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2013 STRATEGY - OIL & GAS (OVERWEIGHT)

kiasutrader
Publish date: Fri, 28 Dec 2012, 09:11 AM

Crude oil price stays steady. Crude oil price has steadily recovered from USD70/barrel in 3Q09 and held steady at an average USD80/barrel since 4Q10. As most oil majors consider stabilizing oil prices as crucial when allocating capital expenditure, we believe most are using USD80/barrel as  a  benchmark.  Although  we  think  that oil  supply is likely  to  outpace  demand in 2013,  we  still think  that  crude  oil  price  is  likely  to  remain  at  about  USD80/barrel  as  prices  are  likely  to  be supported by tensions in the Middle East and economic stimulus programmes in the west.

Petronas  still  the  engine  of  the  local  O&G  industry.  Petronas' three-pronged  development blueprint  involves:  i)  enhancing  oil  recovery  at  existing  mature  oilfields,  ii)  development  of marginal  oilfields,  and  iii)  enlarging  its  resource  base.    As  YTD  crude  production  has  dropped 58%  due  to  a  stop-order  in  Sudan,  we  believe  that  Petronas  is  likely  to  strive  for  long-term sustainable  growth  by  enhancing  exploration  and  production  activities.  With  21  successful discoveries  YTD  (seven  in  3Q12  in  Bidara,  Gambir  RDR,  Kurma  Manis-1,  Berangan-1, Tembakau-1,  Kuang  North-2  and  Tukau  Timur  Deep-1),  we  see  offshore  O&G  activities heightening in 2013. This will benefit vessel players like Perdana Petroleum and Alam Maritim.

More EOR, marginal oilfield contracts in 2013. The awarding of marginal oilfield contracts and enhanced  oil  recovery  contracts  were  slower  than  expected  this  year,  with  only  one  marginal oilfield award in July (Coastal Energy, with Petra Energy as the local partner) and one enhanced oil  recovery  award  in  November  (the  Dialog-Haliburton  tie-up).  Hence  we  expect  more contract awards for both projects next year and rate Bumi Armada and Dayang as strong contenders for the  upcoming  marginal  oilfield  contract,  which  will  likely be  for  the  Tembikai  and  Cenang marginal  fields  off  Peninsular  Malaysia  and  SapuraKencana  Petroleum  for  the  next  EOR contract. That said, we do not discount the possibility of SapuraKencana Petroleum and Dialog being awarded another marginal oilfield contract as their balance sheet could support it.

Smaller  players  make  attractive  takeover  targets.  In  anticipation  of  more  contracts  being rolled out next year, we believe the smaller companies which are trading at less than 10x forward earnings make good takeover targets. We particularly like Perdana Petroleum as we believe that its  major  shareholder,  Dayang,  may  increase  its  stake  in  the  company  if  the  latter  manages  to secure jobs in the Pan Malaysia cluster of fields to ensure that the jobs are executed immediately as  new  vessels  take  time  to  build.  We  also  like  Alam  Maritim  as  the  worst  is  over  for  the company amid a recovery in charter rates from a low of USD1/bhp to USD1.8-2.2/bhp now.

Overweight on longer term outlook. All in, we are bullish on the O&G industry in the immediate term as it would be very soon before new contracts are awarded, including: i) RM8-10bn worth of hook-up commissioning in the Pan Malaysia cluster, ii) marginal oilfields, and iii) the replacement of  expiring  brownfield  contracts.  One  of  our  top  picks  for  the  sector  is  SapuraKencana Petroleum (BUY FV RM3.00); while we also like Dialog (BUY FV: RM3.45) and Dayang (BUY FV:  RM2.90). We  like  these  companies  for  their  excellent  track  records  and  believe  that  in  the event of a slowdown in contract awards, they would still have strong orderbook. This reinforces our conviction on their respective earnings growth next year.
Source: OSK
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