Highlight

UMW O&G’s 1QFY14 analyst briefing was hosted by Rohaizad Darus, CEO and attended by more than 15 fund managers and analysts.

There are total 12 rigs (1 semi sub, 6 jack up rigs and 5 hydraulic workover units (HWUs)) scheduled for operation in FY14. Naga 5 was delivered 32 days ahead of schedule and was mobilised on 2 May 14. The construction of Naga 6 and Naga 7 are ahead of schedule and deliveries are expected to be on time.

Given aging existing rigs and robust drilling programs in the region, UMW O&G will continue to solidify its market leadership in Malaysia and expand further into Asia Pacific region such as Myanmar, Vietnam and Indonesia.

Overall, UMW O&G is bidding for 23 rig contracts (11 from Malaysia and 12 from International) worth US$2.03bn.

We gather from management that the charter rate for jack up rig remains stable and do not see any risk of downside revision. In the region, some countries such as Vietnam is experiencing rising charter rate .

The drilling academy is progressing well and expected to produce 100-120 drilling rigs workers for Petronas and UMW O&G over the next few years. This is will help to support the fleet expansion plan.

Comment

We came away from the briefing feeling positive on UMW O&G’s prospects given its strong balance sheet which will allow it flexibility and capability to grow its young fleets with growth opportunity from asset localisation and oversea expansion.

After the recent acquisition of Naga 6 and 7, a total of 8 rigs will be operating in FY15. 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 end of FY14, which still provides room for asset acquisitions.

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 awards to accelerating in next 2 years.

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:1.87) and Scomi Energy (HOLD, TP:1.02).

Forecasts

Unchanged.

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 - 21 May 2014