Oil and gas (O&G) stocks have been rallying on the back of the Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor becoming fully-operational by the fourth quarter of this year. The interest and appetite for O&G stocks have been surprisingly positive throughout the last few months despite the tame prices of the Brent crude oil.
Brent was last traded at US$61.88. It is up 13% on a year-to-date (y-t-d) basis.
Bumi Armada and KNM Holdings Bhd, which have no links to the Pengerang project, have also appreciated by 200% and 475% respectively. Nonetheless, the bigger deal is the US$16bil (RM66.76bil) mega-Pengerang project between Petroliam Nasional Bhd (Petronas) and Saudi Aramco. This project will see 300,000 barrels of oil being produced per day, turning Malaysia into a net exporter of refined fuels for the first time since 2008.
On a macro scale, the successful development of Malaysia’s largest petrochemical cluster will be positive for sustaining the country’s trade and current-account surpluses. Not surprisingly, O&G stocks on Bursa Malaysia have been hogging the volume list for months. On a y-t-d basis, the Bursa Malaysia Energy Index has risen 49.54% from 820.36 points at the start of the year to 1,226.79 as of last Friday. Stocks that were heavily traded included Sapura Energy Bhd. Bumi Armada, Velesto Energy Bhd, Serba Dinamik Holdings Bhd, and Hibiscus Petroleum Bhd.
Enthusiasm on the Pengerang project could also be due to news that Petronas has been approached by Saudi Aramco to participate in the Middle Eastern company’s initial public offering (IPO).
It was reported that Saudi Aramco and its advisers had reached out to several potential investors, including China’s sovereign wealth fund, China National Petroleum Corp and state-owned entities from the United Arab Emirates and Kuwait, as well as Canadian pension funds.
Crown Prince Mohammed bin Salman, the architect of the IPO, expected Aramco to be valued at more than US$2 trillion.
At operating capacity, Maybank Investment Research estimated that the Pengerang Integrated Petroleum Complex (PIPC) would generate an annual revenue of US$11bil, based on an average crude oil price of US$70 per barrel.
“There will be initial start-up losses, before it reaches break-even utilisation of 60% to 65%. Ramp up will be gradual and the project should reach full operating capacity in two to three years. Pemandu forecasts that PIPC will contribute RM8.5bil per annum to Malaysia’s gross domestic product at operating capacity, ” said the research house in an October note.
It added that Dialog Group Bhd, Petronas Gas Bhd, and Petronas Dagangan Bhd should also see meaningful contributions from 2020.
According to Maybank Research, PIPC is expected to render multiple benefits to Malaysia.
Firstly, it should enhance its energy security and storage facilities for crude oil, natural gas and refined petrochemical products.
“Secondly, it should enhance Malaysia’s status in the downstream sector as it becomes a net exporter of refined petroleum products. Malaysia used to import heavily from Singapore and this will be fully-substituted, in our view, ” said Maybank.
Thirdly, it is envisioned that the success of phase one will attract more investments and potentially turn PIPC into a leading petrochemical cluster globally.
Meanwhile, from the perspective of Petronas’ capital expenditure, the O&G sector is expected to see contract flows increasing in the coming months to make up for Petronas’ under-spending in the first half of the year.
Petronas spent RM16bil on capital expenditure in the first half of 2019, representing 32% of its full-year target of RM50bil.
According to Affin Hwang Capital, Petronas has allocated half of the RM50bil for domestic projects.
Affin Hwang Capital said the total RM50bil guidance is still unchanged, showing Petronas’ commitment to roll out more contracts in the coming months.
It believed that contract flows by Petronas could accelerate in the coming months, providing excitement to the sector until year-end.
The aggregate sector contract value announced in the 10 months of 2019 was strong at RM49.9bil, compared with RM13.2bil during the same period last year.
– The Star