Highlights

During a media briefing following the release of 2QFY13 result, Petronas president/group CEO Tan Sri Shamsul Azhar Abbas said that cost remained a major concern, with oil and gas infrastructure facilities and support services rates on the rising trend, especially in light of the downtrend in crude oil prices.

Petronas is in the process of reviewing the costs of some of the projects and would scrap the project if there’s no economic of return. The final investment decision (FDI) for RM60bn Rapid project would only be made in 1Q14. The commission date will defer from early 2017 to Jan 2018.

Comments

Our thesis that Petronas will continue to invest in its capex plan to boost O&G production remain intact. Oil revenue from Petronas remains the key contribution of total government federal revenue (~35-40%). Given the recent concern of fiscal deficit and current account shrinking, it is important for Petronas to continue invest to boost flattening O&G production (Refer fig 1 and 2). ETP driven enhanced oil recovery (EOR) and marginal field seem to be the solution to boost production. The recent entry of Vestigo is likely to expedite the development of marginal oilfields. Uzma stand out as main beneficiary from EOR as its propriety product - UzmAPRES is designed to help clients boost production without much capex.

However, we opined that there might be potential margin pressure for new projects to oil and gas services providers in future. Petronas EBIT margin fell from 35% in 2009 to 31% in 2012 due to still-elevated operating cost in the oil and gas sector (Refer fig 3). To contain cost, Petronas is likely to induce more competition by open tender for new projects going forward. Hence, we expect increase competition and margin pressure for new projects.

Given the current account issue, project that has high import content like RAPID maybe delayed. Oil and Gas companies that are potentially leveraged to RAPID project are some onshore fabricators/process equipment providers (Muhibbah, MMHE, Pantech) and downstream players (Dialog, Petronas Chemical and Petronas Gas).

Looking across coverage, we prefer stocks with huge locked in orderbook which provide longer earning visibility to weather any potential deferment of new projects. Dayang, SapuraKencana, Bumi Armada, Scomi Energy and Uzma ranked on the top with orderbook burn rate range from 3.6x to 6.7x FY13 revenue (Refer fig 4). While MMHE, Wah Seong sit at the bottom, vulnerable to new projects slow down.

Rating

OVERWEIGHT

Positives: We believe that the ETP driven RM300bn Capex spending to enhance exploration, EOR and Marginal fields will continue and drive earnings in the sector.

Negatives: execution risk, delay in contract rollout and investors’ perceptions on previous disappointments

Source: Hong Leong Investment Bank Research - 5 Sep 2013