Investment Highlights

• EPCIC for Kasawari. After changes to the huge Kasawari gas development plans, Petronas has finally launched the engineering, procurement, construction, installation and commissioning (EPCIC) tender for its giant gas field development off Sarawak. While bid invitations have been issued to domestic players including Malaysia Marine & Heavy Engineering (MMHE) and Sapura Energy, Upstream is uncertain whether overseas players have been included.

• MMHE may have the edge. Petronas may prefer MMHE to fabricate the huge central processing platform (CPP) in the deep-water Kasawari sour gas field on Block SK 316 off Sarawak as Sapura Energy had recently secured the contract to build the 19,500-tonne platform for Mubadala Petroleum’s Pegaga project.

• Reviving an earlier concept. Petronas had earlier invited global players to secure a strategic partner with relevant expertise and experience to develop the high carbon dioxide (Co2) Kasawari field. Three consortia, each with Malaysian participation - Sapura with Saipem, Ranhill Worley plus Hyundai Heavy Industries, and MMHE with then-Technip — were bidding back in 2015 to supply the large CPP. However, Petronas aborted this process despite having interest from major players and opted to develop Block SK316 by itself. Petronas Carigali has arranged for Dutch contractor Twister to use its technology to process the acid gas fields containing high concentrations of Co2. Under that programme, the companies were to develop, fabricate and test a skidmounted crystalliser vessel for qualification.

• Smaller scale, but still substantial. The earlier development plant involved a 30,000-tonne CPP with a topsides of 19,000 tonnes, together with a bridge-linked wellhead platform and flare tripod. While the current version of the project is expected to be on a smaller scale, it is likely to still involve a large platform at its core. The Kasawari field contains an estimated recoverable reserves of around 3.2 trillion cubic feet of gas which is able to achieve a targeted production of 900 million cubic feet per day of gas. As well as Kasawari that contains between 30% and 40% Co2, Block SK 316 also hosts the producing NC3 field that supplies feedstock gas to Train 9 at Petronas’ LNG complex at Bintulu and at least five other gas discoveries.

• Sapura could secure installation job. In our view, while MMHE is likely to secure the fabrication job, Sapura Energy with its large fleet of offshore construction vessels, could clinch the offshore installation portion. Given the size of the CPP, we expect the EPCIC portion to reach over US$1.5bil and underpin the rising momentum of the region’s offshore capex spending.

• Rising contract awards. Malaysia’s1Q2018 contract awards jumped 68% QoQ and 36% YoY to RM2.7bil due to Sapura Energy securing the EPCIC work for the Pegaga CPP and Serba Dinamik’s EPC and O&M jobs. Although the Pegaga EPCIC job is lumpy, 1Q2018 order increase augurs a reversal from the 2017 order decline of 15% given Petronas’ downstream focus, particularly on RAPID in Pengerang, Johor. We note that Petronas’ Integrated Logistics Control Tower project, which was expected to be awarded late last year for 110 vessels under 23 packages on a three-plus-two-year basis, has yet to be announced.

• Maintain OVERWEIGHT view on the sector given the stabilising crude oil prices above US$75/barrel, underpinned by the resumption of nuclear sanctions on Iran and deterioration in Venezuela’s output. Notwithstanding Petronas’ cautious capex strategy, asset utilisation rates have begun to improve amid rising regional project rollouts. Hence, we expect charter rates to have bottomed out even in the absence of any upward trajectory at this juncture. Our top picks are still companies with stable and recurring earnings such as Dialog Group and Yinson. Dialog’s earnings visibility is secured largely by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson’s Ghana floating production, storage and offloading vessel project will provide the earnings momentum over the next 2 years. Our other BUYs are MMHE, MISC, Sapura Energy and Bumi Armada, which are trading below their intrinsic values. We maintain a SELL for Petronas Gas due to the Energy Commission’s upcoming announcement of the transportation tariff setting mechanism, which we expect to be value-eroding due to an expected lower targeted rate of return on asset values.

Source: AmInvest Research - 18 Jun 2018