Oil & Gas Stock Picks

Not So RAPID

 PETRONAS  to  delay  RAPID  project  to  2018  Reuters  reports  that PETRONAS  expects  to  push  back  the  commissioning  of  its  USD20b refinery  and  petrochemical  integrated  development  (RAPID)  project  in Johor by  nine months to Jan  2018.  According to an earlier statement by PETRONAS,  the  project  was  to  commence  operations  by  Mar  2017 which  in  itself  was  already  a  delay,  given  that  the  RAPID  project  was originally  scheduled  to  kick  off  in  Mar  2016.  In  reviewing  our  portfolio, Dialog and MMHE have reached our target prices and as such, we are downgrading both stocks from Buy to HOLD. Our top BUYs in the O&G sector and for which we see repricing catalysts are SAKP, Bumi Armada and Perisai.

Reasons for the delay. PETRONAS said earlier that the hiccup was due to infrastructure obstacles and the relocation of villages and cemeteries in the  area  (measuring  2,000ha)  surrounding  Pengerang.   The  project  is also  said to be complicated by a need to secure water supplies,  as well as to cater to the needs of international partners.

FID on RAPID may not meet  its Apr 2014 timeline.  With these issues, PETRONAS will also be hard-pressed to meet  the Apr 2014 deadline for its final investment decision (FID) on the RAPID project. We gather that it is  still  undecided  on  the  design  of  the  facilities  there,  particularly  the specifications  of  the  refinery  and  petrochemical  plants.  The  project involves the processing of  low -grade heavy, sour crude crude oil from the Middle East (i.e. Iraq).

Companies with potential exposure to the RAPID project. While a 9-month delay for a massive project is not a major concern,  this newsflow will  generate  some  negative  sentiment.  O&G  companies  that  are potentially  leveraged  to   this  project  are:  (i)  Dialog  (tank  terminal operations, regasification plant), (ii) KNM, MMHE, Muhibbah Engineering, SAKP  (onshore  fabrication  works  and  process  equipment),  (iii)  Gas Malaysia and Petronas Gas (natural gas transmission, additional volume) and (iv) Petronas Chemicals (petrochemicals). 

  above: Valuation Table (click to enlarge)

Stock  calls  reassessed.  We  have  downgraded  Dialog  and  MMHE  to HOLDs now, primarily for valuation reasons. The former now trades close to our MYR3.05 TP while the latter has surpassed our MYR4.20 TP. Both stocks  have  performed  well.  Dialog  has  surged  by  25%  YTD  while MMHE’s  share  price  has  risen  by  27%  in  the  three  weeks  since  we upgraded it to a BUY on 9 Jul 2013. 

Stock picks.  While we continue  to Overweight the sector, we are more selective on our stock picks now following good share price performances overall.  We continue to favour  Perisai,  which could  re-rate  ahead of  the listing of another  O&G company  with a  similar business model in 4Q13. SAKP  will  benefit  from  potentially  strong  offshore  fabrication  job  flows, which  are  scheduled  to  be  awarded  from  4Q13  and  into  2014.  Bumi Armada should  re-rate  once it bags  the multi-billion dollar Kraken FPSO job.

by Maybank IB