Petroliam Nasional Bhd (PETRONAS) has formally announced the winners for the Pan Malaysia Integrated Offshore Installation Contract last week. Package A was awarded to Barakah Offshore Petroleum Bhd (BARAKAH; OP; TP: RM1.98); Package B to GOM; a subsidiary of Puncak Niaga Holdings Bhd (PUNCAK; OP; TP: RM3.50) and lastly Package C and D to TL-Offshore (TLO); a subsidiary of SapuraKencana Petroleum Bhd (SKPETRO; OP; TP: RM5.81). The total value for the contracts is estimated to be worth c.RM10b; whilst the firm duration for the packages is three years. We are positive on the awards as it is on schedule (versus many of other PETRONAS endeavours that have been significantly delayed, i.e. marginal fields, Chemical Enhanced Oil Recovery (CEOR) projects). We suspect that the lion’s share of the Pan Malaysia T&I contract went to SKPETRO, whilst it is a game-changer for BARAKAH as it lifts the company’s status beyond that of a subcontractor. Heading into 2014, we still expect a flurry of oil and gas activities given PETRONAS’ domestic reserve replenishment concerns. We continue to advocate an OVERWEIGHT call on the sector with our Top Pick still being SKPETRO for its stronghold on the majority of the oil and gas value chain.

Background of the contract. The contract involves the transportation and installation (T&I) for offshore facilities and includes all the necessary services required for the execution of the scopes such as marine spread services, required tools, specialized equipment and manpower services. The T&I services will be covering the eleven PSCs which include PETRONAS Carigali Sdn Bhd, Sarawak Shell Bhd & Sabah Shell Petroleum Co. Ltd., ExxonMobil Exploration and Production Malaysia Inc., Murphy Sarawak Oil Co. Ltd., Hess Oil and Gas Sdn Bhd, Talisman (Malaysia) Ltd., PCPP Operating Company Sdn. Bhd., Kebabangan Petroleum Operating Company Sdn. Bhd., Lundin Malaysia B.V, Petrofac Limited Malaysia and JX Nippon Oil & Gas Exploration (Malaysia) Ltd. The previous packages were awarded in 2009, where two winners were SKPETRO and GOM (subsidiary of PUNCAK).

Package A; a game changer for BARAKAH. We believe Package A makes up c.15-20% of the total RM10b value which implies a contract value of RM1.5-2.0b over three years. According to management, for the first year, there could c.4-5 months of work (not a full-year contribution) as such it will unlikely require a second subcontracted pipelay barge to assist the KL101. The project is a game-changer for BARAKAH, as it is generally known as a market leader in the pipeline precommissioning segment. Securing Package A seals the company’s prospects as a turnkey T&I contractor. As we are very positive on the new project, we are upgrading our target price for the stock to RM1.98 (from RM1.03 previously); based on an upgraded 13x CY15 PER (from 12x previously as we believe its new status renders a stock re-rating). We believe BARAKAH edged out competitors for Package A that included Alam Maritim Resources Bhd (ALAM; OP, TP: RM1.94); and Target Energy (not listed).

Package B goes to incumbent PUNCAK. We believe Package B makes up about 25%-30% of the RM10b value, which implies a contract value of RM2.5-3.0b over the next three years. PUNCAK was one of the incumbents of the previous round of Pan-Malaysia T&I works in 2009, where it received one package. Our water analyst has upgraded his target price to RM3.50 (from RM3.24) on the back of a re-rating of its oil and gas division’s target PER to 12.5x (versus previous 10x) given that the win by PUNCAK for the second time around, implies that it has entrenched itself as a preferred player of PETRONAS. We understand that PUNCAK will continue to use its derrick lay barge DLB264, and that competitors it edged out for Package B included Perisai Petroleum (PERISAI, MP, TP: RM1.42).

SKPETRO takes the lion’s share of the Pan Malaysia T&I with Packages C and D. Whilst SKPETRO has not made a formal announcement last week, we reckon it will only be a matter of time it does so. We believe Package C-D makes up around 50-60% of the RM10b value, which implies a contract value of RM5-6b over the next 3 years for SKPETRO. To recap SKPETRO is one of the incumbents of the previous round of Pan-Malaysia T&I works in 2009. We understand that this contract involves mainly heavy-lifting capabilities. Market rumour had it that SKPETRO will be mobilising derrick lay vessels QP2000 and LTS3000 for the Pan Malaysian offshore installation campaigns. We are maintaining our forecasts as we had already accounted for RM3.6b revenue in FY15 which will include this Pan Malaysia T&I project. As such, we maintain our target price of RM5.81 for the stock based on an implied PER of CY14 PER of 27.1x (to account for the Newfield earnings later). We understand SKPETRO edged out international bidders for such packages; furthermore, another indication is that PETRONAS prefers “local” content.

Source: Kenanga