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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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.

Keppel selling SPC stake - Generous offer by Petrochina

Acquisition by Petrochina. Keppel announced yesterday that it had entered into an agreement to sell its entire 45.51% stake in SPC to Petrochina for S$6.25 per share, or US$1.47bn in cash.

Generous offer. The offer price is at 24% premium to Friday’s closing price and implies 15.7x 2009 PE and 11.6x 2010 PE, and 1.8x and 1.7x P/Bv, respectively. The offer price is generous and valuations are significantly higher than regional peers’ average of less than 10x PE for 2009-10 and 1.1-1.2x P/BV. But for Petrochina, the price tag implies EV/refining capacity of US$16,000/bpd including SPC’s distribution network and E&P assets, which is still lower than the estimated refinery replacement cost of US$20,000/bpd.

Upgrade to Buy with target price of S$6.25. The share sale should trigger a tender offer. In our view, the offer price is attractive and we recommend investors accept the offer. With this tender offer, SPC’s share should rise to S$6.25, which implies 24% upside.

Singapore Petroleum Co: Fuel's off at Jeruk

1Q09 results exceeded both ours and consensus' expectations. Singapore Petroleum Company (SPC) reported 1Q09 PATMI of S$55.5m (-43.7% YoY), exceeding our estimates and the Street's of S$33.6m. SPC's better-than-expected refining margins of US$4.50/bbl (vs. our forecast of US$3.10/bbl) was the quarter's main positive highlight, which led to a turnaround in operating profit of S$118.6m after two quarters of consecutive losses for its downstream activities. The negative drag ? though not unexpected - was the decline in average realisation achieved by SPC as a result of the steep drop in oil prices. This was, however, partially offset by a stronger US$. As such, E&P recorded an operating loss of S$18.2m for the quarter.

All bets off for Jeruk. SPC made a non-cash impairment provision that amounted to S$43.3m for drilling costs incurred from 2003 to 2006 at the Jeruk field. This suggests that the Jeruk discovery, once believed to contain over 170 million barrels of oil resources, would not proceed into oil production.

SPC's current share price implies overly-optimistic refining margin assumptionsof US$4.50/bbl and US$4.60/bbl for FY09 and FY10 respectively, which we opine would be difficult to achieve given the challenging outlook. Due to the lack of catalysts and no improvements in the leading indicators, we keep our forecasts and price target unchanged. As share price has surged 44% since our initiation, we downgrade SPC to NEUTRAL.

Singapore Petroleum Co: Mixed result, still cautious on earnings

SPC results

· Net profit was at the low end of our estimate; excluding E&P asset impairment, core profit exceeded our expectation due to reversal of inventory write-down

· Mixed surprises: E&P loss was disappointing, but operating profit from refining jumped unexpectedly despite weaker refining margin

· Earnings forecast and target price are under review pending a conference call with the company, but we maintain a Fully Valued rating because valuation is expensive

Refining margin was within expectation at US$4.5/bbl (down 36%), but refinery utilisation rate was better than expected at 93%. Refining operating profit jumped 45% due to a reversal of inventory write-down from the previous quarter.

The E&P business reported an unexpected operating loss of S$18.2m, which included S$7.8m exploration expenses from Vietnam and Cambodia projects. This implied that break-even cost for E&P might be in the high US$40+, higher than our c.US$40 estimate. Earnings were also dragged down by S$43.3m non-cash impairment charge for the Jeruk project due to high uncertainties under the current oil price environment.

We remain cautious about SPC's earnings outlook for both the refining and E&P units. For refining, the unexpectedly strong profit in 1Q09 should be one-off. Meanwhile, weak oil demand and surplus capacity will remain major threats to refining margins. Our current estimate is being reviewed for a downgrade following the weak E&P results in 1Q09. SPC's share price has surged 52% YTD, outperforming the STI's 6% rise. But at 8.6x 2009 PE, the counter is expensive compared to 2005-09 average PE of 6.5x. Maintain Fully Valued.

Singapore Petroleum Company Ltd: Holds promise for the longer term

Established home-grown refiner. Formed in 1969, Singapore Petroleum Company Ltd (SPC) is the only independent oil refiner in Singapore. The group has grown over the years to become an international oil refiner and trader and engages in oil and gas exploration, refining, terminalling and distribution, marketing and trading of crude and refined petroleum products. In FY08, SPC achieved a 26.9% YoY rise in revenue to S$11.1b but incurred a 55.5% fall in net profit to S$229.2m, mainly due to volatile refining margins and inventory write-down due to lower oil prices in 2H08.

At the mercy of volatile refining margins. Being an oil refiner, SPC is greatly affected by swings in refining margins which arise from the interplay of demand and supply for crude oil and refined products. Margins can go into negative territory, as 4Q08 and previous oil shocks have shown. It is beyond SPC's control when that happens, and inventory write-downs have to be taken when crude oil prices fall drastically. However, assuming that oil prices will not fall much further given last year's dramatic drop, the likelihood of another extensive inventory write-down is low. Finally, with Singapore being a swing centre, refineries in Singapore may feel the effects of low product demand even more.

Upstream growth as a form of diversification. SPC ventured into upstream operations in 2000 and has three producing assets out of its portfolio of nine assets. Upstream production is a natural hedge against its exposure to downstream refining and marketing, and assuming that crude oil prices maintain above breakeven levels in this current dismal environment, this would ensure more steady and sustainable earnings for the group.

Initiate with HOLD. We initiate coverage on SPC with a HOLD recommendation and fair value estimate of S$2.45 using sum of the parts valuation. The refining business is valued using 8x FY09F PER, lower than the regional average considering the refinery's lower complexity rating and taking into account that earnings may be relatively more affected in swing-centre Singapore. The E&P business is valued using 7X FY09F PER, similar to the regional average. We will turn buyers of the stock around S$2.20, barring a sudden deterioration in economic environment. Any oil discoveries may be a potential share price catalyst, but the general outlook for the group and the industry is muted for now.