Malaysian O&G poises for multi-year growth story

Malaysian O&G Sector to represent 18% of GDP per year

JP Morgan Securities Research says the Malaysian oil & gas sector is poised for a multi-year growth story, as Petroliam Nasional Bhd refocuses its efforts on domestic oil and gas exploration and production. Its top sector pick is DIALOG GROUP BHD.

“Being the third largest country in the Asia-Pacific region in terms of oil reserves after China and India, with upstream and downstream oil and gas production and activities contributing more than 18% of GDP,” it said.

JP Morgan Research said this sector is very relevant to Malaysia’s economic and market prospects, particularly with the recent listing of two of Petronas’ subsidiaries – Malaysia Marine and Heavy Engineering Holdings (MMHE) and Petronas Chemicals.

It said the cumulative market capitalisation of the sector (including Petrochemicals) is 11.7% of the 30-stock FBM KLCI, a significant increase from under 1% in 2000.
Under the Economic Transformation Programme (ETP), a 10-year RM1.4 trillion investment programme spanning 2011-2020, RM105.3 billion investments has been identified within the oil & gas sector.

Key areas of focus:

JP Morgan Research said the areas of focus over the next five to 10 years are firstly, intensifying exploration activities (JP Morgan Research estimates Petronas to spend RM16 billion on deepwater development over the next three years).
Secondly, the development of small fields (estimated development cost of RM65 billion and thirdly, enhanced oil recovery (estimated cost of RM68 billion) and 4) development of oil storage hubs. There is a lack of storage capacity within Singapore and Malaysia where the two countries can emulate the Amsterdam-Rotterdam-Antwerp model to cater for rising oil demand within ASEAN (590 million population)/Asia (three billion population).

It added that the world's largest tank farm owner Vopak recognises the opportunities, teaming up with Dialog to build the RM5 billion Pengerang deepwater terminal project.
Key sector re-ratings:

JP Morgan Research said the key sector re-ratings are from: 1) announcement of three more marginal field risk service contracts by 2Q, 2) awards of deepwater offshore fabrication contracts (long overdue for MHB), 3) commencement of Dialog’s RM5 billion Pengerang deepwater terminal, and 4) potential M&As.

Its top sector pick is Dialog Group Bhd (Overweight, Target Price RM3) as it benefits from development of marginal fields and the RM5 billion investment in the Pengerang deepwater terminal project.
“Our price target is raised from RM2.80 to RM3 as the EIA studies for Pengerang has been secured. Marginal oil fields contracts and additional 350,000 m3 of capacity at Tanjung Langsat is not in the price, in our view,” it said.
The research house was Neutral on MMHE (Target Price:RM6) as it believes the positive news is largely in the price. Its sum-of-the-parts based September 2011 target price of RM6 equates to 25.4 / 25.4 times FY11E/12E P/E and 4.4 times / 3.8 times FY11E/12E P/B.
It is maintaining its Overweigh on Petronas Chemicals (Target Price: RM7.80), leveraged to higher oil prices as well as a key beneficiary to more Petronas investments – translate to more feedstock available for future growth. It said Kencana and SapuraCrest were also potential beneficiaries.

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