Singapore Petroleum Co Ltd: Dim near-term outlook

In line with expectations. Singapore Petroleum Company (SPC) reported its 2Q09 results yesterday, with revenue falling 47.6% YoY (+18% QoQ) to S$1.7b. The group's revenue in 1H09 accounts for 51% of our full-year estimate. Although net profit fell 75.9% YoY (-21.7% QoQ) to S$43.4m in 2Q09, we note that bottomline was impacted by an impairment of E&P assets. The fall in net profit was not surprising considering lower refining margins due to weak demand and excess supply in the market: the group achieved an average refining margin of about US$3/bbl for 2Q09 compared to US$13/bbl in 2Q08. This is also lower than the US$4.50/bbl in 1Q09. SPC's 1H09 net profit accounts for 58% of our full-year estimate.

Several factors affected revenue. Demand for refined products remained weak in the past quarter and the spread of Influenza A (H1N1) also resulted in travel curbs and weaker jet fuel demand. According to SPC, "surplus products flowed into the region", which was made worse by the commissioning of new capacities by other refineries. The group also carriedout a scheduled maintenance of a crude distillation unit which resulted in lower throughput (by 13%). Lower oil prices compared to a year ago also inevitably affected the group's topline (average realization of US$62.61/bbl for 2Q09 compared to US$122.90/bbl in 2Q08).

Additional impairment of Sampang development. SPC provided for a S$43.3m impairment for the Jeruk discovery in the Sampang PSC in 1Q09 due to significant uncertainties with regards to the possibility of future commercial development. An additional S$34.9m impairment was made in the past quarter as the group determined that the carrying costs of the Sampang PSC could not be fully covered by the estimated recoverable values under the current oil price environment.

Dim near-term outlook. The general industry outlook is dim until there is a sustained recovery in the global economy. However, SPC is now a part of PetroChina (holds 67.3% of SPC's as at 21 Jul 09), the listed arm of China National Petroleum Corporation. While PetroChina is in a better position to develop SPC's potential in increasing refinery's complexity rating and enlarging export market, the process will be very lengthy. PetroChina's current intention is to retain the listed status of SPC but the uncertainty of its longer term plans causes us to retain our SELL rating. Our fair value remains at S$4.40 and we encourage investors that have made gains to exit while PetroChina is still acquiring shares.

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