We initiate coverage of Singapore Petroleum (SPC) with a Buy rating and a 12- month price target of S$2.80. SPC has been in the refining business since 1969, butonly began to expand its upstream exposure in 2000. We estimate oil and gas production will account for about 45% of operating profit in 2008.

SPC looks well positioned to weather the expected downturn in the refining industry in 2009 and 2010, based on our view that it is relatively well integrated and has: 1) good exposure to middle distillates; 2) no exposure to petrochemicals; 3) limited downstream capex plans; and 4) a net cash balance sheet and a 6% dividend yield in 2009E.

We expect positive catalysts in 2009 to be: 1) a bottoming and subsequent rise in the oil price in H109; 2) new discoveries; 3) the start-up of the Oyong gas field by the end of 2009; and 4) possible acquisitions in the current low oil price environment.

We derive our price target using a DCF methodology, assuming a WACC of 9.2% (3.1% risk-free rate, 5% risk premium and a 1.4x beta) and 3% terminal growth. We value SPC’s E&P business at S$0.73/share using DCF, or 26% of SPC’s total value.