Company Name: PETRONAS GAS BHD
Research House: OSK
Petronas Gas Bhd
(Dec 2, RM11.40)
Maintain buy at RM11.14 with revised target price of RM13.65 (from RM13.50): Petronas Gas (PTG) has signed a Heads of Agreement (HoA) with Petroliam Nasional Bhd (Petronas) for the development and provision of liquefied natural gas (LNG) facilities and services in the vicinity of Sungai Udang Port, Melaka. The facilities will include two floating and storage units to receive and store LNG, an island jetty and regasification units and pipelines to transport the LNG to the peninsular gas utilisation (PGU) network. The regasification plant will have a maximum capacity of 3.8 million tonnes per annum and be completed by July 2012. The terms of operation will be spelled out in a regasification services agreement (RSA) expected to be signed by March 2011.
While we had known the LNG plant would be built, it was previously not known who would get to operate it, given the track record of previous large gas projects such as the Sabah Sarawak Gas Pipeline (SSGP) where Petronas Carigali is the owner rather than PTG. With this HoA, PTG will now act as the plant's owner and operator. We expect the RSA to contain revenue terms comprising a fixed component to allow for the recouping of capex and a volume-driven component to maximise PTG's service levels. We understand that the capex involved will be about RM1 billion and the EPCC contract will be tendered out. The exact revenue drivers will only be unveiled with the RSA signing. Note that this plant will resolve the problem of gas supply constraints in Peninsular Malaysia and allow the possible extension of first generation power purchase agreements as well as increase the supply of gas for non-power users such as the rubber glove makers.
We had already built in RM1 billion of capex for this plant as well as RM1 billion for the refurbishment and rehabilitation of gas processing plants 2 and 3.
We now include additional gas volume which will be transported by PTG through the PGU in FY13 and FY14. As two million tonnes of LNG are roughly equivalent to 250mmscfd of sales gas, we are conservatively assuming 89mmscfd additional gas from LNG for FY13 and 211mmscfd for FY14. This will boost PTG's gas transport revenue. We are not building in any additional revenue from regasification pending the RSA terms.
Our FY14 net profit forecast is raised by 2% although this should eventually be higher with the potential regasification revenue. Our discounted cash flow-based fair value is raised to RM13.65 and we are becoming increasingly more positive on PTG's longer-term growth prospects with this plant. ' OSK Investment Research, Dec 2
This article appeared in The Edge Financial Daily, December 3, 2010.