News

• UMW Oil & Gas Corporation Bhd (UMWOG) announced that it has been awarded a contract for the provision of 460k drilling hydraulic workover units (HWU) for PETRONAS Carigali Sdn. Bhd (Petronas Carigali).
• The contract is for the provision of HWU to undertake workover services for Petronas Carigali under an umbrella contract. UMWOG will assign its HWU, UMW Gait 6 to undertake workover services, which are services rendered in performing maintenance and/or remedial treatments on an oil or gas well.
• The tenure of the contract is three (3) years commencing from 6 February 2018, with an extension option of one (1) year. Financial Impact
• While we are positive on the contract announcement, the positive earnings impact from the contracts has been included within our forecast.
• On top of that, we believe the margin for the contracts would not be far off from our existing assumed EBIT margin of 6% as Petronas would still be cost conscious in terms of quotation of its work orders (due to uncertainties in oil prices despite firmer trend).
• The announcement of the contracts indicates a pickup in oilfield maintenance activities, pointing to improvement in activities in the overall upstream industry.

Forecast

• Maintained as the utilization of HWU has been within our order book replenishment assumption.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Rating

BUY ↔, TP: RM0.44 ↔

• Following latest outstanding quarterly result, we opined that earnings outlook of the company improved significantly and UMWOG is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner. Moreover, recent share price correction has made the valuation of the stock more attractive.

Valuation

• We maintain our BUY call with TP maintained at RM0.44 (pegged to unchanged FY18 BVPS of 0.8x).

Source: Hong Leong Investment Bank Research - 13 Mar 2018