Singapore Petroleum Co: Tender offer underway

2Q09 net profit fell 76% y-o-y and 22% q-o-q to S$43.5m, including non-cash E&P asset impairment charge of S$34.9m. Refining margin fell to US$3/bbl, while refinery utilization rate fell to 87% due to weak oil demand and scheduled shutdown. E&P's operating profit (before asset impairment) turned positive to S$12.6m vs S$18.2m loss in 1Q09 as crude oil price recovered.

We revised down FY09F net profit by 3% to reflect the soft 2Q09 results, but raised FY10F net profit by 4% as we updated crude oil price assumption to US$57/bbl for 2009 (from US$50) and US$75 for 2010 (from US$70). Subsequently, SPC's fair value is raised to S$5.12 based on sum-of-parts valuation; 7x 2009 PE for refining business and DCF for E&P with 12% discount rate and long-term Brent price target of US$90 (from US$80).

We maintain SPC target price at S$6.25 based on the mandatory cash offer price. Petrochina completed the acquistion of 45.51% of SPC stake from Keppel on 21 June 2009, and made a tender offer for the remaining shares. As at 21 July 2009, Petrochina's stake has amounted to 67.3%. The counter is now trading close to our target price and offer limited upside. Downgrade to Fully Valued.

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