Oil & Gas (Overweight)

A Warning for Vessel Operators
We are concerned that many local vessel operators are aggressively expandingtheir fleet although the selling prices of vessels are at record highs. To avoid adilution, these operators have turned to debt financing, which will stretch theirbalance sheets. Some have resorted to off-balance sheet financing, which wethink has raised the inherent risk disproportionately higher.

Oil&Gas_A Warning Sign_20080818.pdf

• Off-balance sheet funding is actually debt-like financing. Although therepayment obligation is not reflected in a company’s financial statement, itnonetheless presents a significant degree of contingent damage in the event ofan industry downturn.• It may be too early for such developments to be cause for concern as marketplayers are currently enjoying high demand and strong charter rates but theconsequent rise in net gearing of some companies has made us uncomfortable,especially given the recent correction in crude oil price. Should oil price fall toUS$70-80/bbl, we see a halt in deepwater developments over the immediateterm. A potential slowdown in E&P activities may curb demand for offshoresupport vessels, particularly since supplies will be lumpy beyond 2010.• We are adjusting our valuation for vessel operators using a lower multiple of13x in view of the significant change in risk-reward profile. Our revised fairvalue for Petra Perdana is RM5.04 and Alam Maritim RM2.22, while TgOff ismaintained at RM3.08. Given the upside, we are maintaining our Buy calls onthese 3 stocks.