AmWatch - Dialog Group : Phase 2 of Balai RSC may be postponed BUY, 25 Feb 2015

STOCK FOCUS OF THE DAY

Dialog Group : Phase 2 of Balai RSC may be postponed   BUY

The Edge Financial Daily highlighted today that Dialog Group’s risk service contract (RSC) for the Balai Cluster could face a setback as Petronas may likely postpone the project’s second phase. The Balai Cluster marginal oil field is part of Petronas’ enhanced oil recovery (EOR) programme to revive flagging production from mature and depleting oil wells.

This is not a surprise to us as Petronas had earlier indicated that it will not proceed with contracts to award new marginal oil fields until the oil prices stabilise at levels above US$80 per barrel – where breakeven costs for the marginal oil fields is at USD65 per barrel. This comes as Petronas was looking to cut as much as 15%-20% of its capex for 2015.

Separated into two phases, the Balai Cluster project has undergone its pre-development phase and achieved early production. Recall that Dialog has a 32% effective stake in the Balai RSC, with Australia-listed Roc Oil having 48% and Petronas Carigali 20%. The RSC covers four fields – Balai, Bentara, Spaoh, and West Acis. There are no indications that Phase 1 will be halted, while capex incurred by the consortium so far will be reimbursed by Petronas.

However, contribution from its upstream segment is still insignificant for now and growth for the group will continue to be underpinned by its recurring and strong cash-flow generating businesses, which will remain relatively insulated from the near-term fluctuations of oil prices. Furthermore, Dialog’s engineering and construction arm benefits from the EPCC contracts for the construction of its tank terminals.

This is entrenched by its key focus to grow its tank terminal business which is mostly on a take-or-pay basis. Pengerang Phase 1, with a capacity of 1.3mil m3, is near full completion, while Phase 2 is due by mid-2018. The LNG regasification plant and storage tanks will simultaneously be completed by end-2017. We maintain our BUY recommendation on Dialog with a fair value of RM1.95/share.

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Dialog Group : Second phase of Dialog’s RSC postponed?