News

UMW O&G announced that its wholly owned subsidiary UMW Drilling 6 (L) Ltd has entered into a Sale and Purchase Agreement with Tianjin Haiheng Shipbuilding & Offshore Engineering Service for the purchase of two (2) jack-up drilling rigs for a total purchase consideration of US$434m or (US$217m each).

Naga 6 is expected to be completed and delivery in Sep 14 while Naga 7 in Dec 14.

Financial impact

Given Naga 6 will only be delivery by Sep 14 (vs. our previous estimate by June 14), we cut our utilisation for Naga 6 from 50% to 25% in FY14. However, we add in contribution from Naga 7 in FY15 (previously we only assume contribution by FY16). Overall, a total of 8 rigs will be operating in FY15 (versus our previous forecast of 7 rigs).

Overall, our FY14 earnings forecast will be cut by 8% but FY15 earnings will be raised by 5%. After the acquisition, net gearing remain comfortable at 0.4x, which still provides room for asset acquisitions.

Pros / Cons

We are positive on the acquisition and surprise on the earlier than expected delivery date for Naga 7. To recap, the company has ordered Naga 8 recently from Keppel and expected to delivery by the end of Sep 15. After the acquisition, the company has expanded its fleet to 8 rigs, well leveraging on the asset localisation theme in the domestic drilling sector.

Domestically, there is a shortage of locally owned rigs. As of Sept 2013, there are 16 jack-up rigs operating in Malaysia but only 2 are locally owned (Naga 3&4). Drilling into detail, 14 foreign jacks up rig contracts are expects to expire within 1-2 years with 3 in 2H2013, 4 in 1H2014, 5 in 2H2014 and 2 in 2015. Hence, we expect tender and contract award to accelerating in next 2 years.

We gather from management that the construction of Naga 5 is on track to delivery in May 14. To recap, the company has secured US$7m contract for Naga 5 from Nido Petroleum. The contract will commence in Jun 14 with 6 weeks duration. We also understand that the company is currently in negotiation to secure a second contract for Naga 5.

UMW O&G is the best proxy to benefit from rigs localisation. Alternative drilling related stocks stand to benefit from massive drilling activities are Perisai (BUY, TP:1.93) and Scomi Energy (BUY:TP:1.02).

Risks

• Global recession hitting O&G price;
• Technology advancement;
• Relaxation of Petronas’ domestic policy.

Rating

HOLD

Positives: Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives: Increased competition for the markets.

Valuation

We maintain our HOLD call with TP raised from RM3.92 to RM4.12 based on 20x FY15 EPS of 20.6 sen/share. Despite the positive vibes for the drilling sector, we believe current price has already largely factor in its fundamentals.

Source: Hong Leong Investment Bank Research - 13 Feb 2014