The outlook for offshore drilling is encouraging in Malaysia and South East Asia (SEA) and the expenditure is expected to steadily increase up to 2015. Given the growing exploration and production activities, the offshore drilling market is potentially benefiting UMW-OG as a rig owner and operator. Re-rating catalysts could come from i) Intense drilling activity, ii) Focusing on younger asset base and iii) Strong contracted backlog. We derive a fair value of UMW-OG at RM3.03 per share based on sum-of-parts (SOP) approach where the drilling segment is valued on a discounted cash flow (DCF) basis, the hydraulic work units (HWUs) on a net asset value (NAV) basis and PE of 14x to 2015 EPS for the oilfield services segment. The resulting effect is a NEUTRAL call on UMW-OG as we believe the stock is fairly valued at an IPO price.

Upsurge in O&G activity. Being the first Malaysian owner and operator of jack-up drilling rigs, UMW-OG has become one of the market leaders in the provision of offshore drilling services and related oilfield services. The Group believes it will be able to benefit from the anticipated increase in upstream activity in the Asia Pacific and South East Asia (SEA) regions.

Expanding asset base. It has a strong asset base which comprises 5 drilling rigs and 4 HWUs. Currently, the Group is planning to expand its asset base to accommodate potential needs. We do not rule out the Group potentially acquiring more rigs given that O&G industry is now heading into a sustained upswing market. In addition, current operating conditions favour younger rigs, of which OMW-OG is in an ideal position to capitalise on given its newer and higher capacity fleet.

Strong contracted backlog. The drilling rigs are contracted for periods between a few months and 5 years. As at June 2013, contracted backlog totaled approximately RM1.47bn backed by improved charter rates.

Valuations: Given the immense drilling activity potential in the region, we have factored in 3 new jack-up rigs up to 2016 on top of 5 existing rigs. We also assume higher-end rates of USD153k per day for jack-up rigs with 5% decline in daily charter rates (DCR) for every 5 years. Rates for the semi-sub NAGA 1 is to sustain at USD152k per day (2013-2016) and consequently at USD178k (based on latest contract award). Re-rating is possible should there be substantial increases in the charter rates, already high in our current assumptions however.

Source: PublicInvest Research - 30 Oct 2013