• Uzma Berhad (Uzma) is principally involved in O&G upstream services. Its bread and butter is brownfield services such as (i) well workover operation, (ii) well decommissioning and (iii) operation of water injection facility.

• The company is expected to benefit from the revival of exploration activities leveraging on its consulting team that provides expertise in subsurface studies. Besides that, it also may ride on higher demand for HWUs from rising well workover operation and decommissioning works.

• Uzma stock price is currently trading at close to 3-year high. However, this is still not expensive given it is trading at PER of 7.2x which is below its 3-year historical average PER of 9.9x.

An Upstream Service Provider

Uzma Berhad (Uzma) is an O&G service provider specialising in brownfield well services and production optimisation/solution. It owns 9 hydraulic workover units (HWU) which are used for well workover and decommissioning works. Generally, its peer companies within this space include Reservoir Link Energy, Deleum, T7 Global and Velesto Energy. Besides that, it possesses several yards located in Kemaman, Labuan and Miri to support its offshore services in Malaysia. In Thailand, it also has operating facility in Songkhla and Rayong. As at end FY2021, its operation is supported by a strength of 880 full time employees as well as 245 freelance consultants.

Providing Consulting Service in Exploration Work

The company began its journey as a service provider in subsurface studies. This includes consultation service that assists its clients to conduct preliminary studies prior to exploration activities. Demand for such services is low during downturn in oil and gas (O&G) sector as O&G companies generally reduce its spending for riskier activities during low oil price environment.

Navigating Challenging Time via Brownfield Services

Notwithstanding, Uzma managed to survive the previous downcycle by swiftly shifting its focus towards brownfield service. This includes well services and production optimisation services which are vital to maintain the economics of reservoir production. Note that typical production profile of an oil field normally peaks at certain time before an eventual natural decline due to (i) weaker reservoir pressure, and (ii) well integrity issues. Enhanced oil recovery (EOR) technique such as chemical injection, gas injection or water injection will be applied to resolve the former issue but this is generally regarded as an expensive technique. Nevertheless, Uzma managed to secure a 5-year contract with Petronas to provide a cost-effective water injection facility at D18 field offshore Sarawak. This contract has since been extended for another 5-years until 2027.

Revenue is Positively Correlated with Offshore Activities

Uzma has generated a stable revenue of at least RM350mn p.a. over FY2017-2023 (Chart 2). This is bolstered by a diversified of O&G services which are mostly project-based. The company’s revenue rose during 2019 and 2022 as it benefit from higher offshore activities from rising oil price prior to covid-19 pandemic. However, lower O&G spending after Covid- 19 pandemic has stalled its revenue growth in subsequent years. Notwithstanding, its revenue grew by 25% YoY to RM474mn in FY2023 as oil price has recovered from the pandemic. At the bottomline, the company was largely profitable throughout the period except on FY2020 as it was affected mainly by asset impairment due to bleak outlook during the Covid-19 pandemic. In FY2023, PATAMI rose to the highest level since 2017 at RM39mn in tandem with rising demand for O&G services.

Reducing Reliance on Cyclical O&G Business

Moving forward, the company has set a target to achieve 40% of total revenue coming from non-O&G business by 2026. In the O&G segment, it plans to grow its foreign revenue to 30% of the segment revenue. Besides that, it strives to generate a sustainable income by maintaining recurring and project-based contract mix at 60%:40%.

Bright Outlook in Near Term

Uzma’s business outlook is anchored on its strong orderbook of RM2.5bn that comprised of (i) O&G orderbook of RM1.7bn, and (ii) non-O&G orderbook of RM800mn that include Power Purchase Agreement (PPA) asset from Large Scale Solar (LSS4) project. In the O&G segment, production segment (i.e. water injection, chemical production via subsidiary company named MECAS and electric submersible pump) making up 60% of the orderbook. Meanwhile, the remaining 40% comes from well solution segment (i.e. workover operation via hydraulic workover unit (HWU) and other integrated well services (IWS) contracts). Its business outlook is further supported by a tenderbook of RM3bn. Given its expertise in subsurface studies, we expect the company to benefit from revival of exploration activities in Malaysia. Besides that, its earnings will also be boosted by new recurring income stream from LSS project.

Prioritising Debt Repayment over Dividend Payment

Uzma’s balance sheet risk remains manageable with a net gearing position of 68% as at end FY2022. Its net gearing has declined from 91% at the end of 2022 (Chart 5) thanks to positive cashflow from operation (CFO) that it generated over 2017-2022 (except for 2019). Given its high net gearing position previously, it is commendable for the company to utilise its internally generated funds for debt repayment rather than making distribution to its shareholders.

Source: BIMB Securities Research - 19 Sept 2023