News

UMW O&G was awarded US$51.3m worth of contract from PTTEP International for the provision of drilling rig services for Block M3 Appraisal Drilling Campaign 2014 in Myanmar. Naga 5 will be utilised for this contract.

The contract is for five firm wells with approximately 250 days excluding mobilisation and demobilisation and may be extended for another well thereafter.

Financial Impact

The contract value translates to US$205k charter rate per day. However, we understand that after net of tax, the daily charter rate per day should be close to the one currently chartered by NIDO Petroleum (~US$159k) which in line with our assumption.

We have already factored in US$27m and US$55m revenue contribution from Naga 5 in FY14 and FY15 respectively.

Pros/Cons

We are positive but not surprise by the contract award for Naga 5. We understand that Naga 5 is currently working with NIDO Petroleum in Philippines and expected to be completed by July 14. This is the first drilling contract secured in Myanmar after it was awarded a US$10m contract in Feb 14 for the provision of hydraulic workover unit services in the same country.

The exploration and production activities in Myanmar are expected to increase as PTTEP will spend US$3.3bn over the next five years to develop gas project throughout Myanmar. Myanmar has awarded 20 offshore blocks for oil and gas explorations.

Overall, UMW O&G is bidding for 25 rig contracts (12 from Malaysia and 13 from International) worth US$2.21bn. Given existing aging 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 as we have factored in continuous work flow for Naga 5.

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 - 10 Jul 2014