Monday, August 10

Marginal oil fields a boon for local O&G sector

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KUCHING: The award development and production contracts to local players is a game changer for local oil and gas (O&G) service providers as this is the first time local players have been invited to participate.

UOB Kay Hian (Malaysia) Holdings Sdn Bhd (UOB Kay Hian) in its report pointed out that newsflow on this sector would be forthcoming and would act as a near term catalyst for a sector-wide re-rating. This move was intended to groom and moved local O&G players up the value chain.

To recap, Petronas had awarded a risk sharing contract (RSC) to develop and produce the Berantai field to a joint operating party (JOP) formed by a tripartite.

Petrofac Energy Development, a London-listed O&G exploration and production (E&P) company would take a 50 per cent stake, while SapuraCrest Petroleum Bhd (SapuraCrest ) and Kencana Petroleum Bhd (Kencana) would each have a 25 per cent equity participation in the JOP.

The JOP would provide field development plans including the funding for the development cost and production of petroleum resources. The development of the Berantai field would require the provision of one well head platform and a floating production, storage and off-loading (FPSO) vessel.

The research house expected a second well head platform to be installed in subsequent phases. “The RSC will span nine years. Petronas targets first gas by end of December 2011 and the first development base of 19 wells is expected to be completed by end of next year. New incentives and tax allowances will ensure these marginal fields are commercially viable,” it said.

The minimum development cost of the Berantai field was US$800 million. If the development costs were spread over two years, the JOP entity would recognise US$400 million of development work per annum.

“Assuming these contracts yield a 10 per cent net margin, both SapuraCrest and Kencana will add at least another RM30 million to bottom line,” it pointed out.

UOB Kay Hian further said the development of marginal fields would have spillover effects on the sector. Rising spending on E&P would trickle down to other onshore fabricators like Dialog Group Bhd, KNM Group Bhd and Muhibbah Engineering (M) Bhd. Dialog which has a track record was capable of fabricating O&G modules could form a joint venture (JV) partnership with Petrofac for engineering, procurement and construction contract (EPCC) works

Meanwhile, smaller O&G service providers like Petra Energy Bhd, Tanjung Offshore Bhd and Perisai Petroleum Teknologi Bhd would see more contract flows, as the pie for O&G/ E&P expenditure expanded further.

“Valuations at this time appear to be inexpensive, even after the recent rally. Both SapuraCrest and Kencana trade at 17 times to 18 times forward earnings, before factoring in additional earnings arising from development works from Berantai field,” said UOB Kay Hian.

Looking forward, Petronas planned to extract an additional 1.7 billion barrels of oil from marginal oilfields through enhanced oil recovery (EOR) methods and the development of marginal fields. Reserves from marginal oilfields account for eight per cent of Malaysia’s existing O&G reserves of 20.6 billion barrels of oil equivalent (BOE).

The company also planned to develop 25 per cent of existing marginal oilfields, including the Sepat oilfield and Cendor Phase 2 project. These contracts would be awarded by April 2011.

Under the RTSC, Petronas still had 100 per cent ownership and claim on the O&G reserves. Rising crude oil prices might not had a direct or immediate impact to the JOP members’ earnings, said the research house.

Nevertheless, it believed the RSC would still yield a projected internal rate of return (IRR) of 15 per cent to 20 per cent, which was value enhancing. Costs of funding for both SapuraCrest and Kencana were much lower as their balance sheets were among the healthiest in the sector.