DIALOG announced the signing of Baram Junior Cluster Small Field Asset Production Share Contract (PSC). Dialog will take on 70% participating interest including the operatorship of the field, while Petroleum Sarawak (Petros) will take on the remaining 30%. It is a 14-year contract, which comes with a 2-year pre-development phase, 2-year development phase, and a 10-year production phase.
Neutral on the announcement. Kenanga Research has stated in its research report that “overall, the research house remains neutral on the news at this juncture”. Capex requirements, production or reserves numbers will only be made known in 2 years’ time upon the completion of the feasibility studies conducted during the pre-development phase, by which the group would have determined the feasibility and commerciality of the asset.
As such, Kenanga shall await further announcements once a field development and abandonment plan has achieved final investment decision. Nonetheless, on a bigger picture, this development goes in line with the group’s long-term strategy of expanding its business in the upstream oil and gas space, in pursuance to strike a perfect balance between upstream, midstream and downstream.
Currently, its upstream segment still remains the smallest contributor to bottom-line earnings.
Forecasts. No changes to its forecast numbers for financial year 2023-2024 (FY23-24F), as earnings impact (if any, should the asset qualify the feasibility and commerciality assessment) will only kick-in once the asset reaches its production stage 4 years later.
Kenanga Research has maintained OUTPERFORM rating on Dialog, with unchanged target price (TP) of RM3.10. There is no change to its valuation based on ESG given a 3-star ESG rating as appraised by the research house.
Overall, despite the short-term challenges, the group’s long-term outlook still remains largely intact, with its mid-stream assets also provides a degree of earnings defensiveness and resiliency. That said, any further development of its Pengerang Phase 3 is expected to serve
as a potential re-rating catalyst for the stock.
Risks identied include lower utilisations of its tank terminals; slowdown in downstream jobs flow; delay in the development of Pengerang Phase 3; and continued severe cost overruns.
