UMW-OG building up its presence in Southeast Asia

by **Cals** Wed 18 Dec 2013, 01:21

UMW-OG building up its presence in Southeast Asia
Business & Markets 2013
Written by CIMB Research
Tuesday, 17 December 2013 10:08

UMW Oil & Gas Corp Bhd
(Dec 16, RM3.87)
Maintain add at RM3.78 with a target price of RM4.63: UMW-OG has secured a four-month contract extension for its Naga 2 jack-up drilling rig from PetroVietnam Drilling and Well Services Corp as it builds up its presence in Southeast Asia. Watch out for the news flow as the company scouts for contracts for its three new jack-ups to be delivered in FY14 ending Dec 31.

We continue to value the stock at 22.5 times 2015 calendar year price-earnings ratio (PER), a 40% premium over our implied market target of 16.1 times, but still within the historical PER range of the oil and gas big caps. Aggressive fleet expansion is the potential rerating catalyst that supports our “add” recommendation.

The contract extension for UMW-OG’s Naga 2 is worth US$19 million (RM61.6 million). Naga 2 was relocated to Vietnam in May 2013 after UMW-OG entered into a contract with PetroVietnam for the jack-up to drill wells for the end client, Hoang Long Joint Operating Company.

The extension was not a surprise to us. Nonetheless, we are encouraged by the extension, which underscores a strong demand for jack-ups in Southeast Asia.

The extension works out to a day rate of US$155,000 (RM502,280), close to our assumption of US$150,000.

We have confirmed with management that the day rate of the extension matches that of the existing contract. We have imputed the extension in our forecasts. UMW-OG currently has an order book of RM1.4 billion, up 122% from RM632 million a year ago. The order book will last up to FY18. Of the existing four rigs, Naga 2 is the only rig that is working outside of Malaysia.

Accumulate the stock as UMW-OG embarks on an aggressive fleet expansion to take advantage of the shortage of Malaysian-flagged jack-ups as well as high demand for the asset class in Southeast Asia. FY14 is set to be a hot year given the expected delivery of three more jack-ups, namely Naga 5, 6 and 7. — CIMB Research, Dec 13

This article first appeared in The Edge Financial Daily, on December 17, 2013.