Tuesday 25 October 2011

Petronas licensing changes to affect smaller players

Oil and gas sector
Maintain overweight: Most local oil and gas (O&G) players are strong enough to hold their ground should a change in Petroliam Nasional Bhd’s (Petronas) licensing system result in more foreign competition. But marginal companies could see their piece of the pie getting smaller and the race for contracts get even tougher.

Pending further details, the sector remains an “overweight”. Also intact are all our stock recommendations, earnings forecasts and target prices. Our top picks are Petronas Dagangan Bhd for the big caps and Perisai Petroleum Teknologi for the small caps.

We are surprised by the possibility of the national oil company doing away with its current practice of awarding licences only to local O&G companies in certain job categories, as reported by The Edge at the weekend. This will make it harder for smaller companies to compete, but our industry checks indicate that the proposal is still very much preliminary.

These are key points from The Edge’s article: Petronas’ decision to end the restriction on licences in certain job categories to local players means that existing Petronas-licensed O&G firms, such as equipment fabricators and vessel operators, will have to fight for contracts with foreign rivals as well as unlicensed local players.

The move is aimed at further liberalising the domestic O&G sector to attract more foreign investment and promote Malaysia as an O&G hub. However, it will not take place across the board. It is believed that it does not apply to the vendor development programme.

By reforming the licensing system, foreign companies can bid directly for Petronas jobs and be the main contractors.

We think any revamp in Petronas’ licensing system is likely to only negatively impact the industry segments where Malaysian companies are still lagging behind their overseas counterparts, i.e. tubular services and reservoir studies. Therefore, it could be business as usual for most segments, especially those where local players have a competitive advantage and specialised assets — drilling rigs and pipelay barges.

Stay invested as we have positive expectations for the sector given an active execution of the Economic Transformation Programme (ETP) initiatives, most notably the marginal field projects and Pengerang tank terminal. Commanding 52% of RM170 billion committed investments so far, the sector is the single largest beneficiary of the ETP. — CIMB IB Research, Oct 24


This article appeared in The Edge Financial Daily, October 25, 2011.
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