OIL & GAS. Rationale for report : Thematic Research

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1 OIL & GAS 12 June 2013 US shale revolution may not mean cheap gas for Asia Alex Goh Investment Highlights Rationale for report : Thematic Research (OVERWEIGHT) We attended the 17 th Asia Oil & Gas conference at KLCC Convention Centre over the last two days and came away reaffirmed that the fundamentals of the industry remain robust and it is poised to experience a faster rollout of projects over the next 2-3 years. We summarise below the salient views from the event: (1) Enough oil resources for 2 centuries. Peak oil hypothesis, which postulates that global oil production has peaked, has been disproved for now by the North American shale gas revolution. Petronas president/ceo Tan Sri Shamsul Azhar Abbas has indicated that new discoveries and technological advances will enable global recoverable resources to last for the next 2 centuries based on current trends of consumption. But a key strategy for national oil companies will be in enhancing energy security to mitigate supply disruptions, thereby ensuring sustainable economic growth. (2) But no cheap gas. The technological changes that have driven significant new production gains from unconventional sources are not likely to lead to cheap gas prices due to:- requirements to generate sufficient investment returns; higher extraction costs; geopolitical risks in Middle-East and Northern Africa; the inherent difficulties encountered by non-north American countries in replicating the US breakthrough; huge investment costs in building liquefaction facilities to ship US gas to Asia. (3) US shale revolution hard act to follow. While the US resource boom will have profound economic and geopolitical effects globally, other countries have found difficulties in emulating the North American shale gas success, which stems from an ideal combination of factors:- well-known US geology; unprecedented scale of its oil service industry; adequate water availability; and unique rights of individuals or companies to mineral rights on their land. (4) Gas consumption will rise, due to population growth, rapid urbanisation in Asia, faster Eastern economic growth vs. the West, regulatory shifts from nuclear generation after the Fukushima disaster, less environmental impact from low-carbon footprint amidst a plentiful and expanding global supply. Martin Houston, COO and Executive Director of BG Group does not foresee an oversupply of gas, which should be taken up by latent demand while supply dynamics require a long lead-time. (5) Oil prices likely to stay within a range. Dr Fereidun Fesheraki of FACTS Global Energy expects oil prices to have a floor of US$80/barrel and a ceiling of US$120/barrel, with some weakness likely in 2015/2016 with the commencement of US liquefied natural gas (LNG) exports. But any price lower than the floor will lead to a production drop in unconventional oils such as shale liquids. (6) Growing need for floating solutions. As LNG becomes the fastest growing energy segment, floating regassification projects, such as floating storage regassification units (30 units globally) will increase. In 2015, Petronas will be the first company in the world to operate a floating LNG vessel at the Kanowit field. As mentioned in our earlier reports, which emphasised on the upcoming multiple flows of contracts in Malaysia this year, we maintain our OVERWEIGHT call on the O&G sector with BUY calls for SapuraKencana Petroleum, Alam Maritim, Dialog Group and Petronas Gas. TABLE 1 : SECTOR VALUATION MATRIX Market Fair PE Div yield ROE Stocks Call capitalisation value CY13F CY14F CY13F CY14F FY13F P/BV RMmil RM/share x x % % % x Alam Maritim Resources BUY 1, Boustead Heav y Industries Corp BUY Bumi Armada HOLD 11, Dialog Group BUY 6, KNM Group HOLD MMHE SELL 5, Petronas Gas BUY 41, SapuraKencana Petroleum BUY 25, Wah Seong Corporation HOLD 1, Source: AmResearch PP 12246/05/2013

2 CHART 1: GLOBAL ENERGY DEMAND (MILLION TONNES OF OIL EQUIVALENT) Source:Wood McKenzie AmResearch Sdn Bhd 2

3 CHART 2: GLOBAL ENERGY TRADE SHIFTS TO ASIA NET IMPORTS BY REGION (MILLION TONNES PER ANNUM) Source: Wood McKenzie AmResearch Sdn Bhd 3

4 CHART 3: CHINA SET TO OVERTAKE US IN OIL IMPORTS Source: Wood McKenzie AmResearch Sdn Bhd 4

5 CHART 4 : OPEC SPARE CAPACITY SET TO RISE Source: Wood McKenzie CHART 5 : BREAKEVEN COSTS OF OIL EXTRACTION METHODOLOGIES Source: Wood McKenzie AmResearch Sdn Bhd 5

6 CHART 6: GLOBAL GAS RESERVE Source: UOP, Honeywell AmResearch Sdn Bhd 6

7 CHART 7: PLANNED GLOBAL GAS LIQUEFACTION CAPACITY Source: Hoegh LNG Asia AmResearch Sdn Bhd 7

8 CHART 6: FLOATING STORAGE REGASSIFICATION UNITS GLOBALLY (30) Source: Hoegh LNG Asia AmResearch Sdn Bhd 8

9 TABLE 1: UPCOMING OIL & GAS PROJECTS EPCIC jobs Location Scope of works RMmil Likely bidders Upstream Ex x on-mobil's enhanced oil recov ery Rejuv enation of Tapis, Telok, Seligi, Guntong, Semangkok, Irong Barat, Tabu and Palas oilfiields off Peninsula, Sabah Central processing platforms, gas compression sy stems, process equipment, MOPU, tender rigs, offshore v essels. 10,000 MMHE, SapuraKencana, Wah Seong, Bumi Armada, Alam Maritim & Saraw ak. Carigali-Hess' North Malay gas project- fast track basis North Malay basin (Blocks PM301 and PM302), near JDA Central processing plafform, 8 w ell head platforms, 200km pipeline 16,000 MMHE, SapuraKencana, Wah Seong, Bumi Armada, Alam Maritim Shell's deepw ater Malikai project Malikai field, off Sabah Fabrication of tension leg platform, installation of pipelines and facilities 5,000 MMHE, SapuraKencana, Wah Seong, Bumi Armada, Alam Maritim Petrronas Carigali's EOR projects Dulang, Semarang, Bokor 3 Central Processing Platforms for enhanced oil recov ery. 5,000 MMHE, SapuraKencana, Wah Seong, Bumi Armada, Alam Maritim Petronas' 1mil tonne FLNG Kimanis gas field 1st floating liquiefied natural gas carrier 6,000 Technip-Daew oo, MMHE Murphy Oil, 1.5mil tonne FLNG Rotan, off Sabah 2nd floating liquiefied natural gas carrier 9,000 JGC Corp, Toyo Engineering Shell Malay sia's EOR projects Baram Delta, off Saraw ak and North Sabah Enhanced oil recov ery proejcts 38,000 MMHE, SapuraKencana, Wah Seong, Bumi Armada, Alam Maritim 25 marginal field projects Peninsula, Sabah & Saraw ak New risk-sharing contract from Petronas. 52,500 SapuraKencana,Dialog Group, Petra Energy, Scomi Marine, Puncak Niaga, UMW Oil & Gas, Bumi Armada Petronas' umbrella tender for shallow w ater jobs Peninsula, Sabah & Saraw ak 5-y ear Hook-up & Commissioning, maintenance contracts. 10,000 SapuraKencana, Day ang, Alam Maritim, Perdana Petroleum Downstream Petronas' Refinery & Petrochemical Integrated Development and other mutlinationals Tank Terminal Projects Pengerang, Johor Refinery, petrochemical projects 120,000 Dialog, SapuraKencana, Muhibbah Engineering, Ranhill, KNM Southern Johor- Pengerang, Tanjung Bin, Tank terminals for crude oil, 10,000 Dialog, MMC, Benalec, Tanjung Langsat petrochemicals, LNG. Muhibbah Engineering, Ranhill LNG Regassification plants Malacca, Lahad Datu, Pengerang, Lumut LNG Regassification plants 12,000 Dialog, Muhibbah Engineering, Ranhill Malay sia LNG Train 9 Bintulu, Saraw ak 3.6 mil tonne increase to MLNG's liquefaction facilities 10,000 JGC Corporation, Chiyoda- Saipem Petronas' Samur ammonia/urea plant Sipitang, Sabah Fertilizer plant 4,500 Muhibbah Engineering, Ranhill Total 308,000 Source: AmResearch, various sources AmResearch Sdn Bhd 9

10 Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sea rc h) F a x: ( 03) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sea rc h) F a x: ( 03) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 10