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Raising earnings and fair values. Following our recent round of company visits, we have reaffirmed our Overweight
stance on the oil & gas sector, and raised our earnings estimates by 10%-20% for stocks under our coverage. We are
also raising our fair values by 13%-52%. Our top picks are SapuraCrest and Kencana Petroleum which are the best
proxies to the O&G capex cycle given their demonstrated ability to secure new jobs, improving efficiency, high stock
liquidity and M&A flavour.
l We put forth several catalysts that may be unfolding in the coming months to sustain valuation expansion in the sector:
(1) The Umbrella tender by Petronas Carigali to transport and install pipelines and facilities. Contract value is likely to
surpass earlier expectations of RM3bil. This is because SapuraCrest - since 2007 - has been undertaking part of the
works being tendered which carries a contract value of RM3bil.
(2) Further deepwater support for Gumusut, which has awarded contracts amounting RM5.5bil to date. We estimate that
there could be additional contracts worth RM2.4bil comprising an FPSO and offshore support vessels.
(3) Malikai, Kebabangan and Jangas will be the next deepwater excitements next year. Malikai was the first to roll out with
Shell tendering for design and engineering works. We estimate that capex for the three blocks could reach RM13bil.
(4) Outcome of tender award for eight offshore support vessels by Petronas Carigali expected by end-4Q09.
(5) Mergers & acquisitions could accelerate to expand capacities. In Malaysia, Dayang Enterprise Holdings proposed
buying 40% in Syarikat Borcos Sdn Bhd - one of the largest local marine vessel providers - for RM132mil last month,
while China’s PetroChina Co bought Keppel Corp Ltd’s 45.5% stake in Singapore Petroleum Company in June this
year. Wah Seong hopes to score on former JV partner, Socotherm’s financial distress.
l Bright overseas prospects. Besides Malaysian-centric jobs, we foresee potential upside surprises from several
overseas projects namely in Australia and India. Both Wah Seong and KNM are actively bidding for mega-billion dollar
liquified natural gas projects - Gorgon, Browse, Ichthys in Western Australia and Papua New Guinea. In India, Kencana
and SapuraCrest are bidding for jobs from ONGC, which plans to invest up to US$10bil over five-years.
l Demand and supply fundamentals turning up. SapuraCrest secured a higher charter rate for its T-9 tender rig early
this year despite weak global rates for jackups and semisubmersibles. Marine charter rates remain firm in Malaysia due
to persistent tight supply and Petronas’ patronage of local operators. Most of Malaysian and Singapore companies under
our coverage registered improving margins in 2Q09 with the best Malaysian performers being Kencana Petroleum and
SapuraCrest. Order cancellations are abating - which were not significant for OSV builders like Coastal Contracts as
opposed to bulk carrier makers like Cosco Corp. EPCIC contractors like Kencana have indicated signs of new inflow of
jobs while Dialog will likely undertake its own tank terminal jobs in Tanjung Langsat and Pengerang, Johor.
l Re-accelerating capex spending. Oil & gas companies are re-accelerating capex spending to expand capacities given
easing conditions for credit and robust equity markets facilitating fund raising exercises. Singapore-listed Ezra Holdings
Ltd has re-emphasised its capex spending into deepwater subsea services including an ice-breaker for the Arctic region.
Kencana Petroleum has started building its second tender rig K2 without any JV partner or charter contract. SapuraCrest
remains committed to its investments with Indian companies with two additional construction vessels while Sealink
International is expanding its 20-acre yard. Sime Darby is currently finalising its acquisition of Ramunia’s fabrication yard.
l Strong earnings deliverance and attractive valuations. Recent earnings performance for most of stocks under our
coverage were generally in line with expectations, with outperformances from Tanjung Offshore, Dialog, Coastal
Contracts and Ezra. Recent run up in share prices has pushed Malaysia’s one-year forward PE valuations from just 6x
in March this year to 11x currently. For Singaporean stocks, average PE has likewise risen from 8x to 13x. For many stocks
such as Kencana, Wah Seong and Coastal Contracts, these valuations are still below their three-year average PEs. As
risk premiums continue to contract together with M&A excitements and inflow of new construction jobs, we expect average
PE valuations to expand further by 30%-50%.
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