Integrated oilfield equipment and services supply hub. KS Energy Services Ltd (KS Energy) is an oilfield supply and services provider to the global oil and gas, marine and petrochemical industries. Its core activities are in the distribution of parts and components, capital equipment charter and provision of drilling and rig management services. In FY08, KS Energy achieved a 51.7% YoY rise in revenue to S$611m but incurred a 24.4% fall in net profit to S$60.3m, due to a variety of factors such as lower other operating income coupled with higher administrative expenses and other operating expenses.

All core capital equipment save one have secured contracts. Except for a rig, KS Energy's core fleet (comprising mainly jackup rigs and land rigs) has secured contracts. Most of them are locked in for FY09 and part of FY10, not including renewal options. The contracts range from US$13m for KS Discoverer 2 to more than US$130m for KS Medstar 1. The rig without a contract is also the only one under construction (Super M2) and will be delivered later this year.

Current emphasis on sustainability. At a time when companies are looking at huge drops in earnings and worried about order cancellations, we think those that have firm contracts and lower likelihood of contract cancellations should be in a better position to ride out this recession and emerge stronger. KS Energy is in an enviable position as its entire fleet save one has secured contracts, and its customers include Maersk and BP Pakistan. However, we do note that the distribution business is likely to be impacted by the downturn. The group is also positioned in the oil and gas industry to benefit from the upturn when it arrives. The crux lies in contract executions and ascertaining the impact of the crisis on the distribution business.

Re-initiate with BUY. We re-initiate coverage on KS Energy with a BUY recommendation and fair value estimate of S$0.93 using SOTP valuation (6x FY09F PER for distribution business and 7x peg for drilling services and related business). With secured contracts, the firm is in a better position to weather the downturn though distribution business may be affected. However compared to domestic peers, it has a wider geographical reach and likely better market penetration after several acquisitions. Higher oil prices and accretive acquisitions at low valuations will incentivise us to re-look our valuation pegs.