Oil & Gas Sector - Crude oil output still slowing, new marginal field soon OVERWEIGHT

- Petroliam Nasional’s (Petronas)  strong 1QFY12 results may not be sustainable in the subsequent quarters due to the recent decline in crude oil, liquefied natural gas (LNG) and petrochemical prices, coupled with potential provisions of up to RM3bil for the Sudan pipeline shutdown. But the declining crude oil output will continue to drive the group’s exciting capex rollouts, with a new marginal field risk-sharing contract (RSC) expected to be announced over the next few days. 

- Petronas registered a 1QFY12 net profit increase of 35% QoQ to RM18.2bil due to:- (1) higher prices for crude oil, condensates, liquefied natural gas (LNG) petrochemicals and refined products, (2) increased production from upstream facilities, and (3) absence of provisions incurred in MISC’s exit from its liner business. But Petronas’ 1QFY12 revenue dipped 4% to RM75bil due to lower trading volume for crude oil, condensates, LNG and petroleum products, coupled with a weaker US$. (See Table 2) 

- While Petronas’ total daily output of crude oil and gas rose by 1% to 2.1 million barrels of oil equivalent (boe), this stemmed largely from higher gas output, which rose 5.5% due to new production from Turkmenistan that more than offset the lost output from Sudan. But crude oil production slid 7% QoQ and 11% YoY to 773,000 boe, which is part of an overall declining trend due to natural field depletion, lower reservoir performance and operational challenges in the group’s overseas operations.

- The group’s 1QFY12 capital expenditures rose 27% QoQ to RM9bil, but was down 11% YoY likely due to project timing schedules. But the group remains committed to its RM300bil 5-year capital expenditure target from 2011 to 2015. Petronas has set a target for production to grow by a compounded average growth rate of 3.5% over the next five years with a resource replenishment rate of over 1x on a 3-year rolling average. Petronas approved 9 enhanced or improved oil recovery projects during the quarter, which is to elevate the production rate of the country’s existing reserves. 

- Petronas has identified 23 marginal fields which are divided into 6 clusters. The group expects to announce the award of the six before the year-end. The first RSC for this year is awaiting approval from the Finance Ministry and is expected to be announced over the next few days. We expect the likely candidates for the RSC to be Puncak Niaga, Bumi Armada, UMW Oil & Gas and Boustead Heavy Industries Corp. SapuraKencana Petroleum and Dialog Group, which secured the first two RSCs, remain as contenders for the new marginal fields.

- Besides marginal fields, the group has achieved final investment decision for the country’s first floating LNG project back in March this year and has signed two heads of agreement for the Refinery and Petrochemical Integrated Development complex in Pengerang with Itochu Corp and PTT Global Chemicals. The unabated upward momentum for the oil & gas capex cycle continues to underpin our OVERWEIGHT call on the sector, with MMHE being our top pick given its proven track record in providing fabrication solutions for deepwater and more complex engineering projects. We also like Dialog, SapuraKencana Petroleum, Bumi Armada and Petronas Gas.

Source: AmeSecurites