- Upstream reported that several contractors including Malaysia Marine & Heavy Engineering (MMHE), SapuraKencana Petroleum, and TH Heavy Engineering (THHE) are still in negotiations with the lead contractor Hyundai Heavy Industries (HHI) for the fabrication of the substructure covering a jacket and bridge for Petronas’ Baram Delta Gas Gathering Project 2 (Bardegg-2) and Baronia field development.

- To recall, HHI had recently bagged the US$1bil turnkey contract to fabricate the 30,000-tonne central processing platform (CPP) and associated infrastructure for the project. We understand that the topsides will be built at Hyundai’s Ulsan yard, while the 14,000-tonne substructure to support the CPP will be constructed in Malaysia. The delivery of the jacket and bridge is scheduled for February 2016.

- The Bardegg-2 and Baronia field development also includes several wellhead platforms on the Tukau Timur and Baronia fields that will be tied back to the CPP, where SapuraKencana had won the contract last year. First gas is targeted for early 2018.

- The outlook for the fabricators is muted as orderbook replenishment remains a challenge amid capex cuts by the O&G companies and a slowdown in E&P activities. Furthermore, local fabricators have been facing intense competition from foreign yards and had recently lost out on major fabrication jobs, including the Bergading CPP earlier.

- Petronas had recently announced the deferment of the Sepat gas project, in Block RM313 off Terengganu, until 2017 or 2018. Petronas had earlier evaluated several different development concepts for Sepat, with options including a CPP or an FPSO.

- With the deferment of the Sepat project, the Kasawari CPP remains the only major fabrication job in the near term, where the prequalified parties are HHI, a joint venture between Saipem and SapuraKencana, and a partnership between Technip and MMHE. The submission deadline for the US$4bil turnkey contract has again been extended to March from February due to new technical and commercial requirements for Kasawari.

- This is not a surprise, given Petronas’ focus on optimising its cost structure which would see a reduction in capex by 10%-15% for 2015 and opex by 30%. Our immediate concern centres on the risk of impairment on assets of select companies that was acquired when oil prices were at elevated levels. Petronas had booked impairment losses of RM22bil in 4QFY14 leading to a loss of RM7bil for the quarter.

- We prefer established companies that are exposed to the production phase with long-term service contracts and recurring income, as these are less sensitive to the oil price fluctuations. We maintain our NEUTRAL view on the sector with BUY calls on Dialog Group (FV: RM1.95/share) and Bumi Armada (FV: RM1.45/share).

Source: AmeSecurities