SPC reported a 43.5% drop in 1Q09 net profit to $55.6m from 1Q08, with revenue falling a similar 46.8% to $1.4bn. However, the numbers were much better than expected, reversing a loss of S$50.0m in 4Q08. SPC also recorded impairment charges of $43.3m for drilling costs incurred from 2003 to 2006 at its Indonesian Jeruk field, as the sharp slide in crude oil prices makes the project potentially unviable. Excluding this, gross profit was down just 13% versus 1Q08 to S$133.2m.

Weak crude oil prices led to an operating loss of S$18.2m on the upstream E&P business, withturnover for the sector declining 34% to S$35.1m. Earnings therefore came from the downstream refining business. Despite turnover declining 22% sequentially from lower headline crude prices, operating profit turned around from a S$56.4m loss in 4Q08 to record operating profit of S$118.6m in 1Q09, as gross refining margins (GRM) turned positive to US$4.50 a barrel, but is still down from the US$7 in 1Q08, and an average of US$5.50 per barrel for FY08.

However, SPC warned that margins could be unsustainable, as the boost came fromimprovements in demand from regional economies such as Indonesia and Vietnam and was coupled with the shutdown of several refineries for maintenance which constrained supply. SPC also said that its prospects for 2009 remain uncertain, with demand for oil products likely to stay weak. It also expects pressure on refining margins to resume as new capacity in India, Vietnam and China comes on stream in the next few quarters.

In line with guidance, we view this strong performance in 1Q09 to be a one-off, and expect refining margins to decline to around US$2-3 per barrel, going forward. We also expect its E&P business to remain in the red as crude oil prices remain soft. The sharp run-up in SPC’s share price (up 18% in the last 2 weeks) ahead of its 1Q09 reporting could therefore unravel very quickly.

Similarly, while SPC’s strong quarter will have a positive impact on consolidation to Keppel Corp’s 1Q09 earnings, we are not adjusting our full year contribution, as earnings from this associate remain volatile. We are forecasting a yoy 60% reduction in associate contributions for Keppel, primarily on the back of an anticipated weak showing from SPC. Keppel reports 1Q09 earnings on the 23rd of April.