News  Last Friday, Dialog Group (DIALOG) announced that its wholly owned subsidiary, Dialog Resources Sdn Bhd (Dialog Resources), has accepted a Letter of Intent (LOI) from ROC Oil (Sarawak) Sdn Bhd (ROC) for a farm-out of 20% of ROC’s participating interest in the Production Sharing Contract (PSC) for the three fields D35, D21 and J4 (Fields), located offshore Sarawak, Malaysia.

 This will reduce ROC's participating interest in the PSC to 30% (from 50% previously).

 The farm-out is subject to the satisfactory completion of due diligence, the completion of documentation and PETRONAS’ approval as well as joint venture approval but it does not require approvals from the shareholders.

Comments  We are pleasantly surprised by the announcement as we had expected DIALOG to remain focused on its delivering their ongoing upstream projects before getting another one. Nonetheless, working on a PSC will be another positive leg for the company, moving ahead.

 A quick check online yielded that in 1Q14, ROC farmed into 50%-stake in these fields via a combination of cash payments (USD25m) and minimum work commitments (USD120M for 2 phases of work on the fields.)

 The PSC terms for the block are designed for field redevelopment and enhanced oil recovery (EOR) and ROC’s net working interest 2P reserves stand at 8.7mmboe.

 The fields have a production with a combined gross daily oil rate of ~10,000 barrels of oil per day (bopd) and gas sales of ~17mmscf/d.

 No purchase value was announced but assuming we use SKPETRO’s price tag of USD25/bbl for its Newfield acquisition; DIALOG could be forking out USD43.5m for the 1.74m reserves. However, we caution this is highly arbitrary.

Outlook  Construction works for Phase 1A Pengerang CTF has already been completed in 1QCY14. Phase 1B and Phase 1C are expected to be completed in mid-2014 and end-2014.

 Phase 2 should be “good-to-go” given that the Final Investment Decision (FID) for Petronas’ RAPID project has been approved. For now, the finalised tank terminal capacity and equity stake is pending. We have already included an additional 0.72m cbm of storage capacity into our sum-of-parts forecasts from FY17 onwards.

 The Balai RSC has apparently hit first-oil and is due for Extended Well Testing (EWT) program by 1QCY14. We have only expected earnings contributions from FY17, and as such, any project acceleration would be further earnings catalyst for DIALOG.

Forecast  We maintain our earnings forecasts for now pending the completion of the acquisition.

Rating Maintain Market Perform.

Valuation  Our CY15 SoP-based valuation TP is RM3.92.

 Ex-special share dividend and bonus issue, under maximum scenario (post ESOS and warrant conversion), our TP could be RM1.77.

Risks to our Call (i) Delays in its in-house EPCC jobs and projects.

 (ii) New capex intensive projects which will be a drain on cashflows.

Source: Kenanga