IN A BID to strengthen its position in the upstream oil and gas industry, Barakah Offshore Petroleum Bhd has set its sights on developing marginal oilfields, say sources familiar with the company.

Given its expanding order book, some strategic investors, including Felda Investment Corp (FIC), are keen to acquire a substantial stake in Barakah, which made its debut on Bursa Malaysia last year through a reverse takeover.

According to sources, Barakah is conducting studies on local marginal oilfields to form a cluster for development.

“It is part of the group’s plan to strengthen its presence in the exploration and production segment,” says an industry executive, who also notes that Barakah, which prefers proven oilfields, has yet to narrow them down.

Barakah’s officials were not contactable at press time to shed light on the matter.

“The company has to look at the strength of its balance sheet and risk profile of the assets first before finalising any investment,” says the industry executive.

Should its venture into marginal oilfield development materialise, Barakah will need fresh capital. It is learnt that several interested parties have approached the company for a substantial stake. So far, FIC has entered into talks with the company.

Established as an investment arm of the Federal Land Development Authority, FIC undertakes business activities that are not plantation-related. If it successfully acquires equity interest in Barakah, it would be FIC’s first investment in the oil and gas industry.

“But there is no concrete decision as yet on bringing in a strategic investor mainly because the controlling shareholders believe the market price is undervalued,” says a source familiar with the company.

Barakah’s shares have been on a downward trend lately, declining nearly 27% from a peak of RM1.87 in February to RM1.37 last Thursday.

Net profit in its second quarter ended June 30 tripled to RM12.34 million from the previous corresponding period while revenue surged to RM159.7 million from RM57.71 million. Cash reserves stood at RM145.58 million as at June 30 while short-term borrowings amounted to RM30.46 million.

The steep rise in earnings was mainly due to the completion of a topside installation job for Kebabangan Petroleum Operating Co (KPOC) in Sabah, the start of its Pan-Malaysia transport and installation contract and other construction activities carried out during the quarter.

KPOC is a joint-venture company created for the development and production-sharing contract for the Kebabangan gas field off Sabah by Petronas Carigali Sdn Bhd (40%), ConocoPhillips Sabah Gas Ltd (30%) and Shell Energy Asia Ltd (30%).

Kenanga Research expects Barakah’s profit recognition to pick up in the second half of the year on the back of higher installation and construction activity and the execution of the T&I contract.

Last year, Barakah was awarded a contract worth an estimated RM1.5 billion by various oil and gas production-sharing companies for the transport and installation of facilities in Malaysia’s offshore fields. The contract is for three years with an extension option for another year for facilities under Petroliam Nasional Bhd’s Pan-Malaysia project.

It is worth noting that in the last 10 months alone, Barakah managed to secure four jobs — the RM260 million procurement, construction and commissioning of pipelines job for the Pengerang Integrated Complex by Petronas Gas Bhd; the hook-up, commissioning and topside major maintenance job for Lundin Malaysia B.V.; the RM29 million engineering, procurement, construction and commissioning job for Petronas Dagangan Bhd’s biodiesel storage and blending facilities in Miri; and a pre-commissioning services job for a pipeline in Terengganu from GOM Resources Sdn Bhd.

According to Kenanga Research, the first work order from Lundin is worth RM30 million and is for six months. The earnings before interest, taxes, depreciation and amortisation margin for the contract could be between 20% and 22%. The contract period is from Aug 14, 2014, to Feb 4, 2016.

“Excluding the tender book for the Arab Saudi project, we understand that Barakah is actively bidding for RM400 million to RM600 million worth of projects,” says the research house, adding that Barakah’s order book of RM2.3 billion provides earnings visibility for the next three years.

Most analysts who track the stock have pegged to it a fair value that is at least 20% higher than its closing price of RM1.37 last Thursday. The target prices range from RM1.73 to RM1.95.

UOB Kay Hian has the highest target price among five research houses. Its valuations are pegged at 14 times fully diluted earnings with its forecast earnings per share at 13.3 sen for FY2015 ending Dec 31.

“Our target price-to-earnings ratio is conservative as it is at a 15% discount to the sector’s 16.5 times. We believe a re-rating could take place if the company is able to execute its order book. Assuming the stock re-rates to the sector average, our target price could rise to RM2.24,” it adds.

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

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