Highlights

In our report titled “2014 Outlook – What’s Next?” dated 9 Jan 2014, we advised investors to focus on the micro themes in the O&G industry for alpha generation after strong share price performance in 2013. Our favourable micro themes are risk services contract (RSC), drilling-related stocks, fabrication jobs, and RAPID play. Both RSC and drilling-related stocks have performed strongly in 1H14 with fabrication related contracts award to delay to 4Q14. For 2H14, RAPID will be the main theme for O&G sector after Petronas has approved the final investment decision (FID) for the project.

RAPID is estimated to cost about US$16bn (or RM52.5bn) while the associated facilities will involve an investment of about US$11bn (or RM36.1bn). Total investment worth RM88.6bn vs. RM60bn reported previously. According to JPDC, the Pengerang Integrated Petroleum Complex (PIPC) is estimated to attract RM170bn of investment for the next 10-15 years and it aims to be the “Rotterdam of the East”.

To ensure PIPC will be operational in time (early 2009), site preparation, Cogeneration Plant and Raw Water contracts have been awarded (Refer Figure 1) for the past few months. We understand that bidding is ongoing for total 5 packages for refinery plant following by petrochemical complex, LNG regasification plant. Hence, we expect more EPCC contracts to be award in 3Q14. Main beneficiaries from the onshore fabricator/process equipment providers are: KNM (BUY: TP RM1.35), Dialog, Muhibbah Engineering, Pantech and APB Resources (Not Rated - Indirect Beneficiary). Downstream players like Dialog, Petronas Chemical and Petronas Gas will be the long term beneficiaries.

To note, there are potential more EPCC works if potential foreign investors commit their final investment decision on RAPID as PIPC is expected to attract RM170bn investment for next 10-15 years. 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.

Top Picks

To capitalise on the RAPID theme, our top pick is KNM (BUY: TP:RM1.35). Our TP have not factored in value from EnergyPark Peterborough yet. Phase 1 (23% of total 80MW) will add RM0.39 to our TP.

Source: Hong Leong Investment Bank Research - 7 Aug 2014