News

Uzma announced its wholly owned subsidiary, Uzma Energy Ventures (Sarawak) Sdn Bhd, and EQ Petroleum Developments Malaysia Sdn Bhd (referred to as contractor group) have signed a small risk service contract (RSC) with Petronas.

The contractor group shall be jointly responsible for the development and production of hydrocarbon from the Tanjong Baram field, located offshore Lutong, Sarawak. Total cost of the development phase is estimated to be US$100m. First oil is anticipated to occur in 2015. The contract is for a period of 9 years. Uzma hold 30% stake while EQ Petroleum owns the remaining share.

Financial impact

With assumptions of i) capex of US$100m, ii) project IRR of 20%, iii) project stake of 30%, we estimate that the RSC will contribute ~RM14m per annum to Uzma’s bottom line upon production.

Pros/Cons

We are positive but not surprised as this is in line with our expectation that Uzma will be one of the beneficiaries of RSC contract award in our report entitled ‘2014 Outlook- What’s next?’ dated 9 Jan 2014 given Uzma’s experience and knowledge on full field review and reservoir study.

This fifth RSC contract will re-rate the stock and transform Uzma into an E&P player. We estimate this RSC project will require equity funding of around RM30m for Uzma’s portion (assume debt financing of 70%), which will be financed by recent proposed fund raising of RM90m. We believe the remaining RM60m from the fund raising exercise will be utilized for other potential projects such as enhance oil recovery (EOR). To note, we have factored in a conservative 6% interest earned on the remaining RM60m fund.

Oil revenue remains vital and forms major part of government revenue. Hence, one of the best solutions to increase oil production is through EOR. Uzma stands out as the main beneficiary as its proprietary product, UzmAPRES, is designed to boost production with minimal capex.

Risks

Delay in contract disbursement, execution risk.

Forecasts

Our FY15 earnings will be raised by 12% after factoring in half-yearly earnings contribution (we assume first oil hits in 1H15) from the RSC contract.

Rating

HOLD

Positives –Direct exposure to EOR and exploration spending. Negatives – Small cap with low liquidity.

Valuation

• We maintained our HOLD call with TP raised to RM6.93 from RM6.16 based on 16x FY15 EPS of 43.3 sen/share.
• Post the fund raising exercise, the ex-share price and ex-TP will be adjusted to RM3.58 and RM3.65 respectively.

Source: Hong Leong Investment Bank Research - 2 Apr 2014