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Monday, November 14, 2011

Petronas, Shell Give Impetus to Oil Recovery (OSK)

Media reports last Saturday said Petronas and Shell Malaysia have signed a heads of agreement for two 30-year production-sharing contracts (PSCs) for enhanced oil recovery (EOR) projects offshore Sarawak and Sabah. This agreement would see staged work activities and new investments by Shell and its JV partner, Petronas Carigali SB, to extend the life and increase the recovery factor of the Baram Delta and North Sabah fields. It was also reported that the improvement in recovery efficiency of the oil fields may give rise to an additional 90k-100k boe/day of oil production and extend the field life to beyond 2040.

Main beneficiaries of EOR projects. Overall, we see the EOR projects benefiting the entire O&G supporting services value chain, including the pipe coaters, vessel providers, process equipment manufacturers and others. However, in our view, the main beneficiaries would be fabricators such as MMHE and Kencana and brownfield services providers like Dayang, Petra Energy and Kencana, to a certain extent. They would probably get the biggest chunk of the contracts and also reap lucrative revenue as these projects are recurring in nature. In addition, the margin for services contracts can be as high as 20% to 30% since there will be minimal overheads involved.

Maintain Overweight on O&G sector. Our top picks for the sector include Kencana (Buy, FV:RM3.17) and Dialog (Buy, FV:RM3.66), which we like for their marginal oilfield exposure and their performance track records.

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