Share Performance Price Change (%) PPT FBMKLCI 1 mth (9.1) (1.9) 3 mth (24.2) (3.8) 6 mth (37.5) (4.5) 12 mth (49.5) (9.5) (12-Mth) Share Price relative to the FBM KLCI Source: Bloomberg Cost Cutting for MOPU Rubicone Similar to E3, MOPU Rubicone has been idle since Oct Recently, management relocated Rubicone to Batam from Pasir Gudang. This had resulted in decent cost savings. Currently, warm stacking costs for Rubicone amount to RM100K per month. The Group did not deny the possibility of cold Page 1 of 5

2 stacking the MOPU if necessary. In this case, management estimates that costs would be marginally lower at RM70K per month. In contrast to E3, Perisai allowed Rubicone s put option to expire. This was because management deemed its exercise price (USD30mn) as too low (current book value: USD90mn). Management is currently scouting for tenders for this asset. However, given that Rubicone is a niche asset best suited for small fields, prospects of securing a contract at decent rates appear challenging. Management does not discount the likelihood of asset impairments in 4Q15. This is not only limited to Rubicone and E3, but also to Perisai s entire portfolio of assets. FPSO Kamelia Contract Extension Uncertain To recap, FPSO Kamelia was deployed at the North Malay Basin (NMB) as a temporary Early Production System (EPS). Therefore, upon completion of fixed platforms at the field, an EPS may no longer be needed. At the moment, field development at NMB appears to be on-track, with expected completion by end We do not dismiss the possibility that Hess may re-deploy Kamelia at other fields instead. However, to be conservative, we assume no contract extension (max: three years) for Kamelia. Loss of this contract presents huge earnings downside risk. This is because Kamelia contributed the lion s share of 2015 pretax profits, helping to offset other loss-making assets. Figure 1: Percentage of Profits from Assets Source: Company, TA Research Benefiting from MYR/USD To recap, Perisai practices natural hedging, with the majority of its costs and revenue denominated in USD. Nevertheless, Perisai still benefits from a stronger dollar as 15% of costs are denominated in MYR, whilst almost 100% of revenue is in USD. Every 10 sen increase in our MYR/USD assumption enhances Perisai s FY16/17 core earnings by 43%/18%. Page 2 of 5

3 Demand for Jackups Remain Slow Prospects for premium jack-up rigs in the near-to-medium term remain grim. Tender activities are slow, and projects are being deferred, pending stabilisation of oil prices. In addition, exploration activities have slowed to a trickle. Management believes that currently, merely one rig is deployed for exploration activities in Malaysia. In addition, Daily Charter Rates (DCR) have also dropped in-line with oil price s decline. DCRs are currently hovering at USD90K-110K, marking a significant drop from USD120K-140K in early Meanwhile, jackup utilisation rates in SEA (Figure 2) have also declined to about 60% (2013: 80%). Figure 2: Utilisation Rate of Jackup Rigs in SEA Source: Bloomberg, Rigzone Prioritising the Locals According to Infield data, there are 7 rigs working in Malaysia (Table 1), compared to 15 rigs last year. Out of the total 7 rigs, 3-5 are foreign-owned, with contracts expiring this year or next. Given that Petronas prioritises local content, management believes they have an edge when bidding for Malaysian contracts. To recap, there are merely two local jackup rig operators in Malaysia, namely UMW Oil & Gas (UMW-OG) and Perisai. Currently, UMW-OG has four idle rigs whilst Perisai has two newbuilds in the pipeline. Similar to Petronas, national oil companies in other countries also prioritise local rigs. Hence, Perisai will find it more difficult to secure regional contracts. Nevertheless, management expects more opportunities in Indonesia and Thailand, as opposed to Vietnam, which prioritises rigs from state-owned Petrovietnam Drilling. Table 1: Operational Rigs in Malaysia Source: Infield Data Page 3 of 5

4 Impact We impute losses for E3 in FY16, and assume completion of its disposal in end-fy16. Previously, we assumed that E3 s put option would be exercised in end-fy15. Reduced Rubicone s fixed costs following its shift from Pasir Gudang to Batam. For PP102, we assumed that a contract will only be secured in 2HFY16 (previous: full year contribution), and trimmed FY17 margin by 1ppt. For PP101, we trimmed FY17 margin by 1ppt. As conservative measure, we assume FPSO Kamelia will not obtain a contract extension, and be idle from 3Q16 onwards. We also increase costs to take into consideration anchorage. MYR/USD rate for FY16/17 assumption increased to 4.3 ( previous: 4.0) Following these changes, our FY16/17 earnings are lowered by 110%/118%. As preemptive measure, we incorporated asset impairments totaling RM406mn for Rubicone (RM227mn) and PP101 (RM179mn). This is based on our estimates on the revised fair value (FV) for both assets:- 1) MOPU: applied 40% discount to original FV as earlier oil price assumption baked-in was USD97/bbl, 2) PP101: applied 20% discount to correspond with industry sources reporting 15%-20% discount for newbuild prices. Valuation Our TP for Perisai is thus reduced to RM0.24 (previous: RM0.34) following our earnings downgrade, and coupled with revision in book value. Our TP is based on unchanged 0.3x FY16 P/B, which is at a 33% discount to UMW-OG (0.45x), which has a larger fleet and stronger balance sheets. Maintain Sell. Potential re-rating catalysts are the stabilization of oil prices and new fleet contracts. Page 4 of 5

5 Figure 3: Earnings Summary Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5