Sector Update, 14 November 2014

Oil & Gas Services Neutral (Maintained)

Macro   Risks   Something Has Got To Give 3 Growth   3 Value  

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2 As a result of the fundamental change in the crude oil landscape, this report addresses the impact of the lower crude oil price environment on the companies under our coverage. For our Top Picks, we have chosen companies that are not materially affected by the lower crude oil price environment. Our top BUYs are Dialog, SapuraKencana, and Bumi Armada.

 This time it is different. The lower crude oil price environment is not new to the global scene. The fundamental reasons for the major swings in crude oil prices are: i) economic, ii) geopolitics, and iii) natural disasters. These events/situations, given time, will rectify themselves and allow commodity prices to revert back to norm, under the given

demand and supply situation. This time, though, it is different. As a result of the US shale oil revolution, we are facing a change in the fundamentals in the dynamics of crude oil supply.

 Something has got to give. At the moment, it seems that some of the higher cost producers are cutting capex/production. At the same time, it seems that calls from weaker Organisation of the Petroleum Exporting Countries (OPEC) members to cut production quotas are also coming into play. Whatever happens, something has got to give. We believe that crude oil prices will see some positive movements, possibly over the next 3-6 months, as supply is lowered – either from the higher cost producers or from the OPEC members cutting production quotas. We expect that crude oil price will trade in the USD90-100/barrel (bbl) range, averaging USD95/bbl over the next 12-24 months.

 Sensitivity analysis. For the 16 stocks under our coverage, we provide

investors with sensitivity analyses that not only incorporate different oil price scenarios, but also assumptions of changes in both local and global oil major capex spending. Oil price movements will have direct impact on exploration & production (E&P) players like SapuraKencana Petroleum (SapuraKencana) (SAKP MK, BUY, TP: MYR5.33) and Dialog (DLG MK, BUY, TP: MYR2.25). The decision on capex spending will affect day rates, availability of future contracts and orderbook replenishment rates. These will affect asset operators in the rig and offshore support vessels (OSV) segments, as well as pure service players. For floating production systems players, while production capex should be relatively sheltered from oil price movements, they could also face project award delays

 Selective picks. Our recommendation is on companies with clear long- term diversification strategies, proven execution track record and niche/top players in oil & gas (O&G) subsectors. Our Top Picks are SapuraKencana, Dialog and Bumi Armada (BAB MK, BUY, TP: MYR2.24), while Dayang (DEHB MK, BUY, TP: MYR4.52) and Coastal Kong Ho Meng +603 9207 7620 Contracts (COCO MK, BUY, TP: MYR5.90) remain as our mid- to small- [email protected] cap Top Picks.

The Research Team +603 9207 7609 [email protected]

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Oil & Gas Services 14 November 2014

Table Of Contents Investment Summary ...... 3

This Time It Is Different ...... 4

The showdown: shale oil producers vs OPEC ...... 5

Something has got to give ...... 6

27 Nov OPEC meeting ...... 6

The Lower Crude Oil Price Environment ...... 7

Regression analysis: USD to crude oil price ...... 7

Crude oil market still adjusting to the new reality ...... 8

Weakening/lower crude oil price environment ...... 8

Malaysia ...... 9

Appendix 1: A Slew Of Capex Cuts Or Project Delays ...... 10

Appendix 2: O&G Crude Oil Price Sensitivity ...... 11

Appendix 3: RHB Coverage ...... 13

See important disclosures at the end of this report 2

Oil & Gas Services 14 November 2014

Investment Summary The fundamental change in the crude oil landscape. As a result of this fundamental change, this report addresses the impact of the lower crude oil price environment on the companies under our coverage. For our Top Picks, the weak crude oil price environment will not have any material impact on earnings. Our top BUYS are Dialog, Ezion (EZI SP, TP: SGD2.65), Logindo Samudramakmur (Logindo) (LEAD IJ, TP: IDR6,200), Nam Cheong (NCL SP, TP SGD0.58) and PTT (PTT TB, TP THB376.00). Our top SELLS are Malaysia Marine and Heavy Engineering (MMHE MK, TP MYR2.01) and Vard Holdings (VARD SP, TP SGD0.57). This time it is different. The lower crude oil price environment is not new to the global scene. In recent history, crude oil prices have slumped to USD9/bbl and have skyrocketed to USD145/bbl. The fundamental reasons for the major swings in prices are: i) economic, ii) geopolitics, and iii) natural disasters. These events/situations, given time, will rectify themselves and allow commodity prices to revert back to norm. This time, though, it is different. This is because we are facing a change in the fundamentals in the dynamics of crude oil supply and trade flows as a result of the US shale oil revolution. Something has got to give. At the moment, it seems that some of the higher cost producers, ie shale oil/Canadian oil sands, now have to cut capex/production. At the same time, it seems that calls from weaker OPEC members to cut the organisation’s production quotas are also coming into play. Whatever happens, something has got to give. We believe that crude oil prices will see some positive movements, possibly over the next three to six months, as supply is lowered, either from the higher cost producers or from OPEC members cutting production quotas.

Expect crude oil price to rise from here on. We expect crude oil prices will trade in the range of USD90-100/bbl, averaging USD95/bbl over the next 12-24months. At this price, the highest cost producers, namely the Canadian oil sands and Arctic producers, should be able to make relatively reasonable margins. Also, at this price range, most of the OPEC members will be able to finance their fiscal budgets with the oil dollars. Lower crude oil environment impact. Fundamentally, weakening crude oil price will dampen the earnings of the E&P companies, refineries will report stock losses, and petrochemicals spreads will be dependent on the demand and supply of each particular product. For the services segment, those in the exploration phase will be the first to be affected should there be a cut in spending. Those that are involved in the development and production part of the E&P business will be relatively safe from cuts, depending on the type of fossil fuels being developed. For our ASEAN O&G coverage. We cover 44 companies in four countries across the value chain, ie from upstream to downstream. The coverage concentrates more on the services segment, where most of the listed oil and gas companies in Malaysia, and are in. Thailand is an exception. Here, the listed names are dominated by oil refinery and petrochemical players. A majority of the listed companies under coverage in the services segment will be relatively unaffected by the short-term crude oil price volatilities, as these firms have short- to medium-term services contracts. For Thailand, the companies under coverage are directly affected by the crude oil price volatility via their revenue streams (for the E&P business) and through stock gains/losses (for the refineries).

See important disclosures at the end of this report 3

Oil & Gas Services 14 November 2014

This Time It Is Different The lower crude oil price environment is not new to the global scene. In recent  Crude oil prices have plummeted to USD9/bbl history, we have seen crude oil prices plummeting to USD9/bbl – this was in Dec and skyrocketed to USD145/bbl 1998 when OPEC approved a 10% quota increase at a time when Asian economies were entering a prolonged slump. Crude oil prices have also skyrocketed to a high of USD145/bbl in Jul 2008. Hence, crude oil prices can swing in a wide range in some years while, in others, there are periods of high stability. In 2008, crude oil prices were on a rollercoaster ride. Brent crude prices began the year at USD97/bbl, peaking at USD145/bbl and ending at USD41/bbl. The price of crude oil hit its lowest point at USD34/bbl. This plunge was caused mainly by the financial crisis that wreaked havoc on the global economy and triggered a fall in the overall demand for crude oil. Currently, we believe that the global economy is slowing down and that this will result in steady adjustments in crude oil demand/supply. As such, we do not foresee a crash in prices (as in 2008). 2011 was another year of major swings. Brent crude prices began the year at USD94.73/bbl, peaking at USD126.74/bbl and ending the year at USD107.58/bbl. Crude oil prices hit their lowest point at USD92.98/bbl. Two major events caused these swings:  The Arab Spring. A revolutionary wave of demonstrations that began in Dec 2010 and spread throughout the countries of the Arab League and the nations surrounding them.  Tsunami in Japan. Nuclear power met 25% of Japan’s electricity needs but, after the Fukushima Daiichi nuclear disaster, all nuclear reactors have been shut down on safety grounds. The country replaced the significant loss of nuclear power with generation from imported natural gas, low-sulphur crude oil, fuel oil and coal. The reasons. The fundamental factors behind the major swings in crude oil prices  This time it is different are: i) economic, ii) geopolitics and, iii) natural disasters. These events/situations, given time, will rectify themselves and allow commodity prices to revert back to norm, under given demand and supply situations. This time it is different. This is because we are facing a change in the fundamentals in the dynamics of crude oil supply as a result of shale oil and the future shale gas revolutions. The current weaker crude oil price environment is a result of softer global demand and the surge in shale oil production in the US. As the boost in US oil production has lowered the country’s overall crude oil imports, producers such as and have had to divert their exports to Asia. It seems like there could be a rebalancing of crude oil trade flows as the global crude oil market continues to adjust to the surge in supply due to the new North American shale oil reality. Further details were discussed in our full report published on 16 Oct: Shale Oil Revolution Reality.

Note: Our expectations on crude oil prices are based on the fundamentals of the crude oil market. It does not take into consideration speculation and sentiment on crude oil prices, which can play a significant role in price volatility.

See important disclosures at the end of this report 4

Oil & Gas Services 14 November 2014

Figure 1: Crude oil prices through the years

(USD)

180

160

140

120

100

80

60

40

20

0

Tapis WTI Dubai Brent

Source: RHB

The showdown: shale oil producers vs OPEC Is there really a showdown between OPEC and the shale oil producers? Below are excerpts from Bloomberg over the past week:  When US shale companies talk about having more staying power in a price war, it is the weaker members of OPEC, ie Venezuela, Nigeria, Ecuador and Iran, that are the weakest links. Iran, Iraq and Algeria need at least USD100/bbl. At current prices only Kuwait, Qatar and the (UAE) will earn enough to balance their budgets. Although Saudi Arabia is awash with cash, some OPEC members’ financials are deteriorating quickly. Venezuela, for example, has burned though billions of dollars to stave off default, leaving its foreign reserves near a decade low. Nigerian officials are struggling to stem a sell-off in the NGN, which has left the currency at a record low. These financial strains have resulted in Venezuela, Libya and Nigeria calling for action. OPEC members are countries, not companies, so they tend to look not at the profitability of wells but at revenues for a fiscal or current account standpoint.  To win the showdown with US shale, the Saudis are trying to bring OPEC’s weaker members in line. OPEC is lining up between the haves and the have- nots. Iran, Venezuela, Nigeria and Ecuador are really going to be struggling very mightily at these prices. That is who the shale producers are counting on.  Shale oil drillers will be hurt by the fall in crude prices before members of OPEC because their costs are higher, said the group’s secretary-general, Abdalla el-Badri. As much as 50% of tight oil output will be “out of the market” at current prices. Executives at several large US shale producers, including Chesapeake Energy Corp (CHK US, NR) and EOG Resources Inc (EOG US, NR) have vowed to maintain – and even raise – production as they reported earnings. They say their success in bringing down costs meant that they make money even if prices slump further. OPEC is expected to decide on future production quotas when it meets in Vienna, Austria, on 27 Nov.  Meanwhile, the slide in crude oil price is now threatening to curb the production boom in the US shale oil formations, Bloomberg reported. Peak rig count was 1,609 in October and the count is now down 49 rigs since peak. It is expected to fall by more than 100 rigs by year-end. According to Halliburton (HAL US, NR), the second largest O&G services company by market value, it was told by its US customers that they would not be changing fracking activities for 1H15.

See important disclosures at the end of this report 5

Oil & Gas Services 14 November 2014

Something has got to give Weaker OPEC members feeling the pain. The point of the matter is, at the moment, crude oil prices have slumped to a price point where many OPEC members are now calling for action as oil dollar revenues are falling. These members need oil dollar revenues to finance their fiscal budgets. As mentioned earlier, OPEC members are countries and they look at the revenues from a fiscal standpoint. It is only the lower cost producers/oil-rich Gulf nations, ie Saudi Arabia, Qatar and Kuwait, that can stand lower crude oil prices.

Higher cost producers are also in pain. At this price point, several shale oil producers, ie one of the higher cost producers, are also hurting. Shale oil producers work on the economies of the wells. They also work on the pure technologies. With constant improvements and innovation in technology, the economic costs of such wells could be at much lower breakeven price points in the future.

Will OPEC or shale oil producers fold first? As global oil demand has slipped below expectations, due to weaker-than-expected global economic growth, crude oil production will have to readjust to balance out the market. Therefore, it will have to either be the OPEC member countries having to cut crude oil production or the shale oil producers – including, possibly, the Canadian oil sands and Arctic producers – that will have to shut down their wells at the current – or lower – crude oil prices.

Something has got to give. At the moment, it seems that some of the higher cost producers now have to cut capex/production while – at the same time – it seems that calls from weaker OPEC members to cut the organisation’s production quotas have also come into play. Whatever happens, something has got to give. We believe that crude oil prices will see some positive movements, possibly over the next three to six months, as supply – either way – is lowered.

OPEC meeting: 27 Nov Less crude oil required from OPEC. OPEC has been quoted as stating that the world will need less of its oil than previously estimated for most of the next two decades as growth in shale production in the US grows. The organisation lowered every forecast for its crude through 2035 except for next year. The market is now expecting the oil cartel to possibly look to reducing its production quota by around 500,000 barrels per day (bpd) to perhaps 1.5mbpd. (Source: Bloomberg) Our take. As such, we believe that 500,000bpd is a reasonable cut in production by with OPEC or the shale oil producers. We believe that the cut will have to come from OPEC more than any other producers. We believe that such a move could allow crude oil prices to rebound to our forecasted range of USD90-100/bbl over the next 12-24months. Should agreements not be concluded during the upcoming round of talks among OPEC members, we believe that the next round should bear fruit.

See important disclosures at the end of this report 6

Oil & Gas Services 14 November 2014

The Lower Crude Oil Price Environment As a result of the fundamental change in the crude oil landscape, this report addresses the impact of the lower crude oil price environment on the companies under coverage.

For our ASEAN O&G coverage, we cover 44 companies in four countries across the value chain, from upstream to downstream. The coverage concentrates more on the services segment, where most of the listed O&G companies in Malaysia, Singapore and Indonesia are in. Thailand is an exception, where the listed names are dominated by oil refinery and petrochemical players.

Regression analysis: USD and crude oil price Since crude oil is priced in USD, it seems that the market – at times – tends to look at  There is very low correlation between the the strengthening or weakening of the greenback as one of the factors for USD and crude oil price changes/impact on crude oil prices. We performed a simple regression analysis on the correlation between crude oil prices and the USD index, which comprises the EUR (c.57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%). Based on our simple regression analysis between crude oil price – European Dated Brent and Forties-Oseberg-Ekofisk (BFOE) – and the USD index (using 1,235 observations from Jan 2010-Oct 2014), we found no relationship between the two variables. We regressed crude oil prices per day on the daily USD index to roughly estimate the impact of the change in the USD on oil prices. However, we found no significant linear relationship between the two variables. Our regression model produced a low R square value of only 16%. The reason for the low correlation between the two variables could possibly lie with the fact that crude oil prices are dependent upon many other factors and not only the USD.

Figure 2: Regression results I Regression statistics Multiple R 0.404 R square 0.163 Adjusted R square 0.163 Standard error 0.133 Observations 1,235.000

Source: RHB

Figure 3: Regression results II

Crude oil 4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2 4.25 4.3 4.35 4.4 4.45 4.5 USD index Y Predicted Y

Source: RHB

See important disclosures at the end of this report 7

Oil & Gas Services 14 November 2014

Crude oil market still adjusting to the new reality The crude oil market is currently adjusting to the new global demand and supply  We expect crude oil prices to trade in the balance reality. This, along with how OPEC manages its crude oil trades over the USD90-100/bbl range over the next 12-24 medium term, will determine at what price crude oil settles at. It has become a rather months and averaging USD95/bbl for 2015 difficult task to pinpoint where prices will average over the medium to long term. and the longer term According to media reports, it would seem that the market has put the crude oil price average in the range of USD80-105/bbl. We expect prices to trade in the USD90- 100/bbl range over the next 12-24 months. At this price, the highest cost producers (Canadian oil sands and Arctic producers) should be able to make relatively reasonable margins. Also, at this price range, most of the OPEC members will be able to finance their fiscal budgets with their oil dollars. As such, we expect crude oil prices to average USD95/bbl, down from our previous forecast of USD100-105/bbl. Please refer to our report dated 31 Oct on Exploration & Production (PTTEP) (PTTEP TB, BUY, TP: THB167.00), 9M14 Net Profit Falls 6% YoY, dated 31st October, for more details.

Weakening/lower crude oil price environment  Oil companies, in general, will look to cut During times of weakening or lower crude oil prices, oil companies in general will look spending to match their cash flows to cut their spending to match their cash flows streams. The capex budget on individual companies will be separated into committed and uncommitted spending. Committed spending will be for long-term projects under development and production phase. Uncommitted spending will be for the likes of M&As and the exploration portion of the E&P business. Spending cuts will first be on the uncommitted budgets. Further cuts can be on the committed budgets, should these projects be viewed as uneconomical under current/future crude oil price expectations. Under this current environment, it will be the projects that are in the higher costs fossil fuels category (deepwater, Canadian oil sands, shale oil/gas). Once spending cuts occur, this will, in turn, have a negative impact on the overall spending environment going forward. Crude oil price weakening will dampen earnings on E&P stocks, the refineries will  Immediate impact will be on the exploration report stock losses and petrochemical spreads will be dependent on the demand and phase and its related businesses supply of each particular product. For the services segment, ie chartered vessels, drillings rigs, etc, which are in the exploration phase of the business, will be the first to be affected should there be a cut in spending. Services companies that are involved in the development and production portion of the E&P segment will be relatively safe from cuts. National oil companies (NOCs) like Thailand’s PTT, Pertamina and Malaysia’s  NOCs operate with the national interest being operate with slightly different strategies than those of general oil at the forefront of their strategies companies. NOCs look at the longer-term, with national interest being at the forefront of their strategies going forward as they have to consider the long-term economic benefits of their respective nations. However, we believe that it is highly likely that some downward adjustments in capex are possible going forward, given the current global economic environment and crude oil price slump.

See important disclosures at the end of this report 8

Oil & Gas Services 14 November 2014

Malaysia E&P  RSC owners are less affected as they are paid by a set fee per barrel extracted Malaysian companies that are directly affected by crude oil price volatility are those that own production sharing contracts (PSCs) and risk service contracts (RSCs), as both are involved in crude oil production. Owners of PSCs will be more affected than RSC owners, as they own an equity stake in the field. When it comes to PSCs, the proceeds of every barrel extracted are distributed amongst the equity partners. RSCs would be less affected as they are paid a set fee for every barrel extracted.

 FPSOs are sheltered from oil price volatility Floating Production Storage Offloading (FPSO) We believe FPSO counters will be relatively sheltered from the oil price volatility, as these companies are involved in the oil production phase and not the exploration side. FPSOs are chartered out on a long term basis, ie eight years or more, with the charter rates locked in from the start. The oil companies involved will still be paying such firms the daily charter rate even in the event that oil prices make it uneconomical for the field to remain in production. FPSO players under our coverage, ie Bumi Armada and Yinson (YNS MK, NEUTRAL, TP: MYR2.60), are still bidding for projects around the world. Bumi Armada is bidding for large FPSO projects that require capex of more than USD1bn while Yinson is looking at mid- to small-sized FPSO projects that require about USD500m in capex. In our assumptions, we have inputted one project win each for Bumi Armada and Yinson.

 Drilling rigs in the exploration phase will be Drilling rigs more affected by the volatility in crude oil We believe rig owners that are exposed to exploration drilling will be affected by prices volatility in crude oil prices. It would be uneconomical to undertake exploration during such times and oil companies will focus more on production. Rigs that are currently on deployment are chartered out over a 2-3 year period. New rigs that are currently under construction – and yet to be chartered out – might be seeing lower charter rates as a result of the falling crude oil prices and the additional new supply of drilling rigs.

 Majority of the OSV players’ vessels are on OSVs long-term contracts The majority of the vessels of the OSV players under our coverage are under long- term contracts, ie more than five years. As such, if vessel charter rates were to come down in the near term, we believe that vessels on long-term contracts will not be affected, while those looking for spot charters may command a lower charter rate in the near term. It is also possible for new vessels to get lower charter rates when compared to those already on charter.

Services/fabrication  Service players are on long-term contracts, Service players, ie hook-up commissioning (HuCC), pipe coating, transportation and but slowdown in work is possible. installation, are on long-term umbrella contracts. However, with the current weakness in oil prices, we believe there is a possibility that we might see a slowdown in work orders coming in. When capex is reduced, it is possible that there could be a slowdown in HuCC work orders, as there will be fewer new platforms and offshore modules to install. Fabricators, ie offshore platforms and modules, will unlikely be affected in the near term as planned projects will still be underway. Over the medium term, though, we believe some projects that are currently in the design and planning stages might be unfeasible in light of a weak crude oil price environment and face the risk of getting scrapped or delayed. This, we believe, may affect the ability of the fabricators to replenish their orderbooks. Between the two major fabricators under our coverage, we believe Muhibbah Engineering (Muhibbah) (MUHI MK, NEUTRAL, TP: MYR3.22) to be in a much better position vis-à-vis MMHE. This is because Muhibbah’s current orderbook will keep the company occupied well into 2016 whereas MMHE’s orderbook will only last until end- 2015. Due to this, we believe MMHE is at a greater risk of not securing any new fabrication projects, especially in light of the potential decreased capex spending and crude oil weakness.

See important disclosures at the end of this report 9

Oil & Gas Services 14 November 2014

Petrochemicals  Slight improved spreads with naphtha Petrochemical plants that are more reliant on naphtha feedstock may be seeing crackers better spreads in the event that crude oil price falls, provided that product prices stay at the same levels. We estimate naphtha feedstock to make up about 8% of feedstock cost for Petronas Chemicals (PCHEM MK, NEUTRAL, TP: MYR6.08) as most of its feedstock is gas-based, ie ethane, propane, butane and methane.

Appendix 1: A Slew Of Capex Cuts Or Project Delays Most oil majors expect to review their FY15 capital budgeting decisions towards end- 2014 and the long-term expected direction of crude oil prices plays a crucial role in upstream capex decisions. In this event, projects in the exploration phase, projects in the initial phases of development and projects requiring high production breakeven costs are most susceptible to capex cuts. Of the international O&G operators that have released their current quarter financial results, some companies that have announced clear capex cuts are the US shale producers and service players.  Canadian Natural Resources (CNQ CN, NR), with a planned USD7.5bn capex, said its Grouse oil sands projects in Alberta is at risk of being deferred in FY15 should US/WTI oil price reach USD70/bbl.  Continental Resources (CLR US, NR), the largest oil producer in North Dakota's Bakken shale formation, announced a USD600m cut in its FY15 capex (to USD4.6bn) and a cut in production targets, as it postpones a planned drilling expansion when oil prices are low.  Apache (APA US, NR), a US E&P company, saw 3Q earnings fell partly due to writedowns of O&G assets from lower commodity prices. Apache is looking to reduce its debt by cutting capex and selling assets and has already announced divestitures of its Argentinean operations, deep-water assets in the Gulf of Mexico and a stake in its Egypt business  In November, Statoil (STL NO, NR), Norway’s biggest oil major, suspended two more rigs (the Transocean Spitsbergen and Songa Trym) as it reins in spending, citing overcapacity. This follows the suspension of two rigs from Oilfield Services (2883 CN, NR) and Saipem SpA (SPM IM, NR), and a contract termination for Diamond Offshore Drilling (DO US, NR) in June.  Plains All American Pipeline (PAA US, NR) revealed its FY15 preliminary EBITDA growth guidance of 8-15% above FY13’s USD2.18bn, as “it reflects uncertainties of oil prices and potential drilling reduction by producers in various crude oil resources plays”.  Oasis Petroleum (OAS US, NR) disappointed 3Q earnings expectations, and said it would cut capital spending, especially to core wells if crude oil prices (WTI) stay below USD80/bbl for an extended time.  Atwood Oceanics (ATW US, NR) postponed the delivery of its two drillships under construction at a South Korean yard, by six months, amid prolonged weakened sentiment for ultra-deepwater drilling market.  Hercules Offshore (Hercules) (HERO US, NR) is laying off more than 300 employees by year-end due to anticipated closure of four rigs in the Gulf of Mexico. Hercules had a total workforce of 2,200 as at Dec 2013.  The supermajors, ie Exxon Mobil (XOM US, NR), Royal Dutch Shell (RDSA NA, NR), Chevron and BP (BP US, NR) have lower average profit margins at 26% than a decade ago at 35%, as they are shelving expansion plans and shedding operations in the current environment where there is no more easy oil. (Source: Bloomberg, Reuters, Wall Street Journal)

See important disclosures at the end of this report 10

Oil & Gas Services 14 November 2014

Appendix 2: Sensitivity

Figure 4: Earnings sensitivity to crude oil price and oil majors’ capex I Companies and key variables Bear Base Bull Comments Crude oil price (USD/bbl) 85 95 105 Our in-house forecast is USD90-100/bbl for FY15 Change (%) -11% - 11%

Services/ fabrication The Pan Malaysia service contracts by Petronas are Dayang Enterprise based on a call-out basis. Our bear case scenario assumes TP (MYR/share) 3.96 4.52 5.14 merely half a year’s worth of work orders and bull case Change (%) -12% - +14% assumes full year recognition of work orders

FY15F EPS (MYR) 0.25 0.29 0.33 Change (%) -12% - +14%

Petra Energy TP (MYR/share) 1.07 3.02 3.53 Change (%) -65% - +17%

FY15F EPS (MYR) 0.07 0.19 0.22 Change (%) -65% - +17%

Favelle Favco We assumed the company’s crane orderbook to have TP (MYR/share) 3.04 3.62 4.21 -/+15% swing in orderbook assumption for our scenarios Change (%) -17% - +16%

FY15F EPS (MYR) 0.30 0.36 0.42 Change (%) -17% - +16%

Wah Seong Corporation We assumed Wah Seong’s pipe-coating orderbook to have TP (MYR/share) 1.97 2.40 2.78 -/+15% swing in orderbook assumption for our scenarios Change (%) -18% - +16%

FY15F EPS (MYR) 0.14 0.16 0.19 Change (%) -18% - +16%

Muhibbah Engineering We assumed construction and fabrication to have SOP valuation (MYR/share) 3.16 3.22 3.63 -/+15% swing in orderbook assumption for our scenarios Change (%) -3% - +13%

FY15F EPS (MYR) 0.19 0.26 0.30 Change (%) -27% - +16%

Malaysia Marine and Heavy We assumed construction and fabrication to have TP (MYR/share) 1.68 2.01 2.34 -/+15% swing in orderbook assumption for our scenarios Change (%) -16% - +16%

FY15F EPS (MYR) 0.11 0.13 0.15 Change (%) -16% - +16%

Downstream (petrochemicals) Petronas Chemicals TP (MYR/share) 5.84 6.08 6.33 Change (%) -4% - +4%

FY15F EPS (MYR) 0.41 0.42 0.44 Change (%) -4% - +4%

Source: RHB

See important disclosures at the end of this report 11

Oil & Gas Services 14 November 2014

Figure 5: Earnings sensitivity to crude oil price and oil majors’ capex II Companies and key variables Bear Base Bull Comments Crude oil price (USD/bbl) 85 95 105 Our in-house forecast is USD90-100/bbl for FY15 Change (%) -11% - 11%

Integrated/ E&P These companies have ownership in E&P assets that are SapuraKencana Petroleum directly impacted by oil prices. They also have sizable SOP valuation (MYR/share) 4.17 4.53 5.33 international exposure to service contracts that could be Change (%) -21% -16% - affected by capital budgeting decisions of oil majors.

FY16F EPS (MYR) 0.24 0.26 0.28 Change (%) -15% -8% -

Dialog Group SOP valuation (MYR/share) 1.94 2.08 2.25 Change (%) -14% -8% -

FY16F EPS (MYR) 0.24 0.26 0.28 Change (%) -8% -4% -

Floating, Production, Offloading and In general, our SOP valuation for the FPSO companies Storage (FPSO) assumed some FPSO contract wins. A bear case scenario Bumi Armada assumes no contract wins, which would de-rate valuations SOP valuation (MYR/share) 1.89 2.24 2.40 Regardless, earnings impact is very immaterial. Change (%) -16% - +7%

FY15F EPS (MYR) 0.07 0.07 0.07 Change (%) - - -

Yinson Holdings SOP valuation (MYR/share) 2.25 2.60 2.80 Change (%) -14% - +8%

FY16F EPS (MYR) 0.12 0.12 0.12 Change (%) - - -

Drilling/ jackup rigs Our bear case scenario assumes a 30% drop in charter Perisai Petroleum Teknologi 0.71 0.88 1.05 rates and utilisation. Our bull case scenario assumes SOP valuation (MYR/share) -19% - +19% 5% increase in orderbook and charter rates assumption Change (%)

FY15F EPS (MYR) 0.05 0.06 0.07 Change (%) -19% - +19%

Coastal Contracts SOP valuation (MYR/share) 4.72 5.90 6.27 Change (%) -20% - +6%

FY15F EPS (MYR) 0.31 0.37 0.39 Change (%) -16% - +5%

OSVs Our bear case scenario assumes a 10% drop in charter Alam Maritim rates and utilisation. Our bull case scenario assumes TP (MYR/share) 1.00 1.12 1.24 10% increase in orderbook and charter rates assumption Change (%) -11% - +11%

FY15F EPS (MYR) 0.08 0.09 0.10 Change (%) -11% - +11%

Daya Materials SOP valuation (MYR/share) 0.27 0.31 0.34 Change (%) -13% - +11%

FY15F EPS (MYR) 0.03 0.04 0.05 Change (%) -13% - +11%

Perdana Petroleum TP (MYR/share) 1.36 2.20 2.94 Change (%) -39% - +34%

FY15F EPS (MYR) 0.08 0.14 0.18 Change (%) -40% - +28%

Source: RHB

See important disclosures at the end of this report 12

Oil & Gas Services 14 November 2014

Appendix 3: RHB coverage

Figure 6: Summary valuation table - RHB coverage Market Cap Last price TP P/E (x) Core profit growth (%) Company Ticker MYRm MYR MYR Rating FYE FY13 FY14F FY15F FY13 FY14F FY15F Alam Maritim AMRB MK 836.7 0.91 1.12 NEUTRAL Dec 11.4 11.4 9.7 21.8% (0.2%) 18.0% Bumi Armada BAB MK 8,154.0 1.36 2.24 BUY Dec 9.2 9.4 9.0 11.3% (1.3%) 4.0% Coastal Contract COCO MK 1,928.0 3.74 5.90 BUY Dec 15.2 11.5 10.0 22.8% 32.2% 14.7%

Daya Materials DAYA MK 305.4 0.22 0.31 NEUTRAL Dec 33.8 11.7 6.1 (58.5%) 190.2% 90.4% Dayang Enterprise DEHB MK 2318.3 2.81 4.52 BUY Dec 19.2 10.9 9.2 19.0% 76.2% 18.7% * Dialog DLG MK 7,627.0 1.55 2.25 BUY Jun 39.5 31.5 24.6 1.1% 27.0% 31.7% Favelle Favco FFB MK 666.0 3.14 3.20 NEUTRAL Dec 9.9 9.2 8.6 36.3% 7.0% 7.8% Malaysia Marine and Heavy Engineering MMHE MK 3104.0 1.94 2.01 SELL Dec 13.1 19.5 15.0 (2.3%) (32.8%) 30.6% Muhibbah Engineering MUHI MK 1160.9 2.82 3.22 NEUTRAL Dec 13.6 14.0 9.5 na (2.9%) 47.8% Perdana Petroleum PETR MK 1067.4 1.37 2.20 BUY Dec 18.1 7.8 10.1 109.5 130.5% 16.1%

Perisai Petroleum Teknologi PPT MK 811.2 0.75 0.88 SELL Dec 13.1 546.2 12.4 (9.0%) (97.4%) >100% Petra Energy PENB MK 720.8 2.24 3.02 NEUTRAL Dec 36.8 35.5 11.4 73.1% 10.2% 211.6% Petronas Chemicals PCHEM MK 47280.0 5.91 6.08 NEUTRAL Dec 14.9 12.8 12.6 (11.6%) 17.1% 1.5% * SapuraKencana Petroleum SAKP MK 18515.8 3.09 5.33 BUY Jan 17.3 13.6 11.3 101.7% 24.3% 20.1% Wah Seong WSC MK 1255.3 1.62 2.25 BUY Dec 30.0 11.3 9.9 (11.7%) 164.2% 14.7% * Yinson YNS MK 2726.6 2.64 2.60 NEUTRAL Jan 56.9 24.9 22.0 16.0% 133.9% 8.5%

* Note: FY14, FY15F and FY16F for Dialog, SapuraKencana Petroleum and Yinson Source: RHB

Figure 7: Summary valuation table - RHB coverage EV/EBITDA (x) P/BV (x) Net gearing (%) Yield (%) Company FY13 FY14F FY15F FY13 FY14F FY15F FY13 FY14F FY15F FY13 FY14F FY15F Alam Maritim 7.9 6.8 5.8 1.4 1.3 1.2 70.4% 77.2% 72.6% - 3.5% 4.1% Bumi Armada 7.3 4.2 4.1 0.9 0.6 0.5 71.7% 22.2% 28.9% 2.7% 2.7% 2.8% Coastal Contract 13.0 10.9 9.4 2.2 1.9 1.7 - 11.2% 41.6% 1.3% 2.2% 2.5% Daya Materials 18.9 9.3 6.4 1.3 1.1 1.0 29.4% 90.2% 111.0% 0.2% 1.8% 3.3% Dayang Enterprise 9.3 6.5 5.5 3.5 2.4 2.1 3.1% 8.6% 7.4% 2.4% 4.6% 5.4% * Dialog 17.9 15.6 13.3 5.8 5.2 4.6 29.3% 53.6% 53.1% 1.0% 1.3% 1.6% Favelle Favco 5.4 4.2 4.2 1.7 1.5 1.4 - - - 3.3% 4.3% 4.7% Malaysia Marine and Heavy 5.2% 5.2% 5.2% Engineering 10.3 10.3 9.1 1.2 1.2 1.2 - - - Muhibbah Engineering 6.3 6.2 4.5 2.1 1.9 1.7 - - - - 1.4% 2.1% Perdana Petroleum 13.8 8.0 8.3 1.3 1.1 1.3 91.3% 83.9% 56.4% ------Perisai Petroleum Teknologi 7.8 47.4 14.0 0.9 1.0 0.9 29.0% 129.2% 139.4% Petra Energy 34.2 13.1 7.8 1.5 1.5 1.3 17.9% 10.1% 6.6% 0.7% 0.8% 2.5% Petronas Chemicals 8.0 6.7 6.3 2.2 2.0 1.9 - - - 3.4% 3.9% 4.0% * SapuraKencana Petroleum 13.1 10.5 9.1 1.9 1.6 1.4 107.6% 95.8% 69.6% - - - Wah Seong 13.1 8.0 7.7 1.3 1.2 1.1 45.6% 52.4% 49.6% 1.3% 3.5% 4.0% * Yinson 61.8 12.6 12.2 5.3 2.4 2.1 121.0% 50.7% 67.1% - - -

* Note: FY14, FY15F and FY16F for Dialog, SapuraKencana Petroleum and Yinson Source: RHB

See important disclosures at the end of this report 13

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice to independently evaluate the particular investments and strategies.

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