Oil & gas sector ripe for upward re-rating

Oil & gas sector ripe for upward re-rating

Tags: Alam Maritim Resources Bhd | Barrow Island | Chevron Corp | enhanced oil recovery | EOR | Exxon Mobil Corp | Gorgon project | Handal Resources Bhd | Jason Yap | Kencana Petroleum Bhd | liquefied natural gas | LNG | O&G | oil and gas sector | OSK Research Sdn Bhd | Petra Group | Petroliam Nasional Bhd | Petronas | Royal Dutch Shell plc | Tanjung Offshore Bhd | Wah Seong Corp Bhd

Written by Chong Jin Hun
Tuesday, 06 October 2009 22:46

KUALA LUMPUR: The Malaysian oil and gas (O&G) sector could be ripe for an upward re-rating in anticipation of support services firms being awarded new contracts by oil majors as demand for crude oil recovers amid an improving global economic landscape.

Valuations for O&G support services firms are deemed attractive at current prices, according to OSK Research Sdn Bhd analyst Jason Yap. He noted that average sector valuations are trading below a price-to-earnings ratio (PER) of 10 times financial year 2010 earnings, compared with a historical PER of between 18 and 20 times.

"Once the tap is turned on and contracts start to flow, the future earnings of local supporting O&G companies would be upgraded and a fundamental upward re-rating on the sector would follow.

"There has been no major O&G contract award in the past one year and we believe these are due anytime now," Yap wrote in a note to clients yesterday.

Yap, who likes O&G firms like ALAM MARITIM RESOURCES BHD [], KENCANA PETROLEUM BHD [] and Wah Seong Corp Bhd, is retaining his outperform call on the sector.

The industry is deemed fairly valued at a higher PER of 11 times, an upgrade from the nine times estimated earlier. The upward revision is in anticipation of new jobs in the pipeline.

O&G support services include fabrication of O&G facilities, pipe coating, installation of pipeline and facilities, engineering, procurement and CONSTRUCTION [] and provision of offshore supply vessels (OSV).

Several global large-scale projects involving local companies are worth noting. These include Australia's Gorgon liquefied natural gas (LNG) project, which includes the construction of an LNG facility with an annual capacity of some 15 million tonnes on Barrow Island, off Western Australia.

The Gorgon LNG initiative, one of the world's largest, is a collaboration among three oil majors — Chevron Corp, Exxon Mobil Corp and Royal Dutch Shell plc. Based on news reports, the initial phase of the project is valued at some A$43 billion (RM132.69 billion).

Malaysian entities including process equipment maker KNM GROUP BHD [] and pipe-coating specialist Wah Seong are among bidders for the job, Yap said, quoting sources.

In Malaysia, Exxon Mobil and Petroliam Nasional Bhd (Petronas) had signed a production-sharing contract to develop seven existing oil fields off the peninsula. These include the Seligi, Guntong, Tapis, Semangkok, Irong Barat, Tabu and Palas fields, which are mostly off the coast of Terengganu.

Both parties had agreed to spend at least US$2.1 billion (RM7.22 billion) on major enhanced oil recovery (EOR) operations, rejuvenation of facilities and further development and drilling activities in the fields.

OSK said potential beneficiaries of the project included OSV players like Alam Maritim, Petra Group and TANJUNG OFFSHORE BHD [], besides crane manufacturer Handal Resources Bhd.

Oil sands projects, which involve companies like KNM, are an area to watch as oil prices gained momentum.

"With oil prices building a new base at US$70 a barrel, we believe it would be a matter of time before oil sands projects, which were previously abandoned owing to unfavourable oil price, are revived," said Yap.

Crude oil prices have more than doubled to US$70 a barrel from about US$30 a barrel early this year. The commodity almost touched US$150 a barrel in the middle of last year. OSK estimated that the commodity would be transacted at between US$70 and US$80 a barrel next year.

"We believe crude oil prices should go up in 2010 in line with a better global economic outlook and spur the award of new O&G projects," Yap said.

While a rise in crude oil prices was often associated with the weakness of the US dollar, Yap said the major driver of crude prices was an anticipation of a recovery in the global economy and higher demand for the hydrocarbon resource.

"Also, there is a very real possibility of a scarcity of oil supply starting from the next few years since most of the oil majors have been holding back the bulk of their capex on new O&G projects in the past one year," Yap said.