Firms navigate into renewables in the face of energy transition

New challenge: A man fishes near docked oil drilling platforms in Port Aransas, Texas. With the trend to a greener future coming back in the spotlight, companies have had to try to reinvent themselves in some way or another. — AP

OIL and gas (O&G) companies continue to restrategise and reposition their operations following the continued talks toward a greener energy future.

This long-talked-about transition to green energy appears to be gaining momentum of late and has become more prevalent after it was widely publicised that the odd weather phenomenon is due to climate change in the past one to two years.

With this trend to a greener future coming back in the spotlight, companies, especially those in the O&G industry, have had to try to reinvent themselves in some way or another in the face of the energy transition.

Over the week, upstream O&G service provider Sapura Energy Bhd says some of the main challenges it has been facing is the shift in capital expenditure (capex) away from O&G to green energy.

Group chief executive officer Datuk Mohd Anuar Taib (pic below) says international oil majors have increased their capex in renewable energy and this has come at an expense to O&G contractors such as Sapura Energy.

Datuk Mohd Anuar Taib

“This adds to the future uncertainties of the business. We are working towards addressing these future uncertainties,” he says.

Sapura Energy explains further in its 2021 annual report that it is embracing the energy transition by focusing on gas as the transition fuel, and building a presence in the renewable energy space.

The group also says it has taken deliberate steps to embrace the energy transition to cleaner fuel and renewable sources, by giving priority to gas development in its exploration and production portfolio and major projects.

Sapura Energy adds that it is focusing on offshore wind to begin its journey into the renewable energy space.

The group notes that a portion of its tender book, or 6% of its total bid book, is in renewables and it has five project bids currently in progress in this segment.

Another company pursuing investments into renewables is Dialog Group Bhd. Its first venture into this space was in August when it signed a memorandum of understanding (MoU) with Diyou Fibre (M) Sdn Bhd.

The MoU proposes a joint venture in which Dialog will hold a 51% stake to build, own and operate a food grade recycled polyethylene terephthalate (PET) pellet production facility.

This is a downstream venture and will see it uses recycled PET flakes as raw materials to produce food grade recycled PET pellets that would then be sold to food and beverage customers.

In a filing with Bursa Malaysia, the group said the total investment outlay for this project is estimated at US$25mil (RM105.39mil).

The group says it will use both internally generated funds and borrowings to finance its investment in this venture.

Dialog also says in its 2021 annual report that it will further expand its reach into renewables, including clean and green energy, as well as recycling ventures.

Dialog hq building

“This is a continuation of the group’s initiatives to achieve business sustainability and fulfil its environmental, social and governance (ESG) agenda through commercially viable ventures,” it says.

The group also notes that any investments into renewables would require intensive capital requirements and this would entail the need for a careful evaluation and viability assessments of such projects.

Dialog had over the past week also secured a contract valued at RM360mil from Petronas Gas Bhd for the provision of engineering, procurement, construction and commissioning for a new booster compressor station with associated equipment and facilities at Mengkibol, Kluang, Johor.

The project duration is expected to be 26 to 28 months that is anticipated to end in the first quarter of 2024.

Hong Leong Investment Bank (HLIB) Research in its note says it expects this contract to be earnings accretive of about RM36mil over a period of 28 months, based on its assumption of a 10% net profit margin.

“It would then enhance Dialog’s financial year 2022 (FY22) to FY23 earnings by circa 2% annually (or RM12mil each year), based on our forecast, which is somewhat negligible,” HLIB Research adds.

HLIB Research maintained its “buy” rating on Dialog with an unchanged target price of RM3.38.

“Our target price of RM3.38 implies an attractive 39% upside to the current share price. Valuation wise, Dialog is currently trading at FY23 forecast price-to-earnings ratio of 22 times, which is at about 30% discount to its pre-pandemic mean of 32 times in 2019,” it notes.

Despite the continued hype on renewables with the intense focus on ESG criterions presently, it is mindful to be aware that hydrocarbon still accounts for more than 80% of the global energy mix, according to ourworldindata.org.

Other than its critical role in making widely used products such as medicine, plastic, pesticides and synthetic fabrics, hydrocarbons still play a very important part in the economy.

It is also expected to continue to be a major fuel and power source in the next couple of decades.