Why didn’t Petronas buy Murphy’s assets?

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MURPHY OIL CORP has pared down its stake in its Malaysian upstream portfolio, which comprises seven production sharing contracts (PSCs) in local waters with Petroliam Nasional Bhd (Petronas).

The international oil major announced last Thursday that it had sold a 30% stake in its Malaysian assets to Indonesia’s state-owned energy company PT Pertamina for US$2 billion (RM6.5 billion). Murphy still holds an interest in the assets and will continue to execute the development of oil and gas fields in both deep and shallow waters.

Geographically, Malaysia is the largest contributor to Murphy’s revenue.

Since the proven oil and gas reserves are in our backyard, some quarters see the sale as a missed opportunity for local oil and gas players.

However, industry players doubt that local players are capable of putting down the RM6.5 billion purchase price. Not only do they lack the financial muscle, some do not have the capability and technology to swallow such big assets.

While these local players are not in Murphy’s league, Petronas should have the financial muscle and technology. Why didn’t the national oil firm step in to take over the assets from Murphy?

A source close to the national oil company tells The Edge that it is better off investing elsewhere.

“Instead of investing in these assets, Petronas can use that US$2 billion for discovered greenfield projects where the returns could be much higher,” he says.

“The benchmark for any oil company is the return on investment. Cost of funds depends on return on investment and optimisation. The decision to purchase the stake has to be a pure financial evaluation and not because it is a home field,” he adds.

He points out that when Petronas signed the production sharing contracts (PSCs) with the contractors, the amount invested was lower. The value of these assets has appreciated substantially over the years.

“I don’t deny that these assets are good … but the assets are already fully valued. Petronas can get higher returns elsewhere,” says the source.

That said, some quarters think that the proven oilfields are like low-hanging fruits. They are less risky relative to greenfield projects.

“Yes, the risks in venturing into new fields are higher but it is better for Petronas to put money into developing other fields rather than take control of Murphy’s assets, which are already fully valued,” the source adds.

Murphy’s seven PSCs cover about 2.87 million gross acres of oil and gas fields in Peninsular Malaysia, Sarawak and Sabah. As at end-2013, Murphy had 2.6 million acres of undeveloped areas.

Among the PSCs that Murphy has a stake in are Block K, Block H, SK309, SK311, SK314A, Block P and three gas agreements in PM311.

The portfolio is expected to nearly double and produce 142,000 barrels of oil equivalent per day (boepd) in 2014 compared with 86,000 boepd last year.

Going forward, output is expected to be ramped up towards 2017 as additional fields are brought onstream via Block K’s Kikeh, SK309 and SK311 infrastructure.  

In addition, Block H’s Rotan floating liquefied natural gas (FLNG) project, developed in conjunction with Petronas Carigali, will commence gas production in 2019.

Other upsides to the assets includes the undeveloped PM311 block in Peninsular Malaysia where Murphy currently has three gas-holding agreements. It holds 75% interest in the Kenarong, Kenarong North and Pertang discoveries. The development options for PM311 are being studied.

Murphy’s recently acquired SK314A exploration acreage in Sarawak is also another booster. The shallow water block, which was acquired in May last year, has total gross acreage of 1.12 million acres. Murphy has an 85% working interest in the PSC that covers a three-year exploration period.

In the past two years, Murphy has already made major discoveries in its Malaysian portfolio. In 2012, Block K’s three fields — Kikeh, Kakap-Gumusut and Siakap North — produced average volumes of 44,900 bpd, 2,300 bpd and 1,000 bpd respectively.

This year, Kikeh is expected to produce 29,000 bpd, while Kakap-Gumusut and Siakap North are expected to produce 8,100 bpd and 7,400 bpd respectively.

The total proven reserves booked in Block K have increased to 102 million barrels of oil (mbo) and 75 billion cu ft of natural gas as at end-2013 from 85.4 mbo and 72.9 billion cu ft in 2012.

According to Murphy’s 2013 annual report, production from the Malaysian assets is equivalent to about 86,000 bpd and is Murphy’s largest contributor, followed by those in the US and Canada.

For its 2013 financial year ended Dec 31, 2013 (FY2013), Murphy’s oilfields in Malaysia generated profit of US$786.4 million, and those in the US and Canada brought in US$435.4 million and US$180.8 million respectively.

Revenue for FY2013 was also led by the Malaysian assets. The assets made up about 43.4% of Murphy’s total O&G revenue of US$5.3 billion.

The assets contributed about US$2.3 billion in revenue to the group, followed by the US’ US$1.8 billion, Canada’s US$1.1 billion and the Republic of the Congo’s US$83.6 million.

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.