OIL & GAS. Rationale for report : Thematic Research

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1 OIL & GAS 24 October 2012 Depleting production, but capex rollout could disappoint Alex Goh Investment Highlights Rationale for report : Thematic Research (NEUTRAL) Petroliam Nasional s (Petronas) 1HFY12 net profit growth of 4% YoY was driven by higher prices for crude oil, liquefied natural gas and petrochemicals, and gains from the listing of Gas Malaysia despite a 2% YoY decline in Malaysia s hydrocarbon output. But the group s 2QFY12 net profit fell 30% QoQ due to overall lower product prices and volume (See Table 2). Petronas total daily output of crude oil, condensate and gas in Malaysia fell QoQ by 9%, 8% and 12% respectively, in tandem with an overall declining trend due to natural field depletion, lower reservoir performance, plant maintenance of the group s Bintulu plant and operational challenges in the group s overseas operations. Petronas maintains its targeted production growth of 3.5% on a compounded average basis over the next five years, with a resource replenishment rate of over 1x on a 3-year rolling average. Petronas has made 4 successful discoveries at Duyong Shallow, Kuang North-1, Zuhal East-2 and M5-2, which will elevate the production rate of the country s existing reserves. The group s 1QFY12 capital expenditure rose 35% QoQ and 22%YoY to RM12bil, largely for exploration and production. But in view of Petronas RM300bil 5-year capital expenditure target from 2011 to 2015 or at an average of RM60bil annually, the current capex momentum still appears slow at RM40bil in 2011 and RM20bil in 1HFY12. From our channel checks, we understand that the slow capex rollout in Malaysia to-date stems largely from higher design and engineering requirements arising from project complexities as the new developments attempt to access more difficult-to-reach reserves. The technologies being studied involve enhanced and improved oil recovery projects, including high carbon dioxide content in the fields. Additionally, there is a possibility of further deferrals of upstream maintenance works given the need to maintain gas production in the country. There is a likelihood of further delays in the rollout of fabrication projects as the large central processing platform awards for the North Malay Basin Phase 2, as well as the Bokor, Dulang and Semarang fields could slip into early next year. But the slack in this segment could be partly offset by other segments in the oil & gas value chain such as the hook-up, commissioning and maintenance works, which include the replacement of expiring long-term contracts. Petronas and its production-sharing contractors are currently holding an open Pan-Malaysian tender for hook-up, construction and commissioning (HUCC) works potentially worth RM8bil-RM10bil, with the results expected to be announced by the end of the year. Interested bidders are SapuraKencana Petroleum, Dayang Enterprise, Petra Energy, and possibly, Shapadu. As expectations for the earnings growth momentum for key oil & gas players are likely to moderate by next year, we have downgraded the sector to NEUTRAL from OVERWEIGHT. We are currently reviewing our call and estimates for Dialog Group and Bumi Armada, given their lofty premium to the sector. For now, our top pick continues to be Petronas Gas, which is at an earnings inflection point with the commencement of the Lekas regassification plant. TABLE 1 : SECTOR VALUATION MATRIX Market Fair PE Div yield ROE Stocks Call capitalisation value CY12F CY13F CY12F CY13F FY12F P/BV RMmil RM/share x x % % % x Alam Maritim Resources BUY Boustead Heav y Industries HOLD 514 UR Bumi Armada BUY 10, Dialog Group BUY 5, KNM Group SELL (5.2) 0.4 MMHE HOLD 7, Petronas Gas BUY 37, SapuraKencana Petroleum BUY 11, Wah Seong Corporation HOLD 1, Source: AmResearch PP 12246/05/2013

2 TABLE 2 : PETRONAS RESULTS BREAKDOWN YE 31 Dec (RMmil) 1HFY11 1HFY12 YoY (%) 2QFY11 1QCY12 2QCY12 QoQ (%) YoY (%) Ex ploration & production 27,398 25,465 (7.1) 14,691 13,864 11,581 (16.5) (21.2) Gas & power 32,886 40, ,853 21,389 19,323 (9.7) 14.7 Dow nstream 72,237 72, ,067 36,263 36,180 (0.2) (5.0) Corporate & others 6,063 7, ,331 3,637 3,613 (0.7) 8.5 Revenue 138, , ,942 75,153 70,697 (5.9) (3.1) Ex ploration & production 22,693 19,224 (15.3) 12,258 11,238 7,986 (28.9) (34.9) Gas & power 5,191 9, ,142 5,130 4,503 (12.2) 8.7 Dow nstream 3,414 2,720 (20.3) 1,336 2, (70.8) (54.0) Corporate & others 49 1,571 > >100 Inter-co adjustments, corporate & others 20,897 20,388 (2.4) 13,294 11,111 9,021 (18.8) (32.1) Profit after tax before interest 52,244 53, ,187 30,250 23,030 (23.9) (26.2) Interest ex pense (1,731) (1,469) (15.1) (838) (568) (646) 13.7 (22.9) Associates 1, (44.2) (19.4) (49.2) Pre-tax profit 51,664 52, ,914 30,038 22,671 (24.5) (26.7) Tax (17,188) (16,745) (2.6) (9,206) (9,294) (7,451) (19.8) (19.1) Profit after tax 34,476 35, ,708 20,744 15,220 (26.6) (29.9) MI (4,534) (4,985) 9.9 (2,320) (2,532) (2,453) (3.1) 5.7 Net profit 29,942 30, ,388 18,212 12,767 (29.9) (34.1) EBIT margin (%) Pre-tax margin (%) Effectiv e tax rate (%) Capital expenditure (RMmil) (19,992) (20,380) 1.9 (9,577) (8,674) (11,706) Petronas' total production (average daily '000 boe) -oil (12.5) (14.0) (14.4) -gas 1,272 1,259 (1.0) 1,230 1,338 1,185 (11.4) (3.7) Total 2,096 1,980 (5.5) 2,007 2,111 1,850 (12.4) (7.8) Malaysia's production (average daily '000 boe) Gas 1, (3.6) 964 1, (12.1) (5.7) Condensate (5.2) (8.0) (4.6) Crude (9.1) 7.4 Total 1,578 1,550 (1.8) 1,491 1,641 1,462 (10.9) (1.9) AmResearch Sdn Bhd 2

3 CHART 2: MALAYSIA HYDROCARBON PRODUCTION & PETRONAS ENTITLEMENT CHART 3: SALES GAS DELIVERY AmResearch Sdn Bhd 3

4 TABLE 1: UPCOMING OIL & GAS PROJECTS EPCIC jobs Location Scope of works RMmil Likely bidders Ex x on-mobil's enhanced oil recov ery Rejuv enation of Seligi, Guntong, Tapis, Central processing platforms, gas Semangkok, Irong Barat, Tabu and Palas compression sy stems, process equipment, oilfiields off Peninsula, Sabah & Saraw ak. MPOU, tender rigs, offshore vessels. Petronas Carigali's North Malay gas project- North Malay basin (Blocks PM301 and Central processing plafform, 8 w ell head fast track basis PM302), near JDA platforms, 200km pipeline Shell's deepw ater Malikai project Malikai field, off Sabah Fabrication of tension leg platform, installation of pipelines and facilities 7,000 MMHE, Kencana, Sime 15,000 MMHE, Kencana, Sime 5,000 MMHE, Kencana, Sime Engineering, Tanjung Offshore, Alam Maritim, Murphy Oil Rotan, off Sabah Floating liquiefied natural gas carrier 4,500 Technip-Daewoo, MMHE Petrronas Carigali Dulang, Semarang, Bokor 3 Central Processing Platforms for enhanced oil recovery. 3,000 MMHE, Kencana Petroleum Shell Malay sia Baram Delta, off Saraw ak and North Sabah Enhanced oil recov ery proejcts 38,000 MMHE, Kencana, Sime 24 marginal field projects peninsula, Sabah & Saraw ak New risk-sharing contract from Petronas. 59,520 Kencana, SapuraCrest, Alam Maritim, Tanjung Offshore, Dialog Group Petronas' umbrella tender for shallow w ater jobs Peninsula, Sabah & Saraw ak Topside maintenance & marine spread. 2,000 Kencana, Day ang, Alam Maritim, Tanjung Offshore. Marine charters 55 additional offshore v essels Offshore Malay sia Mainly AHTS charters for shallow w aters. 3,500 Day ang, Bumi Armada. Total 137,520 Source: AmResearch, various sources AmResearch Sdn Bhd 4

5 CHART 5: PETRONAS CAPEX RMbil FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY11 9MFYDec11 Others Exploration & production 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 5

OIL & GAS. Rationale for report : Thematic Research

OIL & GAS. Rationale for report : Thematic Research OIL & GAS 26 July 2013 US Gulf of Mexico s jackup index at record levels Alex Goh alexgoh@ambankgroup.com +603 2036 2291 Investment Highlights Rationale for report : Thematic Research (OVERWEIGHT) According