• We see the recent deteriorating results from Petronas and the sharp drop in the Mining sector IPI as signs that urgency to resuscitate and/or expedite O&G production is intensifying.  
• The lower production, higher spending on O&G assets, the conclusion of 5 PSCs and a 3rd RSC reiterate our view that the Petronas is acting to offset declining production by investing locally, which is a matter of urgency for the Government who rely on contributions from Petronas, which total above RM100bn for the past 5 years.  Furthermore O&G is the major driver of ETP to bring Malaysia to high income status.
• Compounding the problem is a 10.4% yoy decline in the July Mining IPI which helped drag the IPI down 4.7% yoy which was mainly caused by a decrease in natural gas and oil production declining 25.1% and 3.4% respectively. As at July, the mining index was only 76.4, a far cry from 2005 level when the index was started at 100.
• Difficulty in raising the mining output will have significant consequence on the Government’s finances going into 2013. In the absence of GST implementation, oil revenue (~35% of total Government’s revenue) will be the crucial determinant of Government’s spending ability in 2013. In this regard, we sense the urgency for Petronas to expedite award of RSC contracts to reverse production decline.
• We reiterate our overweight call and maintaining the view that focused spending to resuscitate and/or expedite O&G production will benefit selected O&G players as CAPEX spending and RSC disbursement intensifies in 2H2012 and 2013. 
• Top picks in order of preference whereby all would benefit from the above;  
• SapuraKencana (TP: RM2.77 BUY, 20x FY01/14 EPS of 13.4 sen/share)
• Dayang (TP: 2.65 BUY, 14x FY13 EPS of 19 sen/share),
• Perisai  (TP: RM1.60 BUY, 16x FY13 EPS of 10 sen/share)
• Uzma  (TP: RM2.10 BUY, 10x FY13 EPS of 21 sen/share).

Source: Hong Leong Investment Bank Research - 12 Sep 2012