Downstream oil & gas companies under coverage reported a mixed set of 4QCY11 results. Rotary Engineering (Rotary) met our 4QCY11 forecasts, but PEC disappointed due to higher-than-expected costs on its Rotterdam project. Rotary’s SATORP project is on track for completion by Dec 12 and we expect its Fujairah project to commence soon. On the other hand, PEC suffered delays on its Rotterdam project and made S$5.6m of provisions on unclaimed variation work during the quarter. That said, the project is substantially completed and we do not expect further provisions going forward. Outlook for downstream oil and gas companies remains cloudy, and we prefer PEC over Rotary for its undemanding valuations.
Mixed bag of results
Downstream oil & gas companies under coverage reported a mixed set of 4QCY11 results. Rotary Engineering (Rotary) met our 4QCY11 forecasts, but PEC disappointed due to higher-than-expected costs on its Rotterdam project. Rotary proposed a 2 S cts final dividend, bringing its FY11 total dividend to 3 S cents. PEC’s year-end is in June, and we are expecting final dividend of 2 S cents.
Review of major projects
With most of the construction work completed, Rotary’s SATORP project (contract value: US$745m) remains on track for completion by Dec 12. We also expect its Fujairah project (contract value: US$250m) to commence soon. On the other hand, PEC had encountered several difficulties in its Rotterdam project, including execution delays and claims on variation orders, resulting in S$5.6m of provisions in 4QCY11. That said, the Rotterdam project is substantially completed and we do not expect further provisions going forward.
Uncertain 2012 outlook
The outlook for downstream oil and gas companies remains cloudy. Within Singapore, competition is stiff and project margins are low. The other key market - the Middle East region – is facing increasing political risks (Israel-Iran conflict, Arab Spring). Nonetheless, Rotary hopes to bag another big EPC project in the region, and is currently pre-qualified for the Jizan refinery project. For PEC, it is currently working on a US$82.5m ENOC EPC project in the UAE.
Strong balance sheet
Despite headwinds in the operating environment, both Rotary and PEC possess strong balance sheets with net cash positions of S$6m and S$147m respectively as of end Dec 11. We value PEC at 1x PBR (BUY, FV: S$0.93), and Rotary at 1.3x PBR (HOLD, FV: S$0.72) for its stronger track record. Between the two, we prefer PEC as valuation is undemanding and its share buyback mandate may limit downside risk to share prices.
Review of major projects
With most of the construction work completed, Rotary’s SATORP project (contract value: US$745m) remains on track for completion by Dec 12. We also expect its Fujairah project (contract value: US$250m) to commence soon. On the other hand, PEC had encountered several difficulties in its Rotterdam project, including execution delays and claims on variation orders, resulting in S$5.6m of provisions in 4QCY11. That said, the Rotterdam project is substantially completed and we do not expect further provisions going forward.
Uncertain 2012 outlook
The outlook for downstream oil and gas companies remains cloudy. Within Singapore, competition is stiff and project margins are low. The other key market - the Middle East region – is facing increasing political risks (Israel-Iran conflict, Arab Spring). Nonetheless, Rotary hopes to bag another big EPC project in the region, and is currently pre-qualified for the Jizan refinery project. For PEC, it is currently working on a US$82.5m ENOC EPC project in the UAE.
Strong balance sheet
Despite headwinds in the operating environment, both Rotary and PEC possess strong balance sheets with net cash positions of S$6m and S$147m respectively as of end Dec 11. We value PEC at 1x PBR (BUY, FV: S$0.93), and Rotary at 1.3x PBR (HOLD, FV: S$0.72) for its stronger track record. Between the two, we prefer PEC as valuation is undemanding and its share buyback mandate may limit downside risk to share prices.
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