Oil & Gas - 2013 Budget: A booster shot for Downstream O&G

We are not surprised to see the downstream oil and  gas segment being the key focus in this Budget given its strong contribution  to the Malaysian economy. Two key initiatives were announced for this segment. For the first initiative, the three immediate oil & gas beneficiaries will be in the likes of Dialog, PChem and PetGas. Being the first mover in the Pengerang Integrated Petroleum Complex (PIPC) project in Johor, Dialog is the top beneficiary. PChem and PetGas should also benefit due to their involvements in SAMUR and Melaka RGT. Subsequently, onshore oil & gas constructors and process equipment & fixtures players will also benefit from the spillover opportunities of such developments. For the second initiative, Dialog again is the immediate foreseeable beneficiary given that it is one of the first five licensed GIFT traders. Overall, the initiatives are testament to the Government’s aim to ensure the viability of the PIPC and the Sipitang Oil & Gas Industrial Park (SOGIP) projects. As such, we remain bullish with an OVERWEIGHT rating on the sector. Our preference within the downstream sector is clearly Dialog (OP; TP: RM2.79) while SapuraKencana (OP; TP: RM2.80) remains our TOP PICK for the overall Oil & Gas sector.

Initiative 1:  Investment Tax Allowance of 100% for the period of  10 years for qualified companies that invest in refinery activities on petroleum products. The projects include the PETRONAS Refinery and Petrochemical Integrated Development (RAPID), oil and gas storage Terminal in Johor, Regasification Plant in Melaka as well as oil and gas terminal in Sipitang, Sabah.

Dialog, PChem and PetGas are the immediate beneficiaries.  Being the first mover in the Pengerang Integrated Petroleum Complex (PIPC) project, Dialog Group Bhd (OP; TP: RM2.79) will benefit for its involvement in its: 1) RM5b Pengerang CTF for the oil storage facilities; and 2) the planned RM4b LNG storage facilities and the regasification terminal (RGT).

Petronas Chemicals Group Bhd (“PChem”, OP; TP: RM7.46) will also enjoy this allowance given its involvement in the USD1.5b Sabah Ammonia-Urea (SAMUR) project located in Sipitang that will be ready by end-2014. Likewise, Petronas Gas Bhd (“PetGas”, NOT RATED) will benefit as it is the operator and owner of Melaka RGT. 

Onshore construction & engineering and process equipment fixture players are the secondary beneficiaries.  Subsequently, successful development of such facilities will spur opportunities for:

1) Onshore oil & gas constructors - such as Dialog, SapuraKencana Petroleum Bhd  (OP; TP: RM2.80); Muhibbah Engineering (M) Bhd (MP; TP: RM0.82); MMC Corporation Bhd (OP; TP: RM2.80); and East Malaysia-based Naim Holdings (OP; TP: RM2.46); and, Suria Capital (NOT RATED); and

2) Process equipment & fixtures players – such as KNM Group Bhd (MP; TP: RM0.73); and Pantech Group Holdings Bhd (NOT RATED).

Besides onshore oil & gas constructors, civil engineering constructors like WCT Bhd (OP; TP: RM3.09) is the purported beneficiary of the earthworks in RAPID, while Benalec Holdings Bhd (OP; TP: RM1.71) could be a beneficiary for land reclamation works.

Source: Kenanga