AmWatch - Kulim : Signs oil and gas operating agreement BUY, 28 Oct 2014

STOCK FOCUS OF THE DAY

Kulim : Signs oil and gas operating agreement     BUY

Kulim Bhd has signed a joint operating agreement with PT Radiant Bukit Barisan E&P (PT RBB) and PT Graha Sumber Berkah (PT GSB) to explore and develop an oil and gas field in Central Sumatera, Indonesia. PT RBB will be the lead operator in the oil and gas project while Kulim and PT GSB will the co-operators. The role of a co-operator includes providing financial, technical and human capital support for the project. As a co-operator in the project, Kulim will be entitled to 60% of the net profit.

Total cost of the exploration activities from 2015 to 2018 is estimated at US$53.7mil or RM175.7mil. Assuming a 60% shareholding, we estimate Kulim’s share of exploration cost at RM105.4mil over four years or RM26.4mil per year. We are neutral on this development. It would take a long time before the oil and gas field starts commercial operations to generate profits. Currently, the oil and gas field is still under exploration stages.

Financing the exploration cost is not an issue for Kulim as RM850mil of the disposal proceeds of NBPOL of RM2.75bil have been allocated for investments and working capital. According to the Bursa announcement, the oil and gas block was explored by previous operators such as PT Caltex Pacific from 1981 to 1984 and Hunt Oil-Apache from 1991 to 1994. The latter undertook a seismic survey and drilled the well, which tested for significant gas and condensate. Recently, PT RBB completed the drilling of one well to the depth of 5,550 feet. Maintain BUY for now.

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