2023 M&A opportunities in Southeast Asia – Part 3 – Malaysia

Oil and gas remains a critical industry for Malaysia, with revenues making up about 20% of GDP and the country is the 5th largest LNG exporter in the world. However, they have entered that difficult transition period where their attraction to the majors has become limited and they are needing to identify and attract different companies to invest.

The opportunities in Malaysia can be delineated into three regions:

• Peninsular Malaysia: produces oil and gas into Peninsular Malaysia for domestic markets. It is pretty mature, with production in decline and the majority of activities limited to trying to limit decline rates. There are a few small undeveloped discoveries that MPM have offered under specific small field terms.
• Sarawak: produces predominantly gas, the majority of which is sent to the MLNG complex in Bintulu for export to international markets. Some gas is sent to domestic markets and downstream industries in Sarawak.
• Sabah: historical developments have focussed on oil but there is significant gas potential, particularly in the deepwater. However, the ability to develop gas fields has been limited by issues with the SSGP with PETRONAS now investing in a new FLNG vessel for Sabah to provide an alternative route to market.

In terms of M&A, we are likely to see similar trends to Indonesia (see previous article), with some of the majors seeing the country as core and others looking to exit, with little reason to enter for those not present. The gas-to-LNG opportunities should remain attractive to a number of the second-tier international investors but the relatively high GHG intensity (owing to gas fields being CO2 prone) will become a larger challenge. The government have realised this and are actively pursuing a number of CCUS options. ?

The majors

I looked at the majors across the region in a previous article. To summarise for Malaysia:

• ExxonMobil: primary position is their producing assets offshore Peninsular Malaysia. It appears the sales process that began in late-2019 has failed. Whilst these may still be considered for divestment by ExxonMobil, they would need to be more generous with their price expectations.
• Chevron: no position and no reason to enter.
• Shell: have a very long history here and operate a large number of key assets. They have stated that Malaysia is one of their key focus areas, so we can expect them to stay. However, there may be some further gentle pruning around the edges.
• BP: no position and no reason to enter.
• ConocoPhillips: hold a stake in a number of assets in Sarawak and Sabah. Could they consider an exit? And thus, the complete exit from Southeast Asia. The planned ZLNG vessel should help with their monetisation challenges (owing to SSGP issues) at the Kebabangan Cluster, which would improve the value of this asset.
• TotalEnergies: they have some exploration interest in deepwater Sabah that includes the Tepat discovery. They have talked about drilling a second well at Tepat but could look to sell post-drill if they see some value upside, or simply sell/relinquish prior to drilling.
• Eni: no position. Would be an interesting company to enter but seems unlikely.

Companies that may look to exit

There have been rumours around a few domestic and international companies that could look to exit Malaysia:

• Sapura Energy: rumours have been swirling since late-2021 about Sapura Energy potentially divesting their upstream business (including their 50% interest in SapuraOMV) to support their offshore service business. They have a nice portfolio of gas assets, both in production and for potential development. I understand there was a process running last year that failed but a new process will begin soon, but this could be complicated by the below.
• OMV: have stated their intention to divest their upstream business, with November seeing reports that the Carlyle Group are looking to acquire these assets. Parallel processes from two parties could be tricky to navigate.
• Mubadala Energy: Mubadala have been pulling back from Southeast Asia. In Malaysia, their major asset is the Pegaga field that came onstream last year. It is a very nice asset but Mubadala may prioritise the strategic exit from the region rather than continuing to operate the asset. At a corporate level, Mubadala sold their 25% stake in OMV to ADNOC. But this wasn’t driven by any upstream holdings.

The gas from these fields provide supply to MLNG, giving exposure to international LNG prices. A buyer could look at just one of these companies or acquiring both would provide a stronger position. As a set of assets, they would be a very attractive proposition to someone looking to grow their exposure to gas-to-LNG assets. The recent LNG market shocks have shown the importance of having a stake in these types of assets for the major LNG importing nations. For Malaysia, this would include the Japanese and Korean companies with an interest in the region and these would be my most likely buyers, with Korean companies POSCO International and SK earthon being may favourites as they made quiet entries into Malaysia through exploration block awards in 2021 and 2022. Another option, could be for KUFPEC to expand their position in Malaysia in preparation for the development of Lang Lebah, in which they hold a 42.5% stake.

• Hess: hold a decent producing position in the North Malay basin through two Peninsular Malaysia blocks plus a block in the MTJDA held by the Carigali Hess JV. Rumours have swirled around Hess potentially divesting from these assets for a number of years but this has always been denied by Hess. One driver of a potential divestment would be ESG pressures as these assets, in particular the MTJDA asset, contribute significantly towards Hess’ equity Scope 1 and 2 emissions. The potential buyer pool for these assets looks limited to either PETRONAS Carigali or PTTEP.

• Petrofac: again, there have been rumours about Petrofac looking to divest their operated stake in PM-304 since 2019. My understanding is there has been a process running but bids were not at the expected level. We could see a new process given the more robust price outlooks.

Companies with growth ambitions

Malaysia remains attractive to some of the larger regional companies, particularly the gas-to-LNG opportunities. At the other end of the scale, we have seen a number of regional or domestic companies growing their position through smaller acquisition of through bid rounds for DROs. I have put together the table below to highlight some of the companies involved in Malaysia and some of those with potential to enter (let me know if I've missed anyone).

Taking a closer look at a few of these companies:

• Jadestone Energy: have a clear regional growth strategy and entered Malaysia in 2021 when they acquired SapuraOMV’s Peninsular Malaysia assets. Their current acquisition focus in the region is likely to be on gas assets with near-term production potential. However, the scale of these acquisitions will likely be limited.
• Hibiscus Petroleum: following their acquisition of Repsol’s assets, Hibiscus may look to expand further in its home nation. However, it may not have the financial resources to allow this.
• PETROS (Petroleum Sarawak): since its formation in 2017, the state oil company of Sarawak has slowly increased its interest in the upstream sector in Sarawak. Taking stakes in two producing assets (Kumang Cluster / MLNG I PSC) as well as exploration acreage. 2022 saw them acquire Shell’s stake in two non-operated assets. It can be expected that they will continue to look for opportunities in Sarawak.
• Rex International: entered Malaysia through the award of two of the DROs offered by Malaysia in the 2020 bid round, namely the Rhu-Ara Cluster and the Diwangsa cluster. I don't see them looking at anything larger.
• Ping Petroleum: entered Malaysia through the award of two of the DROs offered by Malaysia in the 2022 bid round, namely the A Cluster and the Meranti Cluster. I don't see them looking at anything larger.
• DIALOG: have held a stake in mature assets in Malaysia since 2012 and continue to optimise production at these assets. The 2022 bid round saw them awarded the Baram Junior Cluster DRO.

The regional NOCs

Regional NOCs play a role in Malaysia, but have taken different approaches since their respective entries.

• PERTAMINA: since acquiring 30% of Murphy’s assets in Malaysia in 2014, they have pretty much remained in Harvest mode, showing no inclination towards either expansion or exploration.
• PTTEP: have a stated strategy to grow in Southeast Asia, with Malaysia being core to this since they acquired Murphy’s Malaysian assets in 2019. They have continued to explore, with a number of notable discoveries including Lang Lebah. They can be expected to continue to explore and also to develop some of these discoveries. It is less clear if they would look at an acquisitional growth strategy.?