Feb 17, 2011

Malaysia Oil and Gas Sector Update by Amresearch

New oil & gas finds raise Petronas’ reserves

Sector Update: We maintain our OVERWEIGHT view on the sector with top BUYs being Malaysia Marine & Heavy Engineering (MMHE) and SapuraCrest Petroleum Bhd.

• Petronas said that it has discovered new oil and gas fields through the drilling of NC3 and Spaoh-1 wells in Blocks SK316 and SK306 in offshore Sarawak state. It said drilling of the NC3 wildcat well had reached almost 4,000 metres and a subsequent appraisal well brought significant discovery in Block SK316 with early estimation of 2.6 trillion standard cubic feet of net gas.

• The Spaoh-1 well located in Block SK306 was drilled in December 2010 to a depth of 3,000 metres, and an early evaluation showed around 100 million barrels of oil and 0.2 trillion standard cubic feet of gas in place.

• As Malaysia had 85 trillion cubic feet of gas reserves while oil reserves stood at 5.8 billion barrels in FY10, the new discoveries account for 3% of the country’s natural gas reserves and 2% of its oil reserves.

• Petronas also said that together with its production sharing contractors, over 50 exploration wells are expected to be drilled offshore Malaysia over the next three years.

• Four new PSCs were awarded during FY10. They comprise 2008 PSC offshore Peninsular Malaysia, Block SK320 PSC offshore Sarawak and two blocks in Sabah- Block SB309 and Block SB310, bringing the total number of PSCs in operation to 75. These new discoveries underpin our optimism for the industry, as the new reserves prolong the life span of Malaysia reserves- 24 years for crude oil and 38 years for natural gas.

• Petronas’ capex is expected to reach RM40bil this year, after falling to 16% YoY to RM37bil in FY10. We expect a stronger growth in FY11F, supported by the completion of the Gumusut-Kakap floating production storage semi-submersible unit, Kebabangan offshore structures, Malikai tension leg platform and marginal field projects.

• The rising values for oil & gas contracts, re-energised domestic spending by Petronas, rampant liquidity against the backdrop of the government’s Economic Transformation Programme to create regional champions in providing oil field & equipment services underscore our continued excitement in the sector. The oil & gas up-cycle is still running full tilt with capex of up to RM10bil largely from enhanced oil recovery, marginal and deepwater fields over the next six months.

• We maintain our OVERWEIGHT view on the sector with top BUYs being Malaysia Marine & Heavy Engineering (MMHE) and SapuraCrest Petroleum Bhd. We have recently advocated a switch from Kencana (still a BUY), to MMHE which is expected to enjoy fresh contract windfalls and significant margin re-rating. We also continue to like SapuraCrest for the group’s huge lock-in order book of RM9bil and a new earnings stream from its recent 25% equity stake in the Berantai risk-sharing contract. Our other BUY calls are Dialog Group, Kencana Petroleum, KNM Group and Petronas Gas.

by AMResearch