Oil & Gas

Oil & Gas
New oil sands investments suggest renewed confidence by oil majors Overweight- Platts and The Canadian Press reported that ConocoPhillips will start work on phase 2 of Surmont oilsands project in Alberta lifting bitumen production from 27,000 to 110,000 barrels/day by 2015. Surmont isa 50:50 joint venture between ConocoPhillips and France’s Total SA. There were no financial details in thenews report.- Suncor Energy Inc. (TSX:SU), another big oil sands player, is starting up Phase 3 of its Firebag oil sandsproject, which had been put into "safe mode" during the recession.

The revival of these oil sands investments suggest that oil majors have renewed confidence in the long term trend for crude oil prices, and thus in non-conventional E&P projects where the investment hurdle rates are higher.
- We highlight that we are looking at US$80-100/barrel crude oil prices in 2010.
- The beneficiaries of increased E&P activity in non-conventional projects include the process equipment andcompression equipment players (KNM, Wah Seong) and technical services providers (Dialog).

Corporate Highlights
Dialog : Potential upside to TLP’s earnings contribution in FY11 Outperform Visit Note
- According to management, the company is in advanced stages of discussion with customers for additionalstorage capacity, which would either be an expansion of T1 (from the current 400k m3 strorage capacity) or development of T2. We view this positively as this would further enhance its recurrent earnings base (i.e.around 70% of its FY09 revenue). We highlight that our back-of-envelope calculations based on the additional 200k m3 storage capacity, suggest our FY11-12 EPS forecasts could be enhanced by 11.3%and 11.1% respectively.

- We understand from management that current E&C orderbook now stands at around RM500m (vs.RM400m previously). These include 56% of the RM600m construction value of Tanjung Langsat Port (TLP)project and Vopak’s terminal in Singapore as well as other smaller EPCC jobs. Management expects 50%of its current orderbook to be recognised in FY10 and the balance in FY11.

- We have raised our FY10-12 EPS forecasts by 2.8%, 1.4% and 0.5% respectively after factoring in: 1)earnings contribution from JSB; and 2) higher revenue contribution from E&C division.- Accordingly, we have raised our SOP fair value to RM1.80 (vs. RM1.58 previously) based on 16x FY06/11PER (vs. 16x CY10 previously). Nevertheless, we highlight potential stronger earnings growth in FY11-12arising from expansion of TLP and EPCC jobs as well as sizeable catalyst handling projects.