Sky Petrol - Profitable Oil Producer with $65 Million Cash

My Analysis of Sky Petrol\'s Q1 Results Sky Petrol reported a good set of results for Q1 and provided an unexpected acquisition plan to boost the revenue of its oil drilling rig rental segments. Sky Petrol terminated its highly lucrative Dagang Oilfield contract mutually in 3Q 09 and acquired an oil tanker shipping company in Jan 2010 to replace the Dagang\'s revenue stream. It currently deals with oil extraction, oil drilling service, rental of oil drilling rigs and domestic coastal shipping of petroleum products. Q1 2010 Financial Highlights Revenue: S$16.2 million (up 76%) Gross Profit: S$8.1 million (up 54%) Net Profit: S$3.18 million (up 48%) Profit due to Shareholders: S$1.63 million (down 26%) S$1.5 million net earnings is due to minority interest (primarily shareholders of the newly acquired shipping coy). Profits declined due to rollover interest expense for its US$13.5 million convertible bonds due in Sept 2010. After which, the company\'s interest expense will be greatly reduced hence possibly boosting Q4 earnings. Admin expenses also increased due to the acquisition of a new business division. Gross profit increased due to higher oil prices which positively impacted its Extraction segment and the chartering of the a second oil drilling rig in 2Q 09 (hence not visible in 1Q 09 results) and chartering of 2 newly acquired LWD drilling rigs in March 2010 (minimal impact in Q1 10). Extraction Segment Revenue Q1 09: S$0.91 million Q4 09: S$2.19 million Q1 10: S$2.67 million Increase in revenue is due primarily to the rise in oil prices. The company drilled and sold oil at US$45 per barrel in Q1 09, US$71 per barrel in Q4 09 and US$76 per barrel in Q1 10. Oil prices has remained above US$80 in Q2 10 so far hence we might see further upside in this segment. The amount of oil extracted remained consistent at 20,000 barrels. There was a slight improvement in gross margins from 10.2% in Q4 09 to 14.5% in Q1 10. This segment remains very weak and volatile due to the volatile oil prices and the inability to gain permission from the oil field owners to drill new oil wells in the field. The segment generated a gross profit of S$0.39 million in Q1 10. I expect a slight improvement in Q2 10 due to better oil prices. Hopefully in light of the recovering oil prices, the oil field owner will lift the drilling restriction on oil producers. Oil Drilling Rig Rental Services Q1 09: $2.33 million Q4 09: $5.43 million Q1 10: $4.88 million Sky Petrol owns 2 oil drilling rigs and charters it out at fixed rates to drilling companies on long term contract. The substantial increase in revenue is due to the chartering of the second rig in 2Q 09. One oil rig is chartered till 1H 2011 and another is chartered till the end of the year after expiring at the end of last year. The drop in revenue could be due to a reduced charter rates for the extended contract for the first rig. Going forward, the company intends to expand this division by acquiring more rigs. It spend S$14.6 million to acquire 2 LWD drilling facilities and it has already been delivered and chartered out in late March 2010. Its impact in Q1 result was minimal but it will play a larger role in Q2 10 earnings. The company also paid $0.6 million deposit for another 6 sets of MWD drilling facilities and another set of LWD drilling facilities. It will be delivered in May 2010 and will have an impact in Q2 earnings. This segment has been producing consistent and steady earnings since the company diversified into it in 2008. Income has been increasing with the acquisition of more drilling facilities. It generated a gross profit of $3.8 million and a gross margin of 78.1% in Q1 10. Revenue from this segment will be stronger in the coming quarters due to recent acquisitions. Drilling Services Q1 09: $0.308 million Q4 09: $0.301 million Q1 10: $0.300 million No surprises from this small segment. This revenue is solely derived from the Co-operation contract signed with Botenaer to use their directional drilling technology to rework old wells. It continues to generate steady income for the Group as long as oil prices remain stable. The gross margin is around 90% since only labor cost is incurred. This contract will last till the end of 2011. It generated a gross profit of S$0.267 million in Q1 10 with a gross margin of 89%. I expect similar performances in the coming quarters. Xinghai Wenling Shipping Company (49% stake) FY 07: S$37.3 million FY 08: S$45.5 million Q1 10: S$8.37 million (FY 09 results were not released) The business scope of Xinghai includes that of transportation of petroleum product within the scope of domestic inshore and the middle and lower areas of Changjiang River, shipping intermediary service, and distribution of the products for ship and non-dangerous chemical fuel oil. Xinghai is currently engaged in the business of transportation of petroleum products for petrochemical companies through a fleet of 7 vessels. Xinghai chartered in 3 vessels in 2010 hence bringing its fleet size to 10 vessels. Sky Petrol acquired a 49% stake in the company for around RMB150 million or S$31.2 million in Feb 2010. It earned a gross profit of $3.7 million and a gross margin of 44.2%. The freight rates for coast shipping of crude oil has remained stable over the past 12 months. This could be a source of stable income for the Group. Acquisition of new vessels will boost potential earnings. Sky Petrol should benefit from greater share of the profit in Q2 onwards by benefiting from a full quarter worth of contribution. Balance Sheet Total assets increased substantially to $184 million due to acquisition of Xinghai Shipping and consolidating it into the Group\'s results. Equity attributable to shareholders rose slightly from $102.8 million to $105.6 million to Q1 10 earnings. Cash balance fell to $65.5 million due to cash out-flow for acquisition of Xinghai Shipping, acquisition of 2 LWD drilling facilities and a deposit for new drilling facilities. A further $16.1 million will be paid in the next quarter to settle the Xinghai transactions. I am not too certain what is the Company\'s capital commitment for the new drilling facilities due in May 2010. Debt level stands at S$27 million of which S$21 million are convertible bonds due in Sept 2010. The company keeps US$3.5 million as a fixed deposit in a Singapore bank. The net cash stands at S$37 million. Cash-flow The company generated S$10.0 million cash from its operating activities. $14.6 million was used to purchase 2 LWD drilling facilities in March 2010 and a further $8.45 million was paid for Xinghai\'s acquisition. $5.7 million was used to pay the minority shareholder in pre-acquisition periods. I believe this refers to the dividend payout for Xinghai\'s shareholder based on their FY 09 results. As a result, the company had a cash out-flow of $21.9 million. Outlook I expect a stronger Q2 performance due to the following reasons - a) Oil prices have remained above US$80 so far in Q2 hence this will benefit the Extraction segment. b) It will benefit from a full quarter worth of contribution from Xinghai Shipping. Tanker freight rates are tied to oil prices hence it should remain stable. c) It will benefit from a full quarter worth of contribution from the 2 recently acquired LWD drilling facilities which has been chartered out in late May 2010 d) It would have received the 6 sets of MWD drilling facilities and another set of LWD drilling facility in late April or early May. This will positively impact in Q2 results when it charters it out. Cash position will decline further after paying for the Xinghai transactions and new drilling rigs. It should have sufficient cash to repay the convertible bond loans in Sept 2010. Management expects the Group to remain profitable in 2010. Share Price: $0.225 NAV: $0.3457 EPS: $0.0057 (1Q) Net Cash/Share: $0.071 (cash - debts - Xinghai payables) Please feel free to share your views or correct any of my mistakes. Note that this is my own personal views so buyers beware

The recent drop in oil prices may have a slight impact on its extraction segment. The following employees and Directors exercised their option to purchase shares 2 days ago: Neo Gim Kiong (Independent Director) purchased 8,000 shares @ $0.11 Dr Wu Shen Kong (Non-Executive Chairman) purchased 48,000 shares @ $0.11 Lee Beng Cheng (Independent Director) purchased 44,000 shares The CEO (and also the Group\'s Founder) sees his stake in the company further diluted from 27.70% to 27.69% due to this share options.