News

UMW O&G announced that its wholly owned subsidiary has received an award for the provision of a Hydraulic Workover Unit (HWU) rig for Petronas Carigali Sdn Bhd workover programme together with the provision of an accommodation work barge and a portable crane.

The contract is valued at approximately RM148m for an initial period of 2 years with an option of an extension of one year.

Comment

We are positive on the award as this will help to improve the average utilisation rate on the hydraulic workover units (HWU) (below 50% to ~70% in FY14). To recap, the lower than expected margin from drilling services in 4QFY13 was partly due to lower utilisation of the HWU business.

We estimate the HWU rig alone will contribute around RM37m for 2 years with rest of the contract value from accommodation work barge and the portable crane.

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.

Naga 6 is expected to be completed and delivery in Sep 14, Naga 7 in Dec 14 and Naga 8 in Sep 15. Net gearing is expected to remain comfortable at 0.4x at the end of FY14, which still provides room for asset acquisitions.

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 (HOLD:TP:1.02).

Forecast

Unchanged and we have assume 70% utilisation for the HWU segment in FY14.

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 and TP of RM4.12 based on unchanged 20x FY15 EPS of 20.6 sen/share. Despite the positive news for the drilling sector, we believe current price has already largely factor in its fundamentals.

Source: Hong Leong Investment Bank Research - 5 Mar 2014