20161017-招商证券_香港_-中石化油服-01033.HK-Record_loss_in_3Q16E,_but_the_worst_is_over_14页_2mb_2mb

Sinopec Oilfield Services (1033 HK) Summary

Core Content

Sinopec Oilfield Services (SSC), a subsidiary of Sinopec Group, experienced a record loss of RMB4.4bn in 3Q16E, far exceeding previous expectations. This was primarily due to the continued reduction in upstream capital expenditure (capex) amid low oil prices. However, the report suggests that the worst is over, as the company is expected to see an improved performance in 4Q16E and 2017E, supported by a moderate recovery in oil prices and potential cost control measures.

Main Points

• Profit Warning and Losses:

  • SSC issued a profit warning for 9M16, projecting a net loss of RMB8.9bn.
  • Quarterly net loss increased from RMB2.8bn in 2Q16 to RMB4.4bn in 3Q16E.
  • Revised 2016E loss projection to RMB8,668mn due to worse-than-expected results.

• Upcoming Turnaround:

  • A potential rebound in upstream capex in 2017E is expected, with an estimated recovery of 10-15% YoY.
  • The report anticipates improved earnings from engineering construction upon the launch of the Xin-Yue-Zhe gas pipeline.
  • Management is incentivized to improve performance due to the share options scheme, which requires a 6% CAGR in total profit from 2015-19E.

• Valuation and Price Targets:

  • The report upgraded the rating from NEUTRAL to BUY.
  • Target price revised to HK$1.9, up 21% from the previous HK$1.57.
  • The valuation is based on a 1.4x P/B for 2017E, reflecting the recent re-rating of global land drillers.
  • SSC is considered undervalued compared to its global peers, especially as it is more sensitive to oil price recovery due to its onshore operations.

• Workload and Financials:

  • Key business segments faced a 2-14% HoH decline in workload in 2H16E.
  • Revenue is expected to grow from RMB43,465mn in 2016E to RMB52,127mn in 2017E and RMB60,248mn in 2018E.
  • Net profit is projected to turn positive in 2017E, reaching RMB451mn, and further increase to RMB1,327mn in 2018E.
  • Net gearing is expected to decrease from 118% in 2016E to 105% in 2018E.

Key Information

• Share Options Scheme:

  • First batch of 50.85mn shares with an exercise price of RMB5.64/share.
  • Exercise is divided into three batches over 5 years.
  • Performance indicators include EOE (EBITDA on net assets) no less than 32%, 6% CAGR in total profit, and EVA greater than zero.

• Xin-Yue-Zhe Gas Pipeline Project:

  • Expected to be launched in 2017E, with a total investment of RMB130bn.
  • Engineering construction capex is estimated at RMB52bn.
  • SSC is expected to win 50% of tenders, contributing RMB26bn revenue and RMB1.6bn net profit in 2017E-20E.
  • This project is projected to account for 22% of total profit during the period.

• Industry and Market Context:

  • The company is a key beneficiary of the possible rebound in upstream capex.
  • Sinopec's upstream capex is expected to rise to US$55/bbl in 2017E, above the breakeven price of US$40-48/bbl for domestic producers.
  • The report highlights that onshore oil and gas production is more sensitive to oil price recovery compared to offshore drilling.

• Cost Control:

  • Management plans to achieve RMB1.3bn cost savings in 2016E, with RMB437mn saved in 1H16.
  • SG&A ratio is expected to decrease to 7% in 2018E from 6.8% in 2015.

• Valuation and Peer Comparison:

  • Global land drillers are re-rating, with a 2017E P/B of 1.4x.
  • SSC is trading at 2017E P/B of 1.1x, which is 21% below its global peers.
  • The report believes this is an attractive valuation given the improved earnings outlook.

Financial Highlights

Outlook

• The report is optimistic about the company's ability to turn around its performance in 2017E, driven by oil price recovery, cost control, and the Xin-Yue-Zhe gas pipeline project.
• The company is expected to benefit from the possible rebound in upstream capex, which is anticipated to rise from RMB47.9bn in 2016E to a higher level in 2017E.
• The management's incentive structure is designed to drive performance improvement and cost efficiency.

Conclusion

Despite significant losses in 3Q16E, the report indicates that the worst is over for SSC. With a revised target price and a more positive outlook for 2017E, the company is positioned for a potential recovery, especially with the expected increase in upstream capex and the launch of the Xin-Yue-Zhe gas pipeline project. The valuation is seen as attractive, and the company is upgraded to BUY.