Oil & Gas Sector - Depleting production, but capex rollout could disappoint NEUTRAL

- Petroliam Nasional’s (Petronas) 1HFY12 net profit growth of 4% YoY was driven by higher prices for crude oil, liquefied natural gas and petrochemicals, and gains from the  listing of Gas Malaysia despite a 2% YoY decline in Malaysia’s hydrocarbon output. But the group’s 2QFY12 net profit fell 30% QoQ due to overall lower product prices and volume (See Table 2).

- Petronas’ total daily output of crude oil, condensate and gas in Malaysia fell QoQ by 9%, 8% and 12% respectively, in tandem with an overall declining trend due to natural field depletion, lower reservoir performance, plant maintenance of the group’s Bintulu plant and operational challenges in the group’s overseas operations.

- Petronas maintains its targeted production growth of 3.5% on a compounded average basis over the next five years, with a resource replenishment rate of over 1x on a 3-year rolling average. Petronas has made 4 successful discoveries at Duyong Shallow, Kuang North-1, Zuhal East-2 and M5-2, which will elevate the production rate of the country’s existing reserves. 

- The group’s 1QFY12 capital expenditure rose 35% QoQ and 22%YoY to RM12bil, largely for exploration and production. But in view of Petronas’ RM300bil 5-year capital expenditure target from 2011 to 2015 or at an average of RM60bil annually, the current capex momentum still appears slow at RM40bil in 2011 and RM20bil in 1HFY12. 

- From our channel checks, we understand that the slow capex rollout in Malaysia to-date stems largely from higher design and engineering requirements arising from project complexities as the new developments attempt to access more difficult-to-reach reserves. The technologies being studied involve enhanced and improved oil recovery projects, including high carbon dioxide content in the fields. Additionally, there is a possibility of further deferrals of upstream maintenance works given the need to maintain gas production in the country.

- There is a likelihood of further delays in the rollout of fabrication projects as the 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. But the slack in this segment could be partly offset by other segments in the oil & gas value chain such as the hook-up, commissioning and maintenance works, which include the replacement of expiring long-term contracts. 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 the results expected to be announced by the end of the year. Interested bidders are SapuraKencana Petroleum, Dayang Enterprise, Petra Energy, and possibly, Shapadu. 

- As expectations for the earnings growth momentum for key oil & gas players are likely to moderate by next year, we have downgraded the sector to NEUTRAL from OVERWEIGHT. We are currently reviewing our call and estimates for Dialog Group and Bumi Armada, given their lofty premium to the sector. For now, our top pick continues to be Petronas Gas, which is at an earnings inflection point with the commencement of the Lekas regassification plant.   

Source: AmeSecurities