Oil & Gas Sector - Spending US$59bil in exploration & production NEUTRAL

- Petroliam Nasional’s (Petronas) executive vice-president of exploration and production business Datuk Wee Yiaw Hin said that the capital expenditure for Petronas and its production sharing contract (PSC) operators will be US$59bil (RM183bil) over the next five years, the Star reported today. He said that 70% of the capex will stem from Petronas, which will largely involve exploration and production.

- Wee said that Petronas aims to maintain and grow its production in oil and gas from 3 strategies - (1) enhanced oil recovery projects, (2) ‘stranded fields’ such as marginal oilfields, and (3) aggressive exploration in new areas such as high pressure, high temperature and deepwater fields.

- Based on Wee’s comments, we estimate Petronas’ exploration and production capex at  RM128bil over the next five years, which translates into 43% of the group’s overall capex programme of RM300bil from 2011 to 2015, which was announced by Petronas’ president/chief executive officer Datuk Shamsul Azhar Abbas earlier last year. We understand that the larger portion of Petronas’ total capex could involve downstream activities such as refineries, petrochemicals, liquefied natural gas plants and storage facilities, as well as maintenance and upgrading actitities. 

- Recall that Petronas is developing the RM60bil (US$20bil) Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, a 3.6 million tonne-LNG Train 9 in Bintulu, and a RM4.7bil (US$1.5bil) Petronas Chemicals’  greenfield ammonia/urea plant in Sipitang, Sabah.

- For upstream development, the capex upward trend is still intact but our channel checks indicate that the momentum of new contract rollouts has temporarily shifted from pure fabrication to offshore installation works in the sector’s value chain. We note that large central processing platform awards for the North Malay Basin Phase 2, as well as the Bokor, Dulang and Semarang fields could slip into early next year from earlier expectations of this year. This stems largely from the increasingly complex engineering designs for the more difficult to reach oil & gas fields.

- But the hook-up, commissioning and maintenance works, which include the replacement of expiring long-term contracts, are likely to materialise towards the end of this year. Petronas and its production-sharing contractors are currently holding an open Pan-Malaysian tender for hook-up, construction and commissioning (HUCC) works potentially worth RM8bil-RM10bil, with interested bidders including SapuraKencana Petroleum, Dayang Enterprise, Petra Energy, and possibly, Shapadu. 

- The recent Budget announcement revealed 10-year income tax exemptions and further incentives in the form of land acquisition costs and/or financing assistance for petroleum refinery, storage and trading activities, which we believe benefit primarily the players involved in RAPID and Southern Johor’s oil & gas hub. Hence, we maintain our Neutral stance on the sector with our top BUYs being Dialog Group and Petronas Gas, which are expected to be re-rated from the multiple tank terminal and LNG regassification projects in the pipeline.   

Source: AmeSecurities