Petra Energy faces earnings risk in traditional ‘bread and butter’ business

KUCHING: The research arm of Kenanga Investment Bank Bhd (Kenanga Research) sees earnings risk for Petra Energy Bhd (Petra Energy) in the group’s traditional ‘bread and butter’ business as it anticipates potential slowdown in hook-up commissioning (HUC) orders from Petroliam Nasional Bhd’s (Petronas) Pan Malaysia project despite being cushioned by earnings from the Kapal, Banang and Meranti (KBM) cluster, risk service contract (RSC).

Despite Petra Energy having an outstanding orderbook from Pan Malaysia contract of circa RM1.6 billion up to 2018, Kenanga Research believed HUC works are likely to fall substantially this year in view of Petronas’ initiatives to trim budget for cash.

On the other hand, topside major maintenance (TMM) works, in the research arm’s view, are less affected given the importance to maintain oil production from these brownfields.

As a result, the research arm forecasted Petra Energy’s revenue to fall 33 per cent in financial year 2016 (FY16) but to recover 36 per cent in FY17 from a much lower base assuming Pan Malaysia works are resumed by Petronas which will only be known in the first quarter of 2017 (1Q17).

According to Kenanga Research, Petra Energy started to register strong earnings in 3Q15 subsequently to the full reimbursement of development and production capital expenditure (capex) and operating expenditure (opex).

Assuming oil prices averaged at US$45 per barrel (bbl) this year, the research arm’s back-of-envelope calculation suggested that the remuneration fees to be collected by Petra Energy will drop circa 17 per cent year on year (y-o-y) to RM42.4 million.

“We reckon the KBM cluster is able to operate at low operating costs but do not discount the possibility of more development plans needed to ensure sustainable production in the future,” it said.

In view of challenging operating environment, Kenanga Research opined Petra Energy will impair the group’s marine assets (forming bulk of its property, plant and equipment (PPE)) especially on its work barges, which are off-hired since last year.

In addition to that, the research arm noticed that Petra Energy’s trade receivables due more than 91 days without impairment have ballooned to RM26.8 million in FY15 from RM16 million a year ago.

“Thus, in our view, it is likely for Petra Energy to provide higher impairment allowance on the incremental amount,” the research arm said.

Excluding impairment/provisions, Kenanga Research’s earnings forecast of RM31.3 million for FY16E was 34 per cent lower than consensus accounting for slower work orders from Pan Malaysia contract and lower associate earnings contribution.

The research arm’s FY17E earnings forecast of RM52.3 million was also 15 per cent weaker than the street assuming that similar activities level in their core business as FY15 (both HUC and TMM work oders from Pan Malaysia are carried out accordingly) and average oil prices of US$51 per bbl.

Kenanga Research noted that despite the potential impending earnings disappointment risks, Petra Energy has low net gearing of 0.23-fold versus industry average of 0.6-fold.

The research arm did not foresee Petra Energy having immediate cashflow problems given the group’s solid cash pile of RM213.5 million as at 4Q15, successful debt restructuring to delay loan repayment and steady cash flow from RSC KBM cluster.

“Having said that, Petra Energy is likely to lower its dividend distribution to shareholders in view of challenging operating environment and potential capex commitment in the next two years,” the research arm said.

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