Hwang-dbs1 13/8/2009

Oil and gas
US$7b Kedah project in the pipeline again
Starbiz reported that the US$7bil Trans-Peninsular Pipeline
(TPP) project that was to take off nearly two years ago may
become a reality as a Chinese party is said to be keen to
take a stake in the project with investment up to RM4b. The
TPP involves building a 312km pipeline linking Yan in Kedah
to Bachok in Kelantan. The project also includes a crude oil
refinery plant in Yan and three storage tanks in Bachok. The
TPP will allow oil shipments from the Middle East to bypass
the Straits of Malacca, one of the world’s most crucial fuel
transportation sea lanes.
Apart from TPP, other oil and gas projects in the pipeline to
be developed in Kedah include: (1) the US$10b refinery in
Sungai Limau, Yan, by Merapoh Resources Corp SB, and (2)
a multi-billion dollar tank farms project in Gurun to be
jointly developed by Pristine Oil (M) SB and UK-based
Lenstar Investments Ltd. Both these projects have thus far
secured funding. There is also another proposal - (3) by SKS
Development for a pipeline linking Kota Perdana in Bukit
Kayu Hitam, Kedah to Songkhla in eastern Thailand.
The development is in line with the plan to develop the
northern corridor into an oil and gas hub to promote the
social and economic activities in this region. While the main
contractor for these projects would most likely be an
international player, the developments will spur new project
flow for the Malaysia oil and gas players with potential
beneficiaries such as Dialog, Muhibbah, Kencana (Not
Rated) for EPCC works given their track record, and KNM
(Buy, TP: RM1.10) for equipment supply, and Wah Seong
(Hold, TP: RM2.00) for potential pipe coating jobs. Typically,
EPCC works account for 30-40% of project value, while
equipment supply and pipe coating account for 10% each
of project value.
Sustainable capex from Petronas and government’s effort to
promote Malaysia as the regional oil and gas hub will be the
key drivers for Malaysian oil and gas players. The sector is a
resilient domestic play given that Petronas’ capex has a huge
multiplier effect to the Malaysian economy. Our picks for
the sector are KNM (Buy, TP: RM1.10) and Alam (Buy, TP:
RM1.70).