More O&G contracts in the pipeline

by **Cals** Fri 04 Oct 2013, 10:17

Business & Markets 2013

Written by Affin IB Research

Friday, 04 October 2013 09:53

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Oil and gas sector
Maintain overweight: After an unexciting third quarter of 2013 calendar year (3Q13) where there was a lull in oil and gas (O&G) contract awards, we expect contract flows to pick up in 4Q13 and the first half (1H) of 2014 in view of: (i) Keith Collins taking office as CEO of Vestigo Petroleum Sdn Bhd (a wholly owned subsidiary of Petroleum Nasional Bhd [Petronas]) on Oct 1. His appointment will help kick-start Vestigo Petroleum’s initiative to develop marginal fields; (ii) the existing Pan Malaysia transport and installation (T&I) contracts expiring by end-2013 and Petronas likely awarding new contracts in October or November 2013; (iii) Petronas’ production sharing contracts likely speeding up development of offshore gas fields in Sarawak to provide feedstock for the upcoming liquefied natural gas (LNG) train 9 in Bintulu; (iv) Newfield Exploration Co targeting to conclude its Malaysia O&G assets sales by end-2013 or early 2014; and (v) the government’s subsidy reduction initiatives which will enable Petronas to lower expenses and allocate higher capital expenditure (capex).

Key contracts or news flow to look out for in 4Q13/1H14 include: (i) the replacement contracts for the Pan Malaysia T&I works (five packages); (ii) risk service contracts for new marginal fields (third licensing round); (iii) outcome of Newfield Exploration’s asset sales; (iv) Petronas’ PM-6 and PM-9 enhanced oil recovery contract; (v) Kraken and Madura floating, production, storage and offloading tenders; and (vi) Petronas’ final investment decision (FID) and further tenders for its refinery and petrochemical integrated development (Rapid) project in Pengerang, Johor.

Of the O&G companies under our coverage, SapuraKENCANA PETROLEUM BHD [] is the busiest as it is heavily involved in most of the tenders (Pan Malaysia T&I, marginal field, Newfield, PM-6 and PM-9 EOR). ALAM MARITIM RESOURCES BHD [] is involved in the Pan Malaysia T&I and marginal field RSC tenders, Bumi Armada Bhd is involved in marginal field RSCs as well as the Kraken and Madura floating, production, storage and offloading tenders while DIALOG GROUP BHD []’s Pengerang Phase 2 project heavily hinges on Petronas’ FID on Rapid.

Maintain “overweight”. We opine that the Malaysian O&G sector is still firmly in a capex upcycle and stronger contract/news flow in 4Q13/1H14 will likely rerate the share prices of O&G companies.

Our top picks for the sector are SapuraKencana (“buy”, target price RM4.62) and Alam Maritim (“buy”, TP RM1.80). We like SapuraKencana for its strong management track record and integrated business model, among others. Alam Maritim is our top pick among the O&G small and mid cap players for its undemanding valuation at 11.4 times 2014 calendar year earnings per share and strong earnings growth driven by higher activities across all business segments. — Affin IB Research, Oct 3

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This article first appeared in The Edge Financial Daily, on October 04, 2013.