KUALA LUMPUR: Although the drop in crude oil prices will likely affect Dialog Group Bhd’s upstream oil and gas (O&G) business, the reverse could be true for its midstream and downstream segments.
Executive chairman Tan Sri Dr Ngau Boon Keat said that on average, when crude oil prices are down, it’s better for its midstream and downstream segments as raw material is cheaper.
“When the price of oil is down, the upstream segment will have to reduce capital expenditure. But if the downstream demand is still there and raw material is cheap, they (oil companies) will spend more money in downstream,” he told a press conference after the group’s extraordinary general meeting last Friday.
He added that since Dialog’s (fundamental: 2.1; valuation: 0.3) midstream O&G business is in the logistics business, which includes its storage tank facilities, the demand is on an increase.
“When crude oil prices drop sharply, traders buy the commodity and store it while waiting for prices to rebound. Thus, in actual fact, when oil prices drop it is good because demand for storage increases.
“So, when crude oil prices are down, value adding is more important. Instead of selling finished material, you sell raw products,” Ngau said.
Noting that the respective midstream, downstream and upstream O&G businesses contributed one-third of the group’s total revenue for the financial year ended June 2014 (FY14), Ngau expects the upstream segment’s contribution to be less in FY15 due to the tumbling crude oil prices.
The group is expecting this year’s ratio to sum up to the tune of 40:40:20 with the least revenue contribution from its upstream segment.
“If one-third of it turns out not that good because of a slowdown, we’ve got [the other] two-thirds that are good. So overall, it should be okay,” said Ngau.
For the first six months ended December 2014 (1HFY15), Dialog reported a 13.6% increase in net profit to RM129.65 million from RM114.08 million a year ago. This was on the back on lower revenue, which dropped 12.43% to RM1.11 billion.
While the group expects revenue from its upstream O&G segment to take a dip in FY15, it is still committed to the segment, especially its oilfield service contract for the Bayan field in Bintulu, Sarawak.
In 2012, Dialog and Halliburton International Inc signed an agreement with Petroliam Nasional Bhd (Petronas) to jointly manage the oilfield for RM3.67 billion over 24 years.
“We are committed to this and will continue to invest in the Bayan field because it is a mature field and we believe that the risk is much lower and it’s a more than 20-year contract,” said Ngau.
In February this year, it was reported that Dialog’s risk service contract (RSC) for Petronas’ Balai Cluster marginal oilfield project may face a setback as the national oil corporation is likely to postpone the project’s second phase until crude oil prices rise back to US$80 (RM290) per barrel. This was never officially confirmed by Dialog or Petronas.
“We can’t comment because Balai Cluster is owned by Petronas. We are just a service provider and we are not allowed to talk about it as it is not our oil or our field,” said Ngau when asked to comment.
To recap, the Balai Cluster RSC — also located in Bintulu — was awarded by Petronas in August 2011 to RC Petroleum Sdn Bhd — a joint venture between Roc Oil Malaysia (Holdings) Sdn Bhd (with a 48% stake), Petronas Carigali Sdn Bhd (20%) and Dialog (32%).
Meanwhile, Dialog’s shareholders approve its plan last Friday to raise funds for its investments in two projects with a collective value of RM9 billion in Pengerang, Johor.
It will be able to raise RM2.65 billion to invest in the proposed RM6.3 billion Pengerang Terminals (Two) Sdn Bhd (SPV2) and RM2.7 billion Pengerang LND (Two) Sdn Bhd (SPV3).
Having a 25% equity portion in the two special purpose vehicles (SPV) each, Dialog’s investment sum for SPV2 is RM1.9 billion, while SPV3 only needs RM750 million.
Ngau said the fundraising exercise will be funded by internal funds, warrant conversion and bank borrowings.
Having to incur borrowings, Ngau sees the group’s gearing ratio increasing up to 0.6 times from the current 0.2 times in four years. “But we are comfortable enough when it reaches that level because we know it’s a long-term recurring income project.”
This article first appeared in The Edge Financial Daily, on April 6, 2015.