Oil & Gas

Dialog, SapCrest...

Dialog has gone up too much even though there are reports seeing the stock hitting RM2.60 or higher even. The 2008 PER is already in the 32x-35x range, which is why investors and institutional players are keener on Sapura Crest with its PER for 2008 at just 25x. Market cap for market cap, Sapura Crest has a long way to go and judging from inherent assets, Sapura Crest looks attractive still. Oil & gas plays has room to go because:

a) oil prices is stubbornly above US$60 per barrel, this gives oil companies a huge buffer to spike up their drilling activities, and even to consider drilling difficult wells

b) the reinvestment in drilling and exploration activities will compound in 2007 compared to 2005-2006

c) The spike in oil prices over the last 2-3 years has alerted companies that they have under-invested before and now needs to do a lot of upgrading work, maintainence work, finding new reserves and building of new facilities

d) Following Nusajaya dreaming, and the Kedah-Kelantan pipeline, the oil and gas play is basically centered on the next government plan to be unmasked for the Eastern Economic Corridor. Following South Johor, the government will soon be releasing details for that area. Dialog has been running as it is a jv partner with Petronas in Kertih Terminals and is the main supplier of base oil to Petronas Carigali, ExxonMobil and Shell for formulation of drilling mud. Sapura Crest should get new pipe installation contracts from Petronas Carigali. Which is also why Hong Leong supremo has bought strategic stakes in Petra Perdana

e) Contract awardment momentum is gathering speed as Petronas has already awarded a floating production facility contract to MISC for the Gemusut oilfield off Sabah. Petronas has already issued tender for 23 new offshore vessels, and another contract for 30 offshore vessels soon.

My best underdog pick, which is currently under the radar, is EPIC. At the current price its 2008 PER is just 16x compared to the above two, its a steal. Plus its relatively well managed, paying the best dividend yield among the oil and gas players for the past 2 years. It is also the most politically effective counter for the Eastern Economic Corridor project as it is Trenggannu's main state vehicle for oil & gas with control over the Kemaman Supply Base.

Share Capital: 165m

Perbadanan Iktisad Terenggannu 43.1%

Lembaga Tabung Haji 34.3%

Free float 22.5% or 37.125m shares

The EEC will see Petronas plonking RM44bn over the next 5 years. While much of the action has been in Dialog and Sapura Crest, its more a matter of paid up which has attracted institutional interest. For those running small funds or smaller fortunes, EPIC looks like a no brainer. So much so that the state government has already upped its stake in EPIC from 39.8% to 43.1% just over the last 3 months. I expect RM3.00 for the stock just before the release of the detail of EEC and could touch RM4.00 during the frenzied feeding. Looking at Dialog and Sapura Crest, I'd rather buy and hold the quiet achiever in EPIC.