Oil & Gas sector
Maintain overweight: Petronas last week raised the quantity of gas from its investment in the Gladstone liquefied natural gas (GLNG) project in Australia - from two million tonnes to 3.5 million. But Petronas sold 5% of its 40% stake in the project to France-based Total for A$217 million (RM628 million), which we estimate has resulted in a loss of US$49 million (RM152 million).

Petronas' sale of the GLNG stake to Total was concurrent with ASX-listed gas producer Santos' sale of 15% of its 60% stake in GLNG for A$650 million. This led to Total acquiring a 20% stake in GLNG from Santos and Petronas in a deal that disappointed investors who had expected a valuation of over US$1 billion.

Recall that Petronas had bought a 40% stake in GLNG in May 2008 at a cost of US$2.5 billion but the parties then renegotiated the contract and Santos waived the final payment of US$500 million. Santos will now own 45% of GLNG (from 60% earlier), with Petronas' stake at 35% (from 40% earlier) and Total coming in at 20%.

We believe that the lower value obtained from Total's purchase reflects a fall in natural gas prices since May 2008, new risks in environmental regulations and the imposition of the 40% Resource Super Profits Tax (RSPT) after costs and capital repayment, effective from July 1, 2012, in addition to Australia's existing corporate tax rate of 30%.

GLNG, which could cost over US$15 billion, processes coal seam gas (CSG) - predominantly methane gas stored within coal deposits or seam - into liquefied natural gas (LNG). It is estimated to have a capacity of 7.2 million tonnes per annum (mtpa) of LNG, with a maximum potential production of 10 mtpa.

GLNG has signed a binding heads of agreement with Total for the sale of 1.5 million tonne a year of LNG for 20 years, starting in 2014. Combined, the Total and Petronas agreements with GLNG provide for the annual sale of five million tonnes of LNG - underpinning development of a two-train project as well as facilitating project finance. With the combined value of the off-take agreements exceeding A$100 billion, we do not expect the remaining 2.2 million tonnes of LNG to have much difficulty in being sold.

We view Petronas' reduction in its Gladstone investment stake as part of its new strategy - under new president/CEO Datuk Shamsul Abbas - to refocus its capex domestically. But Petronas' higher off-take from GLNG emphasises the importance of the proposed RM3 billion floating storage and regassification unit in Melaka - likely to be tendered out towards year-end. Hence, we remain positive on the sector with an expected re-acceleration in domestic oil & gas capex.

We maintain our "overweight" view on the sector with "buy" calls on SapuraCrest, Alam Maritim Resources, Kencana Petroleum, Tanjung Offshore, Dialog Group and Petronas Gas. Our "holds" are Wah Seong Corp and Coastal Contracts. - AmResearch Sdn Bhd, Sept 14


This article appeared in The Edge Financial Daily, September 15, 2010.