• BUY, SOP-derived MYR2.98 TP, 16% upside with c.2% FY23F (Jun) yield. Earlier this week, we hosted a conference call with Dialog’s management, and came away feeling bullish over its outlook. Separately, we are positive on the Baram Junior Cluster small field asset production sharing contract award (abbreviated to BJC) as it will further expand its domestic upstream assets. We believe Dialog is poised to resume growth, on: i) The recovery of its downstream segment, as well as ii) a stronger upstream division, due to Pan Orient Energy Corp (POEC) contributions.

• Key takeaways. Dialog guided that independent terminals have seen better utilisation rates of closer to 90%, vs mid-80% in the previous quarter, and the monthly spot storage rates are now at c.SGD6/cbm. Its downstream earnings could have bottomed, given increased activities in engineering & construction (E&C) and plant maintenance, as well as the improved outlook for fabrication and specialty products. Upstream division could account for one-third of total earnings (from >20% previously) with the inclusion of POEC and uptick in Bayan oilfield services contract (OSC) contribution.

• BJC contract award. Dialog has announced the signing of the BJC contract between itself, Petronas and Petroleum Sarawak Exploration and Production (PSEP), a subsidiary of Petroleum Sarawak (Petros). Dialog Resources will take a 70% participating interest including the operatorship of the BJC contract, while PSEP will hold the remaining 30%. The 14-year contract includes a 2-year pre-development phase that allows Dialog and PSEP to finalise the field development plan (FDP) and proceed into a 2- year development phase, with first commercial production expected by the end of said phase. The production phase will continue for the remaining 10 years or up to the expiry of the contract, whichever is earlier.

• We are positive on the BJC award as it will further expand Dialog’s domestic upstream assets. BJC is one of the six discovered resource opportunities featured in the Malaysia Bid Round 2022 that was launched early last year. These projects are mostly in shallow waters and nearby existing production infrastructure, which could lower its capex. With its experience in mature oil fields (D35/D21/J4) and the Bayan OSC, we think Dialog is capable of executing this project. It is too early to assess the financial impact, until the feasibility study is conducted and a FDP outlined.

• We maintain our earnings estimates and SOP-based TP of MYR2.98, with a 0% ESG premium/discount applied, as Dialog’s ESG score is on par with the country median. Downside risks: Weaker-than-expected tank terminal rates, and slower-than-expected expansion of Pengerang Phase 3. Downside risks to our call: Weaker-than-expected tank terminal rates and higher-than-expected operating costs.

Source: RHB Research - 18 Jan 2023