Kencana Petroleum BUY Target Price RM3.17 by OSK

Bernama reported that there is no change in Petroliam Nasional Bhd's (Petronas) licensing policy related to companies engaged in Malaysia's upstream oil and gas (O&G) industry. The report said that under the Petroleum Regulation 1974, both local and foreign companies wishing to commence or even carry out any business or services related to Malaysia's O&G upstream operations must apply for a licence from Petronas.

The clarification was made following The Edge report last week that such a licence may not be required going forward in bidding for local O&G jobs.

First, we note that Petronas has embarked on a long-term plan to nurture the local O&G service providers, with the first few being Kencana Petroleum Bhd, SapuraCrest Petroleum Bhd and Dialog Group Bhd, which have been awarded marginal oilfields to expose these companies to upstream O&G activities.

Second, we understand that most of the local O&G service providers currently have spare capacity as O&G activities have slowed compared with before the global economic recession in 2008 when their capacity was mostly tailored to local needs.

Noting this spare capacity, it may not make economic sense for Petronas to get resources from the non-local O&G services providers whose capacity is mostly built to meet the requirements of their own countries or regions of operation.

Finally, this licensing requirement does not prevent foreign companies from participating in Malaysia's O&G sector as what is required is a partnership with a local licence holder. In fact, such participation facilitates the transfer of technology and helps enhance the competence of the local companies while at the same time allowing the foreign companies to benefit from the development of the country's resources.

Our top picks are Kencana ('buy', fair value (FV): RM3.17) and Dialog ('buy', FV: RM3.66). With an improving global economic outlook and the crude oil price having gone back to around US$90 (RM277)/barrel, we believe that O&G activities will gradually pick up, which would then benefit all O&G service providers through better utilisation rates and higher sales/unit or services/hour rates.

On the local front, we expect the industry to be in for more marginal oilfield developments and the increasing need for brownfield services to boost O&G production while waiting for the commencement of deepwater activities on a large scale after pre-development preparations are completed.

We gather that the ratio between shallow water and deepwater O&G production is still at 70:30 but over time, the deepwater portion will pick up after all the easy O&G finds deplete.

Hence, we think Petronas is now preparing the local O&G supporting services providers for marginal oilfield (shallow water) developments first before embarking into the more challenging terrain (deepwater). ' OSK Research, Oct 31

Kencana Petroleum Target Price RM3.17 BUY by OSK Research

OSK Research has upgraded KENCANA PETROLEUM BHD to Buy with revised fair value of RM3.17.

The research house said on Monday, May 16, it viewed positively Kencana’s plan to acquire Allied Marine & Equipment Sdn Bhd for RM400m from Worldclass Inspiration Sdn Bhd and Allied Asset Holdings Sdn Bhd.

OSK Research said the purchase would be satisfied by the issuance of 149.3m new shares of Kencana at RM2.68 a share.

“This acquisition also comes with a profit guarantee of RM40m. The entire exercise is expected to be completed by 3QCY11.

“We view this acquisition positively as it would help Kencana to expand vertically. Upgrade to Buy with revised fair value of RM3.17,” it said.

Kencana Petroleum BUY Target Price RM3.05 by OSK Research

Kencana Petroleum Bhd remains a top pick for OSK Research in the oil and gas sector due to its delivery track record.

The research house has maintained a trading "buy" for Kencana with the target unchanged at RM3.05.

"We believe another re-rating of its share price will happen
sometime in the fourth quarter of this year, when there is more guidance from management on the potential contribution from the Berantai marginal field," said OSK Research said in its research note today.

Yesterday, the company announced that its 100 per cent owned subsidiary, Kencana HL SB, has secured a contract from Kebabangan Petroleum Operating Company SB for the fabrication of Kebabangan substructure for Kebabangan Northern Hub Development Project.

"We had expected Kencana to win at least a portion of it given the company’s delivery track record and available yard space.

"We understand that Kencana’s utilisation rate had recently
increased to about 60 per cent but there is still ample room to take on more jobs," OSK Research added.

OSK Research said Kencana's order book should increase to about RM2.4 billion and this is expected to keep the company busy for the next two years. Meanwhile, Kencana’s tender book was about RM5.0 billion.

Hotels near Petroleum Hub are essentially utlised by oil and gas company executives, engineers, and has helped provide a boom for once quiet little towns such as Bintulu, Pekan Baru, Pengerang.