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Highlight Is the bullish outlook on UMW-OG justified?
by Cals Wed 29 Jan 2014, 18:23
| Highlight Is the bullish outlook on UMW-OG justified? |
| Business & Markets 2014 |
| Written by Afiq Isa of theedgemalaysia.com |
| Wednesday, 29 January 2014 16:12 |
THE market capitalisation of UMW Oil & Gas Corp Bhd (UMW-OG) has soared although it has only been listed on Bursa Malaysia for less than three months.
The group’s market cap stood at RM9.06 billion on Jan 22 thanks to the gains in its share price, which closed at RM4.19 on the same day. This represents a staggering 49% increase from its initial public offering (IPO) issue price of RM2.80 per share, which implied a total capitalisation of RM6.05 billion.
According to UMW-OG president Rohaizad Darus, the incoming deliveries of new jack-up (JU) drilling rigs will boost the group’s earnings substantially over the next two years. Drilling services contributed 94% to its total revenue for the first nine months of last year (9M2013).
“It’s simple mathematics. Our four operational rigs currently generate a certain amount of revenue. If we add another one, our bottom line will increase by 25%,” he says during a media briefing last Thursday.
Rohaizad was referring to Naga 5, the group’s latest premium JU rig, which is scheduled for delivery in May. UMW-OG has already secured a US$7 million contract from Nido Petroleum Philippines Pty Ltd for the provision of drilling services by the new rig.
Apart from its JU fleet, the group is also the sole Malaysian operator of hydraulic workover units (HWUs), with four currently being deployed in three countries on short- and long-term tenures.
Coupled with a RM1 billion war chest from its IPO proceeds after deducting last year’s expenses, Rohaizad is confident that the group can leverage on its working relationship with Petroliam Nasional Bhd and other oil majors to secure new contracts for its JU rigs and HWUs.
“We believe we are able to finance a significant number of new rigs and also secure new contracts due to the increasing regional demand.”
Despite its recent share price gains, there are contrasting valuations on the company by research houses. According to Bloomberg data, the consensus analyst view is mostly bearish with 9 out of 13 research houses issuing a “neutral” or “sell” rating on UMW-OG.
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The most bullish are Maybank IB Research and CIMB Research, which set a target price of RM4.80 and RM4.63 respectively. At the other end of the spectrum is Goldman Sachs Research, which set a fair value of a mere RM2.70 on the oil and gas operator.
In a Jan 20 note, Maybank IB argues that the delivery of another two JU rigs — Naga 6 and Naga 7 — by 2015 warrants a premium valuation on the stock. At RM4.80 per share, the research firm has pegged UMW-OG’s shares at 23 times projected earnings for FY2015.
In its calculations, Maybank IB projected that UMW-OG’s core net profit and core earnings per share will triple within two years after taking into account the additional revenue boost from the three upcoming JU rigs.
“The market now demands new, premium JUs, favoured for their superior security, cost and operating features. More importantly, UMW-OG has the balance sheet strength to expand its JU fleet size beyond the projected five units,” it says.
However, it is worth noting that new contracts are the lifeblood of oil and gas companies. UMW-OG’s contract backlog stands at RM1.45 billion, a small figure compared with the order books of other big caps such as SapuraKencana Petroleum Bhd (RM28 billion) and Bumi Armada Bhd (RM10.8 billion), says Alliance Research, which has a “sell” call on the stock, pegging the fair value at RM3.16.
The research outfit says UMW-OG’s valuation has exceeded its peers, whose shares are currently trading at lower price-earnings multiples.
“While the growth outlook for UMW-OG is promising, especially if the group adds on new rigs, we view that valuations have run too far ahead of peers at this juncture,” it says.
At the moment, a huge chunk of UMW-OG’s revenue comes from contracts awarded by Petronas Carigali Sdn Bhd (PCSB), with three out of four rigs deployed for the upstream player’s needs.
Apart from PCSB, UMW-OG’s client base for the JU rigs consists of HESS, Japan Vietnam Petroleum Co and Nido Petroleum.
Underlining its regional expansion plans, Rohaizad says the group is working towards achieving a 50-50 revenue contribution from domestic and overseas operations respectively. For 9M2013, 66% of its revenue came from Malaysia.
“Naga 3 will be moved to Vietnam while Naga 5 will be operating in the Philippines, where we have never been to before. We also have a presence in China, Thailand, Indonesia and Turkmenistan in various capacities.”
The bullish outlook is mainly supported by the upcoming expiration of a whopping 41 JU rig contracts in Southeast Asia this year. In Malaysia, there are currently 18 JUs, of which 16 are foreign owned.
In line with the growing demand, daily charter rates for JUs have accordingly risen over the past four years.
According to Maybank IB, average day rates are now holding steadily at US$150,000 and should rise to between US$160,000 and US$170,000 levels due to the favourable oil price environment as well as a mismatch between demand and supply.
However, it is apparent that the group will have to aggressively expand its operations and secure new contracts on a consistent basis, either one of which is no small task.
The drilling services industry also remains highly competitive, and there is no shortage of international oil and gas operators bidding for the same projects that UMW-OG is gunning for.
UMW-OG will be spending its cash pile on two new rigs — Naga 6 and Naga 7. Will Petronas, which is the company’s major client, also deploy the new jack-up rigs? That will determine whether the bullishness on the stock is justifiable.
This story first appeared in The Edge Malaysia Weekly Edition, on January 27 - February 2, 2014.
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