• Petroliam Nasional (Petronas) confirmed that the Sabah-Sarawak Gas Pipeline (SSGP) suffered a pipe rupture and fire yesterday at 1.59am. The fire, which occurred 4km from Long Selulong, Ulu Baram, Miri, is currently under control with no injuries reported.
• There were five Penan villages — Long Kawa, Long Siang, Ba Selulung, Long Kevok and Long Urang — near the ruptured pipeline. According to the Marudi police chief, three pipelines were fully sealed and secured before 3.00am yesterday.

• Selangau MP and Works Minister Baru Bian expressed his shock over the incident. An investigation on the incident is currently ongoing.

• The SSGP is a 500km natural gas pipeline, built at a cost of RM5bil in 2011, that linked Kimanis in Sabah to Bintulu in Sarawak. The pipeline is part of Petronas’ Sabah– Sarawak Integrated Oil and Gas Project, which has started operating since early 2014.

• There have been incidents along the SSGP. In June 2014, an explosion occurred in the pipeline between Lawas and Long Sukang in Sarawak that caused a temporary shutdown of the line without any casualties. In January 2018, there was a leakage along Long Luping of the Lawas district in the Limbang division which had no impact to surrounding communities and environment.

• The SSGP is owned by Petronas while its operations and maintenance was undertaken by Petronas Gas (PGas) until 1 September 2019 when the responsibility was transferred to Petronas Carigali S/B. As PGas’ Sarawak gas distribution business is separate from the transportation segment, this incident will not have any significant impact on Petronas Gas’ earnings.

• Petronas Chemicals Group (PChem) has an ongoing operation in Sipitang, Sabah under Petronas Chemicals Fertiliser Sabah Sdn Bhd (formerly Sabah Ammonia Urea), which accounts for almost half of the group’s urea production. We estimate that the Sipitang operation could account for 10%–14% of the group’s 9MFY19 earnings.

• However, our channel checks reveal that the pipeline incident was further down the line along the SSGP and does not interrupt the feedgas supply to the Sipitang plant. As such, we maintain PChem’s FY19F–FY21F earnings and our HOLD recommendation with an unchanged fair value of RM7.80/share.

• For the oil & gas sector, we maintain OVERWEIGHT as prospects have radically brightened with rising asset utilisation globally which supported service providers’ improving results.

• While we have BUY calls for MISC, Sapura Energy and Velesto Energy, our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group.

• We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone.

Source: AmInvest Research - 14 Jan 2020