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Local Oil And Gas Industry Enjoys Higher Valuation Than Regional Peers
Malaysia Perspective | 25 February 2013

By Cecilia Kong

In view of the difficulties that Petronas had lately in releasing engineering contracts, brokerages believe that the company, which contributes to as much as a third of Malaysia’s national income, will speed up the release of new contracts after the thirteenth general election. That is to say, the oil and gas industry can expect more projects to come their way in the second half of 2013.

Analysts from Maybank Investment Bank were in Singapore and Hong Kong recently to meet with investors. Fund managers concluded that the Malaysian oil and gas industry will enjoy a higher valuation than their peers in the region.

In this context, Maybank Investment Bank said in its analysis report that Singapore and Hong Kong investors are most interested in five of the oil and gas companies in Malaysia, namely Sapura Kencana (SYM: 5218), Bumi Armada (SYM:5210), Dialog (SYM:7277), Petronas Gas (SYM:6033) and Perisai (SYM:0047). They are also keenly interested in Petronas’ local operations strategy.

“These funds managers are still concerned about the relative valuation between the industry players and their regional peers. This is also the main obstacle that is stopping them from increasing their holdings in these Malaysian oil and gas companies.”

On the other hand, Maybank Investment Bank remains optimistic about the prospects of the Malaysian oil and gas stocks. In addition to maintaining an “overweight” investment rating, “we believe that more engineering contracts will be released this year. For 2013, our preferred counters are Bumi Armada, Dialog and Sapura Kencana.”

According to the report, the majority of fund managers agree with Maybank Investment Bank’s view that Malaysia’s oil and gas industry will be driven only by Petronas’ energy security agenda. “The general trend of 2013 is an increase in the pace of (Petronas) pumping in capital expenditure, while the release of engineering contracts is expected to percolate through the entire value chain of the oil and gas industry.”

However, “there are doubts within the industry on whether these projects will materialise, seeing how some contracts were delayed and re-tendered last year.”

There is no doubt that the general election of 2013 will have a great impact on the Malaysian oil and gas industry, for “many people are waiting to see where this country’s oil policy is headed after the election, because investors are naturally concerned about the sustainability and implementation of (Petronas’) domestic development plans.”

Maybank Investment Bank feels that, regardless of the results of the thirteenth general election, “Petronas is not likely to change its plans, primarily due to energy security considerations.”

“The top priority at the moment is to arrest the slide in the production capacity of hydrocarbons. In this regard, Petronas’ goal is to achieve an average annual growth of 3.5% in production capacity over the next five years. In addition, we note that Petronas is one of the Government’s main source of income. Over the past seven years, Petronas had been contributing to one-third of the national treasury, which translated to RM 54 billion a year.”

To date, investors have their sights trained on the acquisition of Seadrill’s equipment business (Sapura Kencana), new floating production, storage and offloading (FPSO) projects, mergers and acquisitions (Bumi Armada), Petronas’ RAPID project in Pengarang (Dialog), petrol and monopolistic businesses (Petronas Gas), as well as domestic engineering, oil drilling and FPSO projects (Perisai).

Despite the indifference of fund managers in Singapore with regard to the valuation of the Malaysian oil and gas stocks, other fund managers, especially those in Hong Kong, feel that these stocks are priced higher than their peers in the region.

“We think there will be more contracts released. With the recent award of the offshore support vessels (OSV) engineering contract, we believe that (Petronas) will soon be awarding the contracts for the hook-up and commissioning (HUCC) project worth a total value of RM 10 billion.”

“Manufacturing contracts are looking set to pour in by the second half of 2013. We believe that Petronas’ RAPID project will start awarding more contracts after the general election.”

Source: Maybank Kim Eng

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