News

UMW O&G has awarded RM64m worth of contract from Frontier Oil Corp for the provision of a jack-up rig and associated services for the KJF Field SC50 Block offshore Palawan in the Philippines.

The contract is for duration of 120 days with an option for a further 180 days and should commence in mid Jan 15.

This contract will utilise UMW Naga 7, built at the CHMI shipyard in Shenzhen, China.

Financial Impact

The contract value translates to US$167k charter rate per day, which is higher than average long term charter rate of US$150k.

We have already factored in RM176m revenue contribution from Naga 7 in FY15. If Frontier Oil take up total of 300 days (include option 180 days), revenue forecast is circa RM160m.

Pros/Cons

We are positive but not surprise on the contract award for Naga 7. This will further solidify UMW O&G presence in the Philippines market with Naga 5 currently working for Nido Petroleum in Philippines.

We understand that Naga 7 is 75% completed and expected to be delivered in Dec 2014.

Overall, UMW O&G is bidding for 25 rig contracts (12 from Malaysia and 13 from International) worth US$2.21bn. 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.

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 (BUY, TP:1.24).

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 - 3 Jul 2014