Wednesday September 12, 2012
Brisk demand for local rigs
OIL AND GAS SECTOR
By UOB Kay Hian Research
WE hosted a luncheon for private company Gryphon, an aggressive accumulator of mobile offshore production unit (Mopu) rigs that is benefitting from thriving exploration and production (E&P) activities in the oil and gas (O&G) sector, to provide its outlook for the Malaysian rig market.
Gryphon expects especially brisk demand for the sparsely available Malaysian-flagged rigs driven by rising rig count in Malaysian waters, as Malaysia intensified its E&P activities to boost oil production, rising substitution effect as Malaysian-flagged rigs replace some foreign-flagged rigs (on charter expiry). Gryphon notes that the domestic charter rate for rigs has recently firmed up, and expects rates to inch up over time, which point to potentially rising margins for rig owners.
High extension chances for Perisai Petroleum Teknologi Bhd's Mopu charter contract for natural gas production at the Bekok production area. Recall that Perisai's Mopu is contracted out to Petronas at a daily charter rate of US$69,000 per day under a “2+1+1” contract that expires end-2013. Malaysia continues to face a significant shortage of domestic gas supply, and industry observers expect delays to Petronas' plan to rehabilitate a production platform which caught fire in Bekok-C, which augurs well for Perisai (which was mobilised to address the production shortfall in Bekok). The rig accounts for 50% of Perisai's 2012 earning before interest and tax (Ebit).
Continue to overweight the O&G sector, particularly in the rig sub-sector. Brisk demand and potentially rising charter rates could allow rig owners to positively surprise the market.
Among the listed rig owners Perisai, SapuraKencana Petroleum Bhd and UMW Holdings Bhd we maintain our buy calls on Perisai (target price (TP): RM1.59 based on 12 times 2013 forward price-to-earnings (PE) and the net present value from a prospective stake in floating, production, storage and offloading or FPSO Kamelia) and SapuraKencana (TP: RM2.80 based on 17 times FY14 forecast PE). Perisai in particular provides a significant upside to our target price, given its high likelihood of securing a contract for its jack-up rig (taking delivery on July 14) and to secure partial ownership of a FPSO vessel that shares similar demand dynamics and attractive mid-teen internal rate of return as rigs.
Brisk demand for Malaysian-flagged drilling rigs. We believe Petronas and its production sharing contract partners will intensify exploration activities, with a target to drill 50 exploration wells over the next three years. Thus, we foresee continuing strong demand for both jack-ups, mobile offshore production units (Mopu) and FPSO vessels. Demand for Malaysian-flagged rigs are particularly strong as out of the present 25 rigs in Malaysia (of which 15 are jack-up rigs), only one is locally owned (operated by UMW)
We foresee this substitution phenomenon to gain prominence from 2013 onwards, following the expiry of the typical short one to two years charter contracts for rigs, and with a handful of local companies in the midst of acquiring rigs Perisai, UMW and potentially Bumi Armada. Gryphon is also seeing rising demand for mat jack-ups, compared with the current punch-through jack-ups, as the former offers potentially quicker and cheaper deployment or de-commissioning.
Channel checks indicate that charter rates for new jack-ups have improved since two years ago, from more than US$130,000 per day to more than US$150,000 a day. Despite the availability of used rigs at cheap prices, new rigs will continue to be in demand to service more complex wells and harder-to-reach reservoirs.
Target Price: RM3.60
WE are of the view that the group is likely to see a good earnings growth in the second half of this year with risk biased to the upside as the group had reduced its stake in Syarikat Takaful Malaysia by 3.12% to 62.1% over the last two months.
Its upcoming earnings growth will be even stronger as compared with the first half. The strategic decision in capitalising on the upward trend in Syarikat Takaful Malaysia's share price performance will benefit BIMB's profitability and valuation.
The current share price of RM3.09 works out to an undemanding entry price of just 1.36 times book value into its 51%-owned Bank Islam. As such, we believe BIMB is still deeply undervalued and we do not discount the possibility of some corporate actions by the management to unlock its value. BIMB continues to be our dark horse pick in the banking sector.
The group is starting to divest its stake in Syarikat Takaful to capitalise on the strong share price performance of the latter while still maintaining a majority control (51% equity stake). As at Sept 7, the group has divested a 3.12% equity interest in Syarikat Takaful or 5.08 million shares, at proceeds which could be as much as RM30mil. Syarikat Takaful has tripled its market capitalisation to RM1bil from RM326mil in December 2011, and is currently trading at a forward consensus price earnings ratio of 12.9 times its financial year 2013 (FY13) earnings and at 1.6 times price/book value.
According to the company's managing director, the group will continue to explore various strategies to enhance stakeholders value, including the possibility of its 51%-owned Bank Islam assuming BIMB's listing status.
As such, we do not discount the possibility of potential corporate actions by management ahead to unlock the value of the group.
In addition, Bank Islam's management is expecting to achieve a higher financing growth target of 25% year-on-year by end-FY12 with a better financing-to-deposit ratio of 60%. Its higher than the industry's 13% financing growth will mainly be contributed by ETP-related projects.
As such, we still expect Bank Islam to deliver a faster balance sheet growth and achieve a better asset quality similar to its peers in two-three years.
We are maintaining our target price at RM3.60 based on a targeted multiple of 1.7 times its FY13 book value per share of RM2.10.
We believe that any potential corporate actions mentioned above could act as a re-rating catalyst for the group.
CRUDE palm oil (CPO) three-month futures recovered to a high of RM3,091 per tonne on Aug 27 but has since eased to RM2,933 per tonne.
The high soybean oil premium of over US$300 per tonne (highest since November 2008) following the worst US drought in 50 years as well as forecast tightness in the global oilseed and vegetable oil markets until South American production are available from April 2012 are key bullish factors.
Otherwise, prices may have been dragged lower due to the following bearish factors: Prospects of rising production and closing stocks surging even higher above 2 million tonnes as production peaks in the next three months. There are no official statistics but Indonesian oil stocks may have surged to about 4 million tonnes, according to Dhorab Mistry.
Demand risks with key markets posting lower economic growth as the global economy slows. China and India accounted for 19% and 13% of total Malaysian exports.
A stronger US dollar and generally weaker crude oil prices as well as talks of the United States and European Union reducing biofuel mandates until recent tightness of supply and high prices are eliminated have also bearish implications.
Year-to-date, CPO 3-M futures average has dipped further from RM3,194 per tonne to RM3,173 per tonne while locally delivered spot prices averaged RM3,109 per tonne.
SAPURAKENCANA PETROLEUM BHD
Target Price: RM2.77
SAPURAKENCANA Petroleum Bhd announced that its subsidiary, SapuraAcergy Sdn Bhd a 50:50 joint-venture company equally owned by SapuraKencana and Subsea 7 S.A., has been awarded a contract for the charter of vessel, Sapura 3000 from Construcciones Maritimas Mexicanas S.A. de C.V. to undertake heavy lifts in the Gulf of Mexico region.
The contract is for a duration of 125 days and commenced on Aug 18. The contract quantum is US$45mil.
We view the contract award positively and in line with our view that SapuraKencana is a proxy to global growth in offshore oil and gas production expansion.
It also reaffirms our expectations that the company is in an excellent position to secure more contracts.
The contract exceeds our joint-venture level SapuraAcergy and overall orderbook assumptions by 22.6% and 1.4% as well as increase the orderbook to RM365mil and RM3.798bil respectively, largely in line.
Due to the relatively small size of the contract and overall orderbook in line with our expectations, we have not changed our earnings estimates for this year.
Some of the risks include execution risk and escalation of vessel running costs.
The positives include its strong balance sheet and know-how and global trend towards offshore production.
The negatives include increased competition for growth markets and complexities of running a larger organisation.
We maintain our forecasts and rate the stock as “buy.”
Target price for the stock is maintained at RM2.77 based on 20 times financial year ending Jan 31, 2014 earnings per share of 13.9 sen.