UZMA announced the termination of the Tanjong Baram small field risk service contract with Petronas. The project was awarded back in 2014 when oil prices were USD90/barrel, and hence, was already economically unviable for some time. The termination would see UZMA recouping its investments incurred on the project, helping lowering its net-gearing slightly to 0.9x, from 1.0x currently. Maintain MP, with TP of RM0.67.

Termination of Tanjung Baram contract. UZMA and EnQuest had exercised their rights for mutual termination of the Tanjong Baram small field risk service contract with Petronas, following occurrence of “economic cut-off” in accordance with the terms of the contract. Following the termination, Petronas will reimburse the balance of the reimbursable capital and operations over the following 9 months. To recap, Petronas awarded the risk service contract to Uzma and EnQuest back on 27 March 2014 for the development and production of the Tanjong Baram field, located about 6km off Sarawak. Uzma has a 30% stake in the partnership, with EnQuest, being the lead operator, held the remaining 70%.

Positive on the termination. The project was awarded back when oil prices were USD90/barrel, and hence, the contract had been economically unviable for some time. The termination would mean that UZMA is able to recoup its investments incurred on the project. Currently, there is roughly RM50m borrowings on UZMA’s books related to the Tanjong Baram project. Hence, a write-down of these borrowings would see UZMA’s net-gearing slightly improves to 0.9x, from 1.0x currently, and thereby reducing its balance sheet risks. With proper management, UZMA could also potentially utilise these funds as working capital to help improve efficiencies on its other activities.

Maintain MARKET PERFORM, with TP of RM0.67, pegged to 0.4x PBV on FY21E at -1.5SD below its 5-year mean. No changes to our FY20-21E numbers for the time being. Keen investors should be wary of the upcoming weaker results, given operational disruption led by the Covid-19 and plummeting oil prices, and thus should be adopt a nimble trading strategy or be prepared to weather through a period of volatilities.

Risks to our call include: (i) lower-than-expected margins, (ii) slower than-expected order-book recognition.

Source: Kenanga Research - 27 May 2020