UMW-OG awaiting contract renewals for Naga 2 and 3 rigs

by **Cals** Thu 06 Mar 2014, 17:24

Business & Markets 2014

Written by Alliance Research

Thursday, 06 March 2014 10:10

UMW Oil & Gas Corp Bhd
(March 5, RM4.21 )
Maintain neutral with target price of RM4.15: UMW-OG announced that its wholly-owned subsidiary, UMW Petrodril (Malaysia) Sdn Bhd, was successful in its bid to secure a RM148 million contract for the provision of a Hydraulic Workover Unit (HWU) Rig for Petronas Carigali Sdn Bhd’s workover programme, as well as an accommodation work barge and portable crane. The contract is for an initial period of two years with a one-year extension option.

This contract likely involves UMW-OG’s GAIT 3 HWU as the company had recently indicated that it would be mobilised within the quarter for work. For this contract, the day rate for the HWU, together with accommodation barge and crane, comes up to roughly RM206,000. In terms of the charter breakdown, we believe that the HWU is likely to fetch RM50,000 per day.

While the group will earn roughly RM2 million to RM3 million per annum from the usage and services of the HWU, the charter of the accommodation barge will likely yield negligible results for the bottom line as it is a third party charter. UMW-OG does not yet own any offshore support vessels to complement its drilling or HWU work and has to lease from third parties.

We have already assumed that the GAIT 3 will be working over financial year 2014 ending Dec 31 (FY14) to FY15. As such, we make no changes to our estimates.

UMW-OG is awaiting another two key contract renewals for its Naga 2 and Naga 3 drilling rigs which are currently on spot charter contracts that will end in mid-2014. The group will also require more work for its Naga 5 rig which has so far only secured one spot charter job for six weeks starting June 2014.

As for its HWUs, the group is looking for work for GAIT 1 at this juncture with GAIT 2 heading to Vietnam in May 2014.

We maintain our target price of RM4.15 on UMW-OG which is based on FY15 earnings per share pegged to a target price-earnings ratio (PER) of 24 times which is at a premium to the large cap industry average of 20 times.

Since its listing, UMW-OG has been trading ahead of its peers on a PER basis (more than 20 times FY15 earnings compared with peers’ less than 20 times) given its strong growth from the addition of new rigs which brings its four-year earnings per share compound annual growth rate to 45%.

The higher valuation is justified, we believe, as the group has a price-earnings to growth ratio of 0.6 times compared with large cap peers’ average of 1.1 times.

We maintain our “neutral” call. With the new rig delivery timelines having been confirmed, earnings accretions from the rigs appear priced in.

We highlight also that some risks remain as the group is currently on spot charters for its Naga 2, 3 and 5 rigs.

Therefore, there is no guarantee of full utilisation of these rigs in the future. Furthermore the group will need to secure work sooner rather than later for Naga 6 and 7. Otherwise, there could be earnings downside risk to FY15 estimates.

For oil and gas exposure, we continue to prefer SapuraKencana Petroleum Bhd (“strong buy”, target price: RM5.26), which is backed by a RM24 billion order book and recurring income from the Newfield acquisition, providing it strong earnings visibility going into year 2020. — Alliance Research, March 5