Kenanga Research & Investment
Uzma Bhd - Prelude to Bigger Things
We attended UZMA’s briefing yesterday and left feeling more positive as the management provided more details on the recently secured D18 Water Injection contract and Tanjung Baram RSC. The D18 Water Injection Facility (WIF) will be delivered through the conversion of an aged jack-up rig coupled with its inhouse proprietary water injection technology. CAPEX of the asset is expected to be at USD70m and it will raise the group’s net gearing to 0.8x from 0.2x previously post completion of private placement and debt raising. Meanwhile, earnings contribution is expected to be only felt in FY16 with full-year EBIT contribution expected to be at RM16m p.a. Tanjung Baram RSC oil production is expected to be delayed to Aug this year instead of June due to the longer-thanexpected jack-up rig demobilisation and processing facility hiccups. Maintain MARKET PERFORM with an unchanged TP of RM2.58, implying 11x CY16 PER.
More on D18 Water Injection Facility (WIF) contract. To recap, the group has secured a Water Injection Facility (WIF) contract worth RM350-400m from Petronas Carigali last Friday. It will be deployed to the D18 mature oilfield offshore Sarawak to increase the recovery factor and production rate of the D18 oilfield as oilfields usually suffer natural production decline over time. The group will seek to convert an aged jack-up rig in a fabrication yard to a mobile unit whereby it will install its proprietary water injection unit.
Functionality and significance of water injection. In the context of oil production enhancement, water injection is in the earlier stage (Improved Oil Recovery) than Enhanced Oil Recovery (EOR) whereby water flooding technology will be used to improve the reservoir pressure thereby improving oil production utilising the standalone water injection unit. Therefore, it is more common for this stage of oil recovery to be implemented by oil producer as opposed to the later stage (EOR) which is more dependent on the movement in crude oil prices, in our opinion, as it is less technically challenging and costly. We foresee greater avenues for growth in this segment and this contract positions the group as the local pioneer in the water injection technology which will enable it to tap into the large brownfield market in the foreseeable future.
Financial impact of the contract. Assuming a bullish scenario of RM400m contract value, the job is expected to contribute RM80m revenue and RM16m EBIT (assuming 20%) p.a to the group. CAPEX for the water injection unit is estimated to be at USD70m. Assuming 80% debt financing, its net gearing is expected to climb to 0.8x from 0.2x previously, assuming an exchange rate of MYR:USD of 3.8, which is still manageable given its 5-year recurring cash flow from the new contract secured. Petronas also has the right to purchase the water injection unit at the end of the contract, further allaying concerns of inability to recover the asset CAPEX cost.
Tanjung Baram RSC delayed. Originally slated for commencement of oil production in June 2015, the production of the Tanjung Baram RSC is further delayed to early August due to several technical issues. According to the management, this is mainly due to two factors: (i) the demobilisation of the jack-up rig in the field being delayed to 22 days from originally expected 5 days as its leg is stuck in the seabed and (ii) processing facility in West Lutong field is facing hiccups as the gas processed from Tanjung Baram’s oil contains a small amount of hydrocarbon liquid post processing. To rectify the problem, the group need to clean up the well before jack-up removal and help to modify the processing facility. While the processing facility modification is expected to be cost neutral to the group, the ultimate party that will bear the demobilisation cost of the jack-up is still in discussion and we reckon the additional costs to the group will be at USD2-3m.
Maintain MARKET PERFORM. The water injection job win is positive to the group and the delay in RSC, in our opinion, would not have any major financial impact to the group. All in, we opine that the group is on track to become one of the biggest one-stop regional oilfield services players with its comprehensive capabilities in the upstream oilfield services business segment. TP is maintained at RM2.58/share pegged to 11x CY16 PER. Risks to our call include: (i) Higher-than-expected capex requirements and (ii) Contractual and project execution risks in new projects.
Source: Kenanga Research - 15 Jul 2015
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