-  We have downgraded our sector view to NEUTRAL from OVERWEIGHT given the slow rollout of domestic developments, downscaled projects, declining marine charter rates, increasing competition from overseas fabrication players due to the relaxation of local content requirements and deteriorating visibility of regional prospects, especially in Australia’s mega-billion gas field developments. Additionally, there are concerns that the possible replacement of Petronas’ president/CEO Tan Sri Shamsul Abbas next year may lead to further temporary delays in contract awards.

-  Slower project rollouts and delays in the award of new tenders translate to cuts in O&G players’ revenue prospects in FY15F-FY16 and a higher corresponding impact on earnings leveraged to fixed operating costs. The impact will be more significant for domestic- centric upstream players, as opposed to more globalised operators such as Bumi Armada and SapuraKencana or downstream service providers such as Dialog Group. Hence, we have cut our FY16-FY17F earnings forecasts for MMHE by 11%-13% and Alam Maritim Resources by 5%-10%.

-  We have also cut our fair values for Alam Maritim (to RM1.40/share from RM1.80/share previously), MMHE (to RM2.35/share from RM4.30/share) and Yinson Holdings (to RM2.97/share from RM3.67/share). Hence, we have downgraded our recommendations for Petronas Gas from BUY to HOLD while maintaining HOLDs for Yinson and Dialog Group. MMHE remains a SELL while our BUYs are Bumi Armada, SapuraKencana and Alam Maritim.

-  The contract awards to Malaysian O&G players in 3Q2014 fell to only RM711mil from RM8bil previously (see Chart 3). For fabricators like MMHE and TH Heavy Engineering, near-term domestic order prospects have deteriorated as our channel checks reveal that out of 4 central processing platforms (CPPs) being proposed or tendered out in Malaysia at the beginning of the year, only the award for the over US$1bil Bergading CPP may materialise by the end of the year. But this CPP fabrication job appears to have been secured by Hyundai Heavy Industries but some portions may be carved out to the MMHE-Technip joint-venture to meet local content requirements.

-  The slower project rollouts are underscored by recent Upstream reports that the Petronas-operated Baram Delta Gas Gathering Project 2 (Bardegg 2) and Baronia enhanced oil recovery development off Malaysia appears to have slowed with the partners yet to award the CPP to frontrunner Hyundai Heavy Industries. Operator Petronas Carigali has requested to extend the bid validity for the platform tender until December 2014 while the official award of the turnkey CPP contract will only be made after all the key approvals were in place. Nevertheless, the current bidders – Hyundai, TH Heavy Engineering-McDermott, Technip-MMHE and Saipem-SapuraKencana, China Offshore Oil Engineering Company-Petrofac, and Abu Dhabi’s National Petroleum Construction Company are still officially in the game.

-  This CPP jacket was earlier scheduled for delivery by the first quarter of 2016, while the topsides are due for delivery in 36 months after contract award, which means that installation will now likely take place in late 2017 at the earliest. The topsides will weigh 13,000 tonnes and will be installed via the float-over method and integrated to the eight-legged jacket weighing 6,800 tonnes. First gas is targeted for the end of 2017, although this schedule could now slip unless the CPP contract is awarded soon.

-  The Bardegg 2 and Baronia EOR platform tender is one of three simultaneous tenders for EOR and marginal field projects in the SK 307 production sharing contract off Sarawak, East Malaysia. Petronas holds a 60% operating interest in this EOR project with its sole partner, Shell (40%). The new CPP to be located on Baronia will initially extract non-associated gas from the field which, together with the existing associated gas production, will be used for re-injection, together with water into the Baronia reservoir to enhance oil recovery.

-  The other two tenders involve the Tukau Timur and the Bokor fields. But for the Bokor field, Petronas Carigali also appears to be downsizing the scale of the project. The original proposal involved a CPP of over 20,000 tonnes plus up to seven wellhead platforms but the revised plan envisions a 16,000 tonne CPP with 3 satellite wellhead platforms each having a weight of 1,000 tonnes. The revision of the Bokor concept is very likely to defer the production start-up of Bokor phase 3 to beyond 2017, which was earlier targeted in 2015.

-  Petronas decided to scale down Bokor Phase 3 after a review of the project economics, which is expected to come after the completion of front-end engineering and design studies, likely to be undertaken by Aker Solutions, which is leading against other bidders Ranhill Worley and Technip. The national oil company is understood to have invited engineering companies to bid for a contract on the new development concept. The original proposal for the EOR project aimed to more than double oil recovery to 140,000 barrels per day (bpd) from 60,000 bpd.

-  Globally, there are ongoing revisions in project cost and scale given the increasing cost consciousness by oil majors (and not only Petronas) as crude oil prices have softened even though development costs have escalated over the past 3 years. Additionally, even though Petronas is still likely to ramp up its capital spending post-2015, there will be increased competition from foreign yards as local vendor policies are being relaxed under more complex engineering projects. Hence, while there are still multiple EOR projects in the pipeline involving other CPP projects such as the Kasawari, Sepat, and Guntong fields, visibility for local operators’ chances is unclear. But some excitement remains in the downstream sector given that Petronas is still committed to its infrastructural spending for the Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor. While the packages were recently awarded to multiple foreign contractors, there is still likelihood that some of the smaller jobs may be awarded to the local yards.

Source: AmeSecurities