DIALOG announced the signing of a PSC for the Baram Junior Cluster Small Field Asset, taking up a 70% participating interest with the remainder 30% taken up by Petroleum Sarawak Berhad (Petros). Overall, we are neutral on the development, as the asset would still need to go through a 2-year feasibility and commerciality study during its pre-development phase, followed by a 2-year development phase, before it is able to reach the production stage to be earnings accretive. No changes to our FY23-24F numbers, and we maintain our OUTPERFORM call with unchanged SoP-TP of RM3.10.

PSC contract with Petronas. DIALOG announced the signing of Baram Junior Cluster Small Field Asset Production Share Contract (PSC). Dialog will take on 70% participating interest including the operatorship of the field, while Petros will take on the remaining 30%. It is a 14-year contract, which comes with a 2-year pre-development phase, 2-year development phase, and a 10-year production phase.

Neutral on the announcement. Overall, we remain neutral on the news at this juncture. Capex requirements, production or reserves numbers will only be made known in 2 years’ time upon the completion of the feasibility studies conducted during the pre-development phase, by which the group would have determined the feasibility and commerciality of the asset. As such, we await further announcements once a field development and abandonment plan has achieved final investment decision. Nonetheless, on a bigger picture, this development goes in line with the group’s long-term strategy of expanding its business in the upstream oil and gas space, in pursuance to strike a perfect balance between upstream, midstream and downstream. Currently, its upstream segment still remains the smallest contributor to bottom-line earnings.

Forecasts. No changes to our FY23-24F numbers, as earnings impact (if any, should the asset qualify the feasibility and commerciality assessment) will only kick-in once the asset reaches its production stage 4 years later.

Maintain OUTPERFORM, with unchanged SoP-TP of RM3.10. There is no change to our valuation based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Overall, despite the short-term challenges, the group’s long-term outlook still remains largely intact, with its mid-stream assets to also provide a degree of earnings defensiveness and resiliency. That said, any further development of its Pengerang Phase 3 is expected to serve as a potential re-rating catalyst for the stock.

Risks to our call include: (i) lower utilisations of its tank terminals, (ii) slowdown in downstream jobs flow, (iii) delay in the development of Pengerang Phase 3, and (iv) continued severe cost overruns.

Source: Kenanga Research - 18 Jan 2023