CIMB Research has maintained its outperform recommendation on KENCANA PETROLEUM BHD [] at RM1.58 while raising its target price to RM2.41, saying that since July 2007, the company’s yard space had jumped by 65% to 135 acres while annual capacity expanded by 66% to 48,000 tonnes.

It said Kencana has an 18% share of Malaysia’s oil and gas fabrication capacity.

The research house said Kencana’s current order book was worth RM2.1 billion, of which 13% came from the fabrication contract for drilling rig Kencana Mermaid 1 (KM-1).

“The fabrication is expected to be completed by Oct 09 as scheduled. Petronas has booked the rig for a five-year US$235 million contract,” it added.

CIMB Research said in line with the expected increase in Petronas’ capital expenditure, yard availability was crucial to improving the supply network.

Petronas’ large-scale investment suggests that the national oil company and its production-sharing contractors will need a lot of equipment and structures, both upstream and downstream, to get the projects going, it said.

It said this was an area where seven yard owners (including Kencana), which are also Petronas-licensed fabricators for offshore structures, were benefiting.

“The licence is undoubtedly a major advantage as it automatically creates a significant entry barrier for new operators,” it said.

CIMB Research said if Kencana secures the contracts that it was gunning for, its order book could hit a new high upwards of RM3 billion.

It said the potential contracts were the RM500 million fabrication contracts each in Malaysia and India, the RM2 billion Sabah Oil & Gas Terminal, and marine support jobs.

The research house said it had factored in RM1 billion worth of new jobs per annum in its FY7/10-11 forecasts.

It said Kencana remained an outperform premised on the share price triggers of active order book replenishment, and success in new ventures — marine support.

This article appeared in The Edge Financial Daily, April 27, 2009.