PP16832/01/2012 (029059)

Malaysia
Sector Update
9 January 2012

Overweight (unchanged)

Oil & Gas

Lets drive it up!
Still an Overweight. PETRONAS intense capex chase will continue to spearhead growth and excite the sector in 2012. O&G activities are expected to pick up, continuing their pursuit from 2011. We foresee 2 themes featuring prominently in 2012: (i) gas play (ii) continuous strong pipeline of project awards. For these thematics, we tactically advocate SapCrest-Kencana and Dialog as our preferred picks. Theme 1: Gas play. The commercialization of the Lekas regasification project in Jul 2012 with a capacity of 3.8m tpa of gas will lift domestic gas supply by 22% and single-handedly address the nations gas supply constraint currently affecting the power and industrial sectors. The macro agenda behind this. As supply increases, gas subsidy will be progressively cut. Selling price of gas will be periodically raised over the next 4 years to match market rate to avoid potential short term demand disruption. Higher gas price will further incentivize PETRONAS to explore gas fields in Malaysia as exploration costs rise. Theme 2: Continuous strong pipeline of project awards. With a strong capex plan ahead, we expect O&G service providers to continue enjoying a sustained growth as demand for equipment and services increase in light of rising activities in the sector. Fabrication works will dominate headlines. Among the major fabrication jobs that will be up for grabs in 2012 are the: (i) RM1-2b Malikai TLP, (ii) Petronas Carigalis 3 major central processing platform projects (i.e. Bokor, Semarang and Dulang) worth RM3b-4b in total, (iii) Shells 4 midsize fabrication jobs and (iv) a 40,000 tonne platform for Carigali Hess Operating Companys Cakerawala field. Strong visibility for floating solutions. Several FPSO/FSO projects are expected to come on in 2012. We gather that Hess will require floaters for its Belud and Dahlia & Teratai fields while the EOR projects for St Joseph, Angsi and Baram Delta fields will also see a need for floating solutions. With the RM15b North Malay basin field fast-tracked for production by 2013, pipe-coating works will be made known too. In addition, several new marginal fields RSC will also be unveiled in 2012. Picking the winners. We see exciting prospects for the fabricators. We pick Kencana over MMHE due to the formers yard space availability to capitalize on these tenders. Bumi Armada and Wah Seong are our other picks for the leverage on floaters and pipe-coating plays. Petronas Gas (Not Rated) may benefit from the liberalization of gas. Dialog, Bumi Armada and SapCrest-Kencana are the likely candidates to clinch PETRONAS marginal field RSC/ EOR projects.

Wong Chew Hann, CA wchewh@maybank-ib.com (603) 2297 8688

Kim Eng Hong Kong is a sub sid iar y of Malayan B anking B erh ad

SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Oil & Gas Summary of Recommendations (calenderised)

Mkt cap Rec Price (RMm) (RM) Alam Maritim 582.5 Hold 0.74 Dialog * 5,846.4 Buy 2.43 Kencana 5,879.9 Buy 2.95 KNM 961.0 Sell 0.96 MMHE 9,216.0 Hold 5.76 Perdana Pet 376.3 Hold 0.76 Petronas Gas 29,285.2 NR 14.80 SapCrest 5,847.4 Buy 4.58 Tj. Offshore 229.7 Sell 0.79 Wah Seong 1,514.7 Buy 2.01 Source: Maybank-IB; * adjusted for ex-rights Company TP (RM) 0.85 2.80 3.65 1.08 5.70 0.70 NA 5.60 0.70 3.10 EPS (sen) 12F 13F 9.9 10.2 8.3 9.1 17.9 19.7 5.5 13.5 23.1 27.9 3.4 4.5 72.4 72.7 26.5 29.2 3.0 3.2 21.6 22.3 EPS Grth (%) 12F 13F NM 3.4 14.5 8.4 23.3 9.8 NM 143.7 0.9 20.8 NM 34.4 0.0 0.5 18.2 10.1 NM 6.8 15.6 3.2 PE (x) 12F 13F 7.5 7.3 29.3 26.7 16.4 15.0 17.3 7.1 24.9 20.6 22.5 16.8 20.5 20.4 17.3 15.7 25.8 24.2 9.3 9.0 DPS (sen) 12F 13F 0.7 0.7 6.1 6.6 NM NM 0.0 0.0 5.0 5.0 2.0 2.0 50.0 50.0 11.0 11.5 0.0 0.0 11.0 11.5 Div Yield (%) 12F 13F 0.9 0.9 2.5 2.7 NM NM 0.0 0.0 0.9 0.9 2.6 2.6 3.4 3.4 2.4 2.5 0.0 0.0 4.0 5.7

High energy level ahead

Multiple excitements. PETRONAS capex programmes will continue to spearhead growth and thrill the sector in 2012. Focus will again be centered on deepwater, marginal fields, enhanced oil recovery (EOR) projects as it aims to arrest decline in domestic hydrocarbon resources. Targets and aspiration from capex growth. The higher capex pursuit (RM300b over 2011-2015) is crucial for PETRONAS to meet a 5-year production CAGR of 3.5% and resource replenishment ratio of >1 on a 3-year rolling basis. The capex focus will be on (i) new exploration activities, (ii) EOR and (iii) CO developments in exploration & production (E&P). PETRONAS also aims to secure, grow and maximize its gas and power portfolio, notably in the LNG segment. 2 thematic plays in 2012. Against this backdrop, we foresee exciting environment ahead profiting local oil & gas service providers at large. We anticipate 2 major thematics in 2012: (i) gas play and (ii) continuous strong pipeline of contract flows.

Theme #1: Gas play

LNG receiving terminal to start in Jul 2012. The constraint in domestic gas supply plaguing the power and industrial sectors in 2011 and 1H 2012 will be an issue of the past when PETRONAS maiden regasification (regas) plant in Sungai Udang (Melaka) starts production in Jul 2012. The regas plant, with a capacity to handle up to 3.8m tpa (543 mmscfd of gas) will immediately lift domestic gas supply by 22% (based on 2,416 mmscfd of gas transmitted in 2010) as the new supply is injected into the Peninsular Gas Utilisation (PGU) network. Capacity issue readily addressed. The additional gas flow effectively eliminates gas curtailment concerns. Pipeline capacity is not an issue for the existing PGU network is able to transport the additional gas supply. Feed supply is also a non-issue. We understand that PETRONAS is already working towards ensuring the availability of LNG supply from various suppliers (i.e. Australia, Middle East and Europe), both on short and long term contracts.

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As well as supply commitment. GDF Suez will provide about 2.5m tpa of LNG from Aug 2012 to Dec 2014 (2.5 years) while Qatargas and Gladstone LNG will supply 1.5m and 3.5m tpa of LNG on 20-year contracts with 2013 and 2014 delivery start dates.
PETRONAS LNG import commitments
Seller (Country) GDF Suez (France) Qatargas(Qatar) Gladstone LNG (Australia) Total Source: Various, Maybank-IB Scheduled delivery date Aug 2012 2013 2014 Duration (year) 2.5 20 20 Quantity (m tpa) 2.5 1.5 3.5 7.5

Several loose ends; beneficiary. While the current Gas Processing Transmission Agreement (GPTA) structure (that runs from 1 Apr 2010 to 31 Mar 2014) provides a clear demarcation of services between processing and transportation, the structural charges for storage, regas, and transportation have not been finalised and will only be realized at later date. The countrys sole gas transmission operator could be the most direct, biggest benefactor from this development.

Natural gas supply chain in Peninsular Malaysia(2010) (numbers below the boxes are in mmscfd)
LN G Exports
3 , 414

Offshore Sabah & Sarawak

Sarawak
278

Natural gas production

3 , 897

Sabah
205 T NB TN B

Offshore Peninsular
2 , 080

5 , 977

Power s ector
1 , 087

IPPs IP P s

PETRONAS (Gas wholesaler)

I mports Wes t N atuna

Petronas Gas (through PGU system)

(Processing and transmission)
2 , 416

Export to Singapore
141

PETRONAS P E TRONAS c us tomers customers

(including internal consumption)

N on-power Non-power s ec tor se ctor

819

504 G a s Malaysia
315

Ms ia Thai Joint D ev. Area

336

Sources: Various, Maybank-IB

9 January 2012

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Malaysias gas production forecast (2010-25) mmscfd

(mmscfd)
7.0
6.0 5.0 5.9 5.9 6.1 6.3 0.1 0.3 0.5 6.2 0.1 0.5

Gas supply from PM fields

6.2 0.3 0.5

LNG Imports 6.4

0.3 0.3 1.0 6.0

New PM fields 5.6

5.2 4.8 4.2

6.1
0.3 0.5

3.3

3.0

2.8

0.3
1.0

1.0

0.3
0.3 1.0 1.0 0.3 1.0 0.3 1.0 2.9 0.3 1.0 1.7 2024F

4.0
5.9 3.0 2.0 1.0 2010 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 5.9 5.8

5.7

5.6

5.4

5.3

5.1

4.7

4.3

0.3

3.9

3.5

1.0
1.5 2025F

2.0
2020F 2021F 2022F 2023F

Sources: Various, Maybank-IB

The big picture: Higher supply, lower subsidy, increased price. The additional gas supply from the Melaka regas plant would spur development at both the industrial and power sectors. With higher supply, gas subsidies will be reduced periodically as PETRONAS and the external LNG suppliers will be less incentivized to sell gas at submarket rate. As a knock-on effect, the liberalization of domestic gas price (i.e. reducing subsidies on gas price) will catalyse PETRONAS to explore new gas fields in Malaysia. All set to embrace market rate by 2015. We expect Malaysia to embrace market-driven gas price by 2015 as it progressively removes gas price subsidy over the next 4 years. The systematic lift in ASP is aimed at eliminating potential effect of demand destruction for gas. The current gas price charged to the power and industrial sectors (at RM13.70 and RM16.07 per mmBtu) is at a substantial discount (7176%) to the LNG Asia-Pacific LNG price of RM56/mmBtu.

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Theme #2: Continuous contract flows

Strong pipeline of contract flows. We expect O&G service providers to continue enjoying a sustained growth as demand for equipment and services increase in light of rising activities in the sector. Fabrication works will continue to grab headlines. At the deepwater space, we expect the RM1-2b Malikai TLP project to be awarded in 2012. Three bidders are prospecting for this job. This includes the MMHE-Technip partnership. In the shallow water segment, we gather that Petronas Carigali will confer 3 major centralized processing platform (CPP) projects, namely Bokor, Dulang and Semarang worth RM3-4b in total, while Shell will award 4 midsize fabrication jobs. In addition, Carigali Hess Operating Company will need a 40,000 tonne gas compression platform for its Block A-18 Cakerawala field. Strong visibility for floating solutions. We understand that demand for floaters in the domestic market is picking up. The Belud, Kamelia and Dahlia & Teratai field, owned by Hess and Talisman will need 3 FPSO/FSOs. The EOR project for St Joseph field in Sabah will also require a floating solution. The Angsi and Baram Delta EOR fields could also see more projects to be dished out. With the RM15b North Malay basin field fast-tracked for production by 2013, we see a continuous flow of pipe-coating projects. More marginal fields RSC in the pipeline. Following the roll-out of the Berantai and Balai fields Risk Sharing Contracts (RSC) in 2011, we anticipate PETRONAS to continue announcing several more RSCs in 2012 as it aims to achieve a faster pace of development and production activities. Up to 90 hotspots in 25 marginal fields have been identified in Malaysia waters with 10 fields ready for development. Unlocking marginal fields potential could lift Malaysias annual oil production by 55,000 bpd (+10%) by 2020.
Opportunities: Birds eye view
Opportunities Deepwater fields - Malikai Shallow water fields - PCSBs Bokor Types of project Fabrication of TLP Fabrication platforms Fabrication platforms Fabrication platforms 4 midsize fabrication jobs Fabrication of a 40,000 t platform Estimated value RM1b RM2b RM1-2b >RM1b >RM1b RM1-2b RM1b Potential beneficiary MMHE, Kencana MMHE, Kencana MMHE, Kencana MMHE, Kencana MMHE, Kencana MMHE, Kencana

PCSBs Semarang - PCSBs Dulang - Shells project - Carigali Hess Cakerawala project Floating solutions - Hess Belud field - Hess North Malay basin field - Talismans Dahlia & Teratai fields - Shell-PETRONAS St Joseph and Baram Delta fields - Murphys West Patricia SK 309 & SK 311 fields Pipe-coating projects - North Malay basin Marginal field RSCs EOR projects - Seligi, Guntong, Semangkok, Irong Barat, Tabu & Palas fields Source: Various 9 January 2012

Floating solutions Floating solutions Floating solutions Floating solutions FSO Pipe-coating works

NA NA NA NA NA NA NA

Bumi Armada, MISC, MMHE Bumi Armada, MISC, MMHE Bumi Armada, MISC, MMHE Bumi Armada, MISC, MMHE Bumi Armada, MISC, MMHE Wah Seong Dialog, Kencana-SapCrest

Platform structures

NA

MMHE, Kencana

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Beneficiaries, more M&As?

Gas operators, fabricators and floating solution providers to benefit most. We identify: (i) The countrys sole gas transmission operator to directly benefit from the liberalization of Malaysias gas market as LNG is regas and injected into the PGU network, (ii) MMHE and Kencana in the offshore fabrication space to capitalise from the strong domestic offshore project flows, while (iii) Bumi Armada and Wah Seong would profit from floating solution pipe-coating jobs. (iv) Dialog, SapCrest-Kencana and Bumi Armada are prospective winners as PETRONAS rolls out new marginal field RSC/EORs. Corporate exercises should continue to be strong in 2012. MMHE will conclude the purchase of Sime Darbys Pasir Gudang yard in Mar 2012 while the Kencana and SapCrest merger exercise will be finalized in Feb/Mar. Next, we see the offshore support vessel (OSV) market as a potential area for consolidation/merger/acquisition/disposal exercises. Ekuinas next move in TOFF remains a wild card. Ekuinas intentions with regards to TOFF after owning a 24% equity stake are still unclear but we think TOFF could eventually be a platform for Ekuinas to consolidate the oil & gas service providers in the industry, which may be value enhancing for minorities in the long term. Perdana attracts suitors, Alam may seek strategic JVs. We do not rule out Dayang eyeing Perdana Petroleum. Should this happen, the merged entity will have a business model similar to the old Petra Perdana during its early days. We would not rule out Alam courting Coastal Contract akin to the SapCrest-Kencana exercise should both parties be agreeable to the terms.

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APPENDIX 1
Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 10% in the next 12 months Total return is expected to be between -5% to 10% in the next 12 months Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure BV = Book Value CAGR = Compounded Annual Growth Rate Capex = Capital Expenditure CY = Calendar Year DCF = Discounted Cashflow DPS = Dividend Per Share EBIT = Earnings Before Interest And Tax EBITDA = EBIT, Depreciation And Amortisation EPS = Earnings Per Share EV = Enterprise Value FCF = Free Cashflow FV = Fair Value FY = Financial Year FYE = Financial Year End MoM = Month-On-Month NAV = Net Asset Value NTA = Net Tangible Asset P = Price P.A. = Per Annum PAT = Profit After Tax PBT = Profit Before Tax PE = Price Earnings PEG = PE Ratio To Growth PER = PE Ratio QoQ = Quarter-On-Quarter ROA = Return On Asset ROE = Return On Equity ROSF = Return On Shareholders Funds WACC = Weighted Average Cost Of Capital YoY = Year-On-Year YTD = Year-To-Date

Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been indepe ndently verified by Maybank Investment Bank Berhad and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Berhad and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Berhad, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking servic es, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often bu t not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forwardlooking statements. Maybank Investment Bank Berhad expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of u nanticipated events. This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written cons ent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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APPENDIX 1
Additional Disclaimer (for purpose of distribution in Singapore)
This report has been produced as of the date hereof and the information herein maybe subjec t to change. Kim Eng Research Pte Ltd ("KERPL") in Singapore has no obligation to update such information for any recipient. Recipients of this report are to contact KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), KERPL sh all be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. As of 9 January 2012, KERPL does not have an interest in the said company/companies.

Additional Disclaimer (for purpose of distribution in the United States)

This research report prepared by Maybank Investment Bank Berhad is distributed in the United States (US) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Kim Eng Securities USA, a brokerdealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Kim Eng Securities USA in the US shall be borne by Kim Eng. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is not directed at you if Kim Eng Securities is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Kim Eng Securities is permitted to provide research material concerning investments to you under relevant legislation and regulations. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply if the reader is receiving or accessing this report in or from other than Malaysia. As of 9 January 2012, Maybank Investment Bank Berhad and the covering analyst does not have any interest in in any companies recommended in this Market themes report. Analyst Certification: The views expressed in this research report accurately reflect the analyst's personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Additional Disclaimer (for purpose of distribution in the United Kingdom)

This document is being distributed by Kim Eng Securities Limited, which is authorised and regulated by the Financial Services Authority and is for Informational Purposes only.This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.

Published / Printed by

Maybank Investment Bank Berhad (15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194 Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888; Fax: (603) 2282 5136 http://www.maybank-ib.com

9 January 2012

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