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Saturday, June 13, 2009

Oil and Gas:Collective approach at regional conference

Forecasts of US$75-80 per barrel by year-end. We left the 14th Asia Oil & Gas
conference feeling more bullish on the oil & gas sector. After a year of violent
swings, the industry is seeing signs of stability as crude oil spare capacity is on the
rise. Some experts at the conference forecast an oil price of US$75-80 per barrel by
year-end, in line with predictions by some OPEC members.
• Wave of M&As? Declining revenues, shrinking margins and higher costs are
buffeting some SMEs and could result in asset sales and industry consolidation.
The beneficiaries would be bigger, cash-rich companies which get to expand their
capacity at cheaper asset valuations. We are already seeing this in Sime Darby’s
proposed acquisition of Ramunia – a deal that could give Sime’s yard capacity a
tremendous boost.
• Malaysia’s stronger ties with IOCs. Malaysia is determined to further develop
untapped resources with international oil companies (IOCs). To date, Petronas has
signed more than 60 production-sharing contracts (PSCs) with the IOCs. Malaysian
oil & gas service providers, which include all companies in our oil & gas portfolio,
are definitely benefiting from the PSCs.
• Maintain OVERWEIGHT. The conference ended on a high note. Although there are
challenges to overcome, the sentiment is definitely upbeat, especially with the rising
oil price. Already, the companies in our oil & gas portfolio showed bottomline and
margin improvement in the 1Q09 reporting season. As 1Q is typically a weak
quarter, we expect an even better showing from most of the companies towards
year-end. We remain OVERWEIGHT on the oil & gas sector and continue to rate
Kencana as our top pick. All our forecasts, recommendations and target prices are

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