This article first appeared in The Edge Financial Daily on September 29, 2017 - October 5, 2017

KUALA LUMPUR: Shares in Sapura Energy Bhd, formerly SapuraKencana Petroleum Bhd, fell as much as 8.07% yesterday after analysts cut earnings forecasts for the company in the wake of its weak second-quarter earnings, which slumped 74% year-on-year.

JP Morgan, which does not expect any meaningful improvement for the rest of Sapura Energy’s financial year ending Jan 31, 2018 (FY18), slashed earnings forecasts for the year by 80% and for FY19 by 63%.

On Tuesday, Sapura Energy’s share price reached RM1.71 as oil price advanced to a two-year high. But, as of yesterday’s close of RM1.49, it lost 22 sen. Compared with Wednesday, it was down 7.45% or 12 sen.

The oil and gas support service provider’s net profit for the second quarter ended July 31, 2018 (2QFY18) fell to RM28.93 million from RM112.27 million a year earlier, as it registered less income from drilling, and exploration and production.

“Moving forward, the pain is likely to continue in the 3QFY18 as contributions from tender rig SK T-12 end (contract with Chevron ended in June 2017) and a stronger ringgit to 'impact' FX (foreign exchange) gains,” said JP Morgan.

With a low rig utilisation and a continued challenging environment, MIDF Research analyst Tan Wei Min said the drilling segment will be a “bane” for Sapura Energy. He cut his earnings forecasts for Sapura Energy by 58% to RM98.7 million from RM236.4 million for FY18, and by 41% to RM152.5 million from RM258 million for FY19.

He also lowered his target price (TP) for the company to RM1.69 from RM1.71 previously, though he said Sapura Energy’s current share price may still provide trading opportunities, given current global crude oil price trend.

But Affin Hwang Capital analyst Tan Jianyuan thinks its valuation, at a forward 60 times to FY18 earnings estimates, was “lofty” and “not reflective of current fundamentals”.

Besides declining rig utilisation, the immediate challenges Jianyuan highlighted in a note yesterday included subdued daily charter rates of its rigs, and squeezed margins under its engineering and construction division. Jianyuan kept his FY18 earnings forecast at RM161.4 million.

Of Sapura Energy’s 15 drilling rigs, only six were operational in the 2QFY18 — representing a 40% utilisation rate, noted AmInvestment Research analyst Alex Goh. With rig SKD T-12 dropping out, rig utilisation will drop further to 33%, he said. Goh has cut his FY18 earnings forecast by 23% to RM147.6 million.

Apart from falling day charter rates, bids for work in FY19 are seeing strong competitive downward pressures on rates too, CIMB Research chief analyst Raymond Yap said. As such, he expects the drilling segment to see widening losses in the second half of FY18.

In his note, Yap lowered his TP for Sapura Energy to RM1.63 from RM1.80, and cut his net profit forecast by 21% to RM209.5 million from RM254.1 million.