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DBS Driller - DBS Vickers Research 2015-10-05: China to develop giant Chongqing gas field.

DBS Driller - DBS Vickers Research 2015-10-05: China to develop giant Chongqing gas field. DBS Driller Oil & Gas

China to develop giant Chongqing gas field 

  • Investments of up to US$24bn lined up; more than 2,000 shale gas wells to be drilled by 2020. China plans to undertake a major development of the Sichuan basin’s Chongqing region, with a target to produce 20bn cubic metres of shale gas by 2020. The effort will be led by Sinopec and PetroChina, with service opportunities open to foreign companies. Chongqing holds China’s second largest shale gas reserves after Xinjiang, with its reserves pegged at 2 trillion cubic metres – which is humongous compared to the size of China’s proved natural gas reserves of c.4.6 trillion cubic metres as at Jan-15. 

  • DBS‘s View: 

Use of natural gas in China has increased rapidly over the past decade but shale gas is a relatively new development. The government ‘s aim is for natural gas to supply 10% of the nation’s energy needs vs. 5% currently; we could be seeing shale gas starting to contribute in a big way as well. With a ramp-up of domestic gas production, Chinese natural gas imports could slow down in the long run. 

Top stories 


Loyz Energy and Primeline Energy drop merger plans. 

  • The upstream-focused duo had signed a binding MOU in June with the aim of creating a Singapore-listed Pan-Asian oil & gas company. However, Dr. Ming Wang, CEO of China-centric Primeline, said that “with extreme market volatility, both companies’ boards were unable to conclude an agreement”. 

  • DBS’s View: 

While this deal may have been aborted, M&A activity in South-East Asia has been on the rise this year, with YTD deals that have been announced already matching 2014’s level in value terms. We think the M&A wave will continue if oil prices remain subdued. 

Brent ends the week at US$48.13/bbl, representing 1% decline w-o-w. 

  • After dipping slightly on Thursday in response to softer-than-expected US jobs data, oil prices rebounded to US$48 on Friday as Baker Hughes reported that US rig count fell by 29 units. 

  • DBS’s View: 

While US rig count has fallen again, the last time that this happened, production in fact increased due to high-grading of assets and better productivity. Hence, we are wary of jumping to any conclusions. Oil prices have been trading within a narrow band over the past month, and we think it will take a larger drop in production to spark a rally. 

Mexico fares well in second round of offshore block auctions. 

  • Following a historic yet dismal first round of auctions in July which saw only 2 out of 14 shallow-water blocks receiving bids, the country’s second round saw the award of 3 out of 5 blocks to bidders including Italian giant Eni, with bids in excess of the government’s minimum profit-sharing proportion. 

  • DBS‘s View: 

This is positive news for offshore players with assets in Mexico, such as POSH and Ezion. The Mexican government’s concessions on earlier contract requirements were overly demanding and the more favourable terms this time round attracted more interest from bidders. 


Major corporate news (28 Sep – 02 Oct)


Ezra Holdings 


Development: 

  • Ezra is one step ahead to completing the sale of 50% of its subsea arm EMAS AMC to Chiyoda Corporation under a joint venture to be set up between the two companies. The companies announced the signing of a binding share sale and subscription agreement last week. They had undertaken a Memorandum of Understanding (MOU) previously. 

Impact:

  • This is positive news. The progression to a binding agreement increases the likelihood of a deal completion, which would alleviate the stress on Ezra’s balance sheet from maturing notes and an outstanding standby banking facility used to pay down S$150m of perpetuals in September. Notably, there are still Conditions Precedent under the agreement to be met before the deal is officially completed, which we think should be towards the end of this year. 

Vard 


Development: 

  • Vard has secured new contracts for the design and construction of two Offshore Subsea Construction Vessels (“OSCV”) for a new customer, Dubai-based Topaz Energy and Marine (“Topaz”). The vessel will be based on VARD 3 08 design, with hulls to be constructed at Vard Tulcea in Romania. Deliveries are scheduled from Vard Brattvaag in Norway in 3Q 2017 and 4Q 2017 respectively. 

Impact: 

  • This is Vard’s second contract announcement this year. The first contract was secured in June, which we estimate to be worth around NOK400-500m. The aggregate value of the two latest contracts exceeds USD 100m (or approx. NOK850m). This brings YTD wins to NOK 1.2-1.3bn, making up < 30% of our FY15 expectation. We believe our new order win assumptions for Vard in FY15/16 of NOK5bn and NOK7bn respectively, are vulnerable to downside risks. Maintain FULLY VALUED call with a target price of S$0.45, pegged to 0.8x P/BV.

Peer Comparison





HO Pei Hwa DBS Vickers | Suvro SARKAR DBS Vickers | Arhnue TAN DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2015-10-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.00 Same 1.00
HOLD Maintain HOLD 0.39 Same 0.39


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