Oil & Gas - Two more RSC awards next week, three more year-end

OVERWEIGHT (Maintained)

Investment Highlights 

• Upstream reported that Petronas is expected to award two more risk-service contracts (RSC) for the Tembikai and Cenang marginal fields off Peninsular Malaysia by the end of next week. Petronas is also holding technical reviews with shortlisted bidders for three further RSCs to be awarded by the end of 2012. 
• The development of the Tembikai and Cenang discoveries are located near Talisman Energy-operated Block PM 314.The bidder list for the two fields include international oilfield services providers Baker Hughes, Haliburton and Petrofac as well as Australia-based oil and gas independents, AWE and Hydra Energy. Potential Malaysian players in discussions with these foreign players include SapuraKencana, Dialog, Alam Maritim, Daya Materials and Scomi Oilfield Services. 
• Unlike the three earlier RSCs already awarded to SapuraKencana-Petrofac, Dialog-Roc Oil-Petronas Carigali and Canada-listed Coastal Energy, the Tembikai and Cenang marginal field developments would primarily target early gas, not oil production. Talks on the Tembikai and Cenang RSCs came just weeks after Petronas sealed a deal in July with Coastal Energy to develop the Kapal, Banang and Meranti (KBM) fields also off Peninsular Malaysia. We understand that Coastal is negotiating with Petra Energy and Bumi Armada for involvement in the KBM RSC. 
• Recall that foreign players have to involve local companies for at least 30% participating interests in order to secure RSCs in Malaysia. Contractors are reimbursed on operational and capital expenditures on achieving production start-up. The project cost for each RSC is estimated at between US$500mil and US$1bil. 
• We are glad that the news flow for marginal fields is beginning to regain momentum after a lull in the earlier part of the year due to ongoing technical evaluation by the international bidders. Besides marginal field contracts, we expect further enhanced oil recovery contracts to be awarded towards the end of the year. 
• For other projects in the pipeline, the US$5.2bil (RM16bil) North Malay basin project being undertaken by Petronas Carigali and Hess, is still going ahead as planned with first gas from the Kamelia field expected by 1Q2013. Hence, we remain OVERWEIGHT on the sector given that Petronas remains committed to its RM300bil 2011-2015 capex programme, which is likely to accelerate next year onwards despite a slow start for the first two years. 
• Our top BUY is Petronas Gas, as its earnings growth will reach an inflection point with the commencement of the 530mmscfd Lekas regasification terminal (RGT) next moth, further supported for future RGT projects in Lahad Datu, Pengerang and Lumut. Our other BUY calls are SapuraKencana Petroleum, Bumi Armada and Dialog Group. While Dialog’s joint-venture with China Aviation Oil to develop the 380,000 cu metre capacity Langsat 3 tank terminal in Johor has lapsed due to delays in negotiating with port authorities to dredge and develop two berths and other requisite infrastructure, the impact to earnings and sum-ofparts are not significant. In our view, the Langsat 3 project has only been delayed pending resolution of negotiations with the authorities as well as sourcing for alternative off-takers for the storage capacity.

Source: AmeSecurities