KUCHING: The oil and gas sector (O&G) will continue to charge ahead with better times in the immediate term as new contracts are due to be awarded soon.
OSK Research Sdn Bhd (OSK Research) in its investment outlook for 2010 pointed out that some of the local awards in the pipelines include Petronas’ RM3 billion umbrella tender which should benefit SapuraCrest Petroleum Bhd (SapuraCrest), Kencana Petroleum Bhd (Kencana) and Alam Maritim Resources Bhd (Alam).
It noted that other awards include ExxonMobil’s US$2.1 billion brownfield services which should benefit Petra Energy Bhd, Eastern Pacific Industrial Corporation Bhd (EPIC) and Handal Resources Bhd as well as the upcoming deepwater projects such as the Malikai oilfield, which should benefit most of the local O&G companies.
Meanwhile, OSK Research observed that the Federal Government has recently allocated funds to develop Kelantan’s offshore O&G fields in view of the depleting fields off the coast of Terengganu.
It believed that there are further upside for the O&G industry as crude oil price will eventually go up due to a lack of commercially viable substitutes, the recovery of the global economy which may spur demand for energy.
It also noticed that most of the O&G stocks are still trading at single digit price earnings ratio (PER) valuations although they had risen to as high as 18 times to 20 times during the good times.
The research firm also noted that the O&G industry had been quiet for the past one year which supported its conviction that new contract awards would be coming soon.
In the meantime, it said although the industry has been quiet in terms of new contracts, local O&G companies had been using this opportunity to either consolidate their operations or strategically expand their business through vertical or horizontal integration to prepare themselves for potential new O&G projects.
This include Alam-Swiber Engineering Ltd joint venture (JV) on a pipelay barge, Dayang Enterprise Holdings Bhd acquiring 40 per cent stake of Syarikat Borcos Shipping Sdn Bhd, Kencana venturing into the Offshore Support Vessels (OSV) business and Wah Seong Corporation Bhd (Wah Seong) acquiring the remaining 32 per cent stake in PPSC Industrial Holdings Sdn Bhd (PPSC).
Looking ahead, OSK Research expects to see more mergers and acquisitions (M&A) since the valuations of most O&G companies are still attractive.
It recalled that local O&G companies have been bidding for the Gorgon and Papua New Guinea (PNG) liquefied natural gas (LNG) projects with Wah Seong, KNM Group Bhd (KNM) and Kencana joining the bid.
On the other hand, KNM has tendered for about US$300 million worth of process equipment jobs in Australia and the research firm believed that its success rate was above 30 per cent since the group has presence in Australia through its subsidiary KPL Australia Pty Ltd. Similarly, Kencana also bid for some fabrication jobs in Australia.
OSK Research noted that based on the current oil price environment, the issue of delays in project commencement due to unattractive oil prices was no longer applicable.
It stated that the issue currently is more on the ability of O&G customers in getting financing for their projects.
The research firm was optimistic that the issue could be resolved once the global economy show more definite signs of recovery.
Apart from that, it observed that crude oil price has steadily climbed from its quarterly average low of about US$42 per barrel in the first quarter of 2009 to US$70 per barrel in the third quarter of 2009.
In October 2009, oil price held steady at an average US$75 per barrel which is an indication of a potentially higher quarter-on-quarter (QoQ) oil price average for the fourth quarter of financial year 2009.
The average oil price year-to-date (YTD) is about US$59 per barrel.
Besides the recovery of the global economy driving oil demand, the price of the commodity has also gone up on a weakening of the US Dollar against a basket of major world currencies.
Therefore, the research firm remained upbeat on the O&G sector with its top recommendation being Alam Maritim Resources Bhd, Kencana Petroleum Bhd and Wah Seong Corporation Bhd.
BETTER TIMES AHEAD: The oil and gas sector will remain favourable in the near future due to anticipation of the awards of a few oil and gas contracts in the medium term by Petronas and ExxonMobil.