4 OCTOBER 2012
MIDF Research Team 603-2772 1650 aaron.tan@midf.com.my OIL & GAS SECTOR Sustained Growth in Local O&G Awards MAINTAIN POSITIVE We reiterate our POSITIVE stance on the sector based on favourable oil price movement, sustained local oil and gas activities and uptick in global exploration activities. For Jan-Sep12, the West Texas Intermediate (WTI) crude averaged USD96.2pb. We upgrade our WTI price forecast for 2012 from USD90pb to USD94pb (+4.4%), expecting WTI to trade at an average of USD90pb in 4Q12. We maintain our forecast of average WTI price in 2013 at USD90pb. Our BUYS are SapuraKencana, WahSeong, Dialog and Gas Malaysia. OIL PRICES The price of West Texas Intermediate (WTI) crude oil declined 4.4% in September and was lower by 6.7%ytd. The price of Brent crude also declined, by 2.9% in September, but is still higher 4.3%ytd. The spread between WTI and Brent has widened by >100% from USD8.55pb to USD20.20pb since the start of the year. In September, Brent traded at an average of USD113pb compared with August s price of USD112pb. We believe that the price decline in September was caused by 1) Weak data from the US manufacturing sector in early-september; 2) Response to Saudi Arabia s plan to keep output high; 3) Rise in US oil inventories coupled with sluggish demand outlook. So far, QE3 had a short-lived impact on oil price. We upgrade our house s 2012 oil price projection to USD94pb with the assumption that the WTI price will trade at an average of USD90pb in 4Q12. This is in-line with the U.S. Energy Information Administration s (US-EIA) decision to revise its oil price projections upwards by 1.9-2.6% to USD95.66pb and USD92.63pb for 2012 and 2013 respectively. The consensus oil price target for 2012 has also increased by a marginal 0.5% to USD93pb. Figure 1: WTI & Brent Prices vs RM/USD Figure 2: Avg WTI (CL1) and Brent (CO1) Prices 2
Table 1: Crude Oil Price Forecasts CY12 (USDpb) Average WTI (USDpb) Latest Previous Revision (%) YoY (%) 2012F 2013F 2012F 2013F 2012F 2013F 2012F 2013F US EIA 95.66 92.63 93.90 90.25 1.9% 2.6% 0.8% -3.2% Consensus 93.00 96.00 92.50 96.40 0.5% -0.4% -2.0% 3.2% MIDFR 94.00 90.00 90.00 90.00 4.4% 0.0% -5.1% 0.0% Sources: US EIA, Bloomberg, MIDFR Table 2: Historical Crude Oil WTI Prices (USDpb) Monthend Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 USDpb 98.48 107.07 103.02 104.87 86.53 84.96 88.06 96.47 92.19 MoM -0.4% 8.7% -3.8% 1.8% -17.5% -1.8% 3.6% 9.6% -4.4% YoY 6.8% 10.4% -3.5% -8.0% -15.7% -11.0% -8.0% 8.6% 16.4% Sources: US EIA, Bloomberg, MIDFR WORLD CRUDE OIL DEMAND (CONSUMPTION) JULY12 The International Energy Agency (IEA) finally increased (after a series of downward revisions) its 2012 global oil demand outlook to 89.8mbpd from 89.6mbpd previously. However, this slight upgrade is mainly due to revisions in absolute demand by 100kbpd for both 2012 and 2013. The IEA expects demand to grow at a steady rate of around 0.8mbpd in both 2012 and 2013 on the back of a global GDP growth of 3.3% and 3.6% for 2012 and 2013 respectively. World demand is expected to hit 90.6mbpd in 2013. The IEA noted that the pace of oil demand growth is expected to remain relatively steady over the next eighteen month with annual gains of 0.8mbpd for both 2012 and 2013. This modest growth rate stems from the sluggish global economic activity, historically elevated oil price and global improvements in energy efficiency. It is worth noting that despite the sedate headline growth, changes in consumption varied greatly by product. Gasoil demand is forecast to expand more rapidly than oil as a whole, with gains of 1.1% in 2012 to 26.4mbpd and 1.4% in 2013 to 26.8mbpd. Push factors include industrial growth, power generation and shift in transportation fuel to diesel. The US-EIA is of the view that global oil consumption for 2012 and 2013 will be 89.09mbpd (from 88.83mbpd previously) and 90.10mbpd (from 89.70mbpd previously) respectively, still marginally lower than the IEA s forecast for the same period by 0.5-0.7mbpd. 3
WORLD CRUDE OIL SUPPLY (PRODUCTION) AUGUST12 For the month of August, the global oil supply was 90.83mbpd, a fall of 0.1mbpd compared with that in July. OPEC liquid production growth failed to fully offset unplanned outages in non-opec countries. Compared to that a year ago, global oil production was 2.0mbpd higher. Non-OPEC supply fell by 0.2mbpd in August from the preceding month and by 0.1mbpd compared to August 2011. Planned and unplanned outages slowed down growth in non-opec supply to just 0.2mbpd in 3Q12, from 0.6mbpd and 0.5mbpd in 1Q12 and 2Q12 respectively. In its latest publishing, the US-EIA has marginally increased its global oil supply forecast for year 2012 by 0.12% to 89.00mbpd and by 0.22% to 90.52mbpd for 2013. The US-EIA expects non OPEC liquid fuels production to rise by 0.5mbpd in 2012 and by a further 1.2mbpd in 2013. The largest area of non OPEC growth is North America, where production increases by 1.0mbpd and 0.6mbpd in 2012 and 2013, respectively, due to continued production growth from U.S. onshore shale and other tight oil formations and from Canadian oil sands. EIA expects that Kazakhstan will commence commercial production in the Kashagan field next year, increasing its total production by 160,000bpd in 2013. In Brazil, EIA projects output to rise by 200,000bpd in 2013, with increased output from its offshore, pre salt oil fields. Forecast production also rises in Columbia, Russia, and China over the next two years, while production declines in Mexico and the North Sea. Figure 3: Demand & Supply (mbpd) Figure 4: Surplus/Deficit (mbpd) Figure 5: Demand & Supply MoM growth Figure 6: Demand & Supply YoY Growth Sources: Bloomberg, Energy Intelligence Group, MIDFR 4
Table 3: Global Oil Demand Forecasts (mil barrels/day) OECD Non- OECD 2011E Total +/-* OECD Non- OECD 2012F Total +/-* 2012F growth IEA 46.6 42.4 89.0 0.20 46.2 43.5 89.7 0.10 0.79% OPEC 45.7 42.2 87.9 0.10 45.6 43.2 88.7 0.04 0.96% US EIA 46.6 42.4 89.0 0.90 46.2 43.5 89.7-0.20 0.79% Average 88.6 0.43 89.4-0.02 0.84% Sources: US EIA, IEA, OPEC, MIDFR *Compared with the forecasts in previous month Table 4: Global Oil Supply Forecasts (mil barrels/day) OECD Non- OECD 2011E Non- OPEC Total +/-* OECD Non- OECD 2012F Non- OPEC Total +/-* 2012F growth IEA 18.9 29.9 52.8 88.4 88.4 19.8 29.4 53.2 nm na nm OPEC 20.1 32.4 35.1 87.6 87.6 20.9 32.3 - nm na nm US EIA 21.6 68.5 51.6 87.1 87.1 22.4 66.6 52.5 89.0 89.0 2.19% Average 87.7 na 89.0 na Sources: US EIA, MIDFR *Compared with the forecasts in previous month LIST OF MAJOR CONTRACTS AWARDED IN 2012 FOR COMPANIES LISTED ON BURSA MALAYSIA Year-to-date, about to RM7.7b worth of contracts have been awarded to our local listed O&G players. For the month of September, about RM663.9m worth of new jobs were awarded, up by more than 14.8%mom; namely to SapuraKencana (BUY; TP: RM2.74), Handal Resources (Not Rated), Coastal Contracts (Not Rated), Favelle Favco (Not Rated) and Muhibbah Engineering (Not Rated). In terms of number of contracts, 2H12 is turning out to be more exciting than 1H12. For the remaining part of the year, we can expect a possible Floating, Production, Storage and Offloading (FPSO) contract to be awarded, numerous local hook-up and commissioning (HUC) jobs and vessel sale/chartering contracts. We believe that the PAN Malaysia HUC works which was called for tender in July this year will further excite the industry. The umbrella project, worth about RM10b, is made up of nine contracts which will benefit many local HUC players. Key beneficiaries include Dayang (unrated; FV: RM2.32), SapuraKencana (BUY; TP: RM2.74) and Petra Energy (unrated). We believe that awards will likely be in 4Q12 or early 1Q13. In addition to that, the North Malay Basin, which has seen a commitment of RM16.4b from Petronas and Hess, is likely to see some jobs being awarded. Further north of that region is the Thai-Malaysia Joint Development Area, another potential source of job awards. Sources indicate that tenders for pipe manufacturing for the North Malay Basin has been called for and tenders for pipe coating will follow soon after. Potential local beneficiaries for this include Malaysia Marine and Heavy Engineering (HOLD; TP: RM5.06) and Wah Seong Corp (BUY @ RM2.13) 5
The FPSO segment of the value chain will also see more excitement this 2H12. We gather that there are up to four FPSOs which could be up for grabs in the immediate term. Fields which require FPSOs are Belud, Kamelia, Balai, Dahlia & Teratai and Shell s E6 field. The potential beneficiary is Bumi Armada (NEUTRAL; TP: RM3.64) Figure 7 shows the total number and value of contracts awarded to O&G companies listed on Bursa Malaysia. YTD, RM2b worth of contracts were awarded by Petronas subsidiaries and RM5.7b worth of jobs awarded by foreign-owned companies. For the month of September, all the projects tracked were awarded by non-petronas entities. For the third month running, this supports our notion that our local players do not depend solely and heavily on Petronas which mitigates the risk of contract dependency on a single entity. We have not included news that Petra Energy Bhd (Not rated) has been chosen as the local partner for Coastal Energy to develop the Kapal, Banang and Meranti marginal fields as no formal announcement and no contract value have been disclosed. Market speculation is that the value of the contract could be USD0.5-1b. The latest major news reported was that a new oil and gas storage and refining facility, dubbed the Sabah Oil Terminal is being planned in Sipitang Sabah, at an estimated cost of RM8.5b. Figure 7: 9M12 Contracts awarded by Petronas and non-petronas Source: MIDFR, Bursa Malaysia 6
Competitive Offshore Rig Utilization Rates As at end -September 2012, there were 693 (up from 690 end-august 2012) competitive rigs available globally, of which 561 were fully utilized. On average, utilization rates decreased in the month of September from 77.07% to 75.20%. The 1.9pp drop in utilization rates was mainly caused by activities in Africa, North Sea (maintenance works in the Buzzard field) and North America (drop in activity levels in the Canadian Atlantic was offset by the increased in activity in Alaska). However, activities in South East Asia remains vibrant where rig utilization rates increased by 2.4pp to 80.4%. COMPETITIVE OFFSHORE RIG UTILISATION RATES BY REGION Region 28-Sep-12 21-Sep-12 14-Sep-12 31-Aug-12 Utilisation Rate (%) Africa - Other 57.1 57.1 66.7 83.3 Africa - West 85.2 85 85.2 86.9 Asia - Caspian 100 100 100 100 Asia - Far East 60.7 60.7 60.7 58.6 Asia - South 90.9 93.9 90.9 90.9 Asia - SouthEast 80.4 80.4 79.6 78 Australia 91.7 91.7 91.7 91.7 Black Sea 75 75 75 75 Europe - East 100 100 100 100 Europe - North Sea 88.2 88.2 91.8 93 Mediterranean 72.7 81.8 81.8 77.3 MidEast - Persian Gulf 81.2 78.2 79 79 MidEast - Red Sea 77.8 77.8 77.8 66.7 N. America - Canadian Atlantic 33.3 33.3 33.3 100 N. America - Canadian Pacific 0 0 0 0 N. America - Mexico 77.5 75 75 78.9 N. America - US Alaska 100 100 50 50 N. America - US GOM 72.9 70.6 70.6 75.9 S. America - Brazil 91 92.3 89.7 89.7 S. America - Other & Carib. 63.6 63.6 63.6 63.6 S. America - Venezuela 80 80 80 80 Average 75.20 75.46 73.45 77.07 Source: Rigzone, MIDFR 7
CORPORATE & INDUSTRY DEVELOPMENT IN SEPT12 Date Company(s) Event(s) 28-Sep 25-Sep 21-Sep 21-Sep UMW & Petronas Carigali Petronas & GE Oil & Gas Petra Energy Petronas Carigali UMW Group's unit won a contract from Petronas Carigali to supply a main power generation package for the Diyarbekir Oil Dev Project GE Oil and Gas entered into an agreement with Petronas to supply gas turbinedriven compressor train technology for a floating liquefied natural gas (FLNG) facility being developed off the coast of Sarawak, Malaysia. Petra Energy reported to have become the local partner to Coastal Energy on the Kapal, Banang and Meranti marginal fields Risk Service Contract Eurasia Drilling Company Ltd (EDC), the leading onshore and offshore drilling service provider in the Commonwealth of Independent States, has been awarded a multi-year contract extension with Petronas Carigali (Turkmenistan) Sdn Bhd for drilling offshore Turkmenistan in the Caspian Sea 19-Sep Petronas Petroliam Nasional Bhd (Petronas) has decided to sell all its assets in Thailand to Susco Plc. The transfer of assets is expected to be finalized by November. Susco plans to allocate about THB50m a year for facelifts for the 100 petrol stations in Thailand. 13-Sep 12-Sep 7-Sep Dialog Petronas Carigali Petronas The consortium comprising of Dialog Group Bhd, the Johor Government and Royal Vopak will invest RM4.08b to develop the Pengerang LNG terminal project. Petronas Carigali Sdn Bhd, a subsidary of Petronas, has signed a technology collaboration agreement with MIT Innovation Sdn Bhd for the development of a costsaver drilling tool. Petroliam Nasional Bhd (Petronas), which posted a 30% drop in earnings to RM15.22b in the second quarter ended June 30, 2012, will struggle to match last year's performance due to production issues, low oil prices and anticipated increase in gas subsidy. 6-Sep KNM Group KNM Group Bhd has proposed to list its unit Borsig Beteiligungsverwaltungsgesellschaft mb on the Main Board of the Singapore Exchange. It expected the proposed listing to be launched in 2013 with an indicative valuation for Borsig of between RM1.8b and RM1.9b. Sources: Company, Media, MIDFR VALUATION AND RECOMMENDATION We maintain our POSITIVE conviction on the local oil & gas sector on the continuous contract awards announced. With the support from Petronas capex commitment along with jobs in the global arena, we believe that the local O&G players will likely see more action in the coming months. We favour Wah Seong Corp for its undemanding valuation coupled with good visibility, Dialog Group for its strong engineering arm with good support from its Centralised Tankage Facilities, Gas Malaysia for its stable earnings and as a dividend play stock and SapuraKencana for its strong orderbook with its market leading ability as an EPC player. 8
Summary of O&G Stocks under MIDFR s Coverage Company Last Price (RM) TP (RM) Upside (%) Call EPS (sen) PER (x) ROA ROE FY12F FY13F FY12F FY13F (%) (%) Dialog 2.34 2.80 19.7 BUY 7.6 9 36.8 31.1 14.1 24.6 KNM 0.68 0.56-17.6 SELL 10.5 6.6 5.3 8.5 na na SapuraKencana 2.42 2.74 13.2 BUY 11.6 12.8 23.6 21.4 5.8 61.1 Petronas Chemicals 6.44 6.10-5.3 NEUTRAL 43.7 47.7 14.0 12.8 12.3 16.9 MMHE 4.90 5.06 3.3 NEUTRAL 19 22.5 26.6 22.5 6.8 14.5 Petronas Gas 19.74 17.72-10.2 NEUTRAL 79.5 84.4 22.3 21.0 12.8 15.8 Wah Seong 1.76 2.13 21.0 BUY 11.9 16.9 17.9 12.6 4.8 10.1 Bumi Armada 3.69 3.64-1.4 NEUTRAL 14.5 17.3 25.1 21.0 5.2 10.2 Gas Malaysia 2.63 2.84 8.0 BUY 10.9 12.8 26.1 22.2 15.5 22.7 Source: MIDFR estimates WTI Price Chart Source: Bloomberg, MIDFR 9
APPENDIX: YTD 2012 List of Contracts Awarded to Bursa-listed O&G Companies Company Projects Clients Perisai Petroleum Charter of Intan Group s 8 offshore support vessels Provision of topside general maintenance Date (2012) Value (RMm) Emas Offshore 18 Sept 120 Talisman 14-Feb 125 Bumi Armada Provision of DP2 Accomodation Workboat Tecnologías Relacionadas con Energía y Servicios Especializados 7-May 202 Provision of Platform Supply Vessel Petrobras 21-Mar 115 Provision of AHTS Petrobras 16-Jan 155 15km Pipe laying - Caspian Sea Lukoil 16-Apr 620 SapuraKencana PCI for Manora Field Pearl Oil (Thailand) 25-Sep 78 Charter of Sapura 3000 vessel EPCC Platform & Accomodation HUC at Montara Development Project Construcciones Maritimas Mexicanas S.A. de C.V 10-Sep 140 Murphy Sarawak 26-Jul 250-300 PTTEP Australasia 3-Aug 50 HUC for Kebabangan Field Kebabangan 9-Aug 106 Scomi Group Provision of drilling fluids & Engineering services Qatar Petroleum 23-Aug 130 Favelle Favco Provision of offshore cranes Consortium of P.T. Pal Indonesia Offshore Oil Engineering and Technip France 4-Sep 89.6 Muhibbah Engineering Sale of 2 units AHTS na 26-Sep 240.6 10
Company Projects Clients Kencana Petroleum* Date (2012) Value (RMm) MPU Works Petrofac 15-May 49 Offshore topside fabrication EPCC Murphy Oil 8-May 474 EPCC Cogeneration Plants Petronas Gas 30-Apr 35 Fabrication of Tapis R Structure ExxonMobil 29-Feb 74 SapuraCrest* EPCC for Serendah & Patricia platforms Extended works for ITI facilities (from 2013) Murphy Oil 22-Feb 101 Petronas 24-Jun 1300 Pipeline & Umbilical Installation Vietnam 10-Jan 160 MMHE Origin Otway Phase 3 Development Provision of a tender rig known as T-9 Subseas construction project - Vietnam F14/F29 Topsides, Substructure And Process Module Origin Energy Resources 22-May 157 Petronas Carigali 6-Mar 167 na 10-Jan 310 Sarawak Shell 27-Jun 278 SILK Holdings Extension of 2 AHTS Petronas Carigali 10-Aug 35 Provision of 1 AHTS & 2 SSV ExxonMobil 3-Aug 57 Provision of AHTS Petrofac 31-Jul 24 Provision of AHTS ExxonMobil 17-Jul 35 Contract Extension - Provision of AHTS Contract Extension - Provision of AHTS Talisman 28-Jun 24 Petrofac 9-Apr 11 Alam Maritim Provision of four workboats Petronas Carigali 30-May 122 Provision of Vessel ExxonMobil 28-May 126 Works for Sabah O&G Terminal Samsung Engineering Malaysia 26-Jan 115 11
Company Projects Clients Date (2012) Value (RMm) Dayang Provision of topside general maintenance Talisman 14-Feb 125 Extension of time charter for Dayang Zamrud Nautika (for Brunei Shell Petroleum) 16-Jan 85 Handal Resources Provision of crane maintenance services Provision of crane long term service Newfield Peninsula Malaysia 3-Sep 4.7 Carigali-Hess 15-Aug 11 Provision of integrated cranes ExxonMobil 25-Jun 150 Provision of integrated cranes Petronas Carigali 11-Jun 120 Supply of offshore pedestal cranes Supply of offshore pedestal cranes PT Guna Tesuma Internasional 7-Mar 3 Kencana HL 22-Feb 7 Crane service and maintenance Petrofac 24-May na Uzma Tanjung Offshore TH Heavy Engineering Provision of Production and Integrity Chemicals. Supply of Chemical & Related Services Provision of Water Injection Studies Provision of well testing equipments Provision of gas generator packages Fabrication of Substructure and Topside Fabrication of wellhead support structure ExxonMobil 27-Aug 27.5 Talisman 8-Aug 62 Petronas Carigali 11-Jun 36 Petronas Carigali 16-Feb 350 Havayar Trading 13-Jul 80 Sarawak Shell 14-Jun 178 Aquaterra Energy 13-Mar 24 TAS Offshore Sale of AHTS na 14-Jun 49 Sale of AHTS na 18-May 98 Perdana Petroleum Supply of AHTS Murphy Oil 28-Jun 86 Coastal Contracts Sale of AHTS, Subsea support vessel na 20-Sep 111 Source: Bursa Malaysia, Companies, MIDFR Sale of AHTS na 13-Aug 141 12
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY Total return is expected to be >15% over the next 12 months. TRADING BUY NEUTRAL Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL Total return is expected to be <-15% over the next 12 months. TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 13