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The week of 18 August– 24 August 2016
Volume 28 Number 01
Stocks selected under this section are meant for medium and/or long-term investments. When stocks are recommended under this section, it does not mean that its price will take 1 or 2 years to move. If the price moves too
fast,
i
Capital® may recommend a sell. Or if it is still attractive after holding for a while and its price has gone up, we may still recommend holding or even buying more. Or if it declines,
i
Capital® quotes Warren Buffett who
was supposed to have said this : “If you aren’t prepared to see your stocks go down 50%, you shouldn’t own them. Be prepared for declines – and arrange your financial affairs such that you won’t have to sell out”.
B.1. UMW Oil & Gas Corporation (UMWOG, 5243)
This week,
i
Capital
provides an update on UMW
Oil & Gas Corporation Bhd
(UMW OG) which was listed
on the KLSE in Nov 2013.
The last time
i
Capital did
the write up on the company
was almost a year ago. How
have things changed for this
one-time favourite of the
investor community ?
UMW OG is mainly
involved in providing
drilling rigs for the oil and
gas industry. In general,
there are 3 classes of
rigs; namely, jack up rigs,
semi-submersible rigs and
drillships. The difference
lies in the depth of the
waters where the well is to
be drilled. Jack up rigs can
drill in shallow waters with
depths of up to 450 feet (ft)
while semi-submersibles and
drillships can drill up to 9,000
ft and beyond respectively.
UMW OG owns 7 jack up
rigs and 1 semi-submersible.
The jack up is also the
most common in the oil and
gas industry and the cost
averages around US$200
mln each (approximately
RM800 mln).
Singapore-based Keppel
KFELS (a subsidiary of
Keppel Corporation) and
Sembcorp Marine are among
the major builders of jack up
rigs and semi-submersibles
in the world. However, in the
recent years, the Chinese
yards have come up in terms
of quality besides their lower
price and more attractive
financing arrangements
with customers. They
have done so by recruiting
the Singaporean project
managers to their yards
and from there acquiring
the required skills. A surge
in orders before oil price
plunged and then cut back
in investment spending by
the global oil majors led to
an oversupply of jack up rigs
that is currently plaguing the
market.
Updates
In Sep 2015,
SapuraKencana Energy
Peninsula Malaysia
Inc., SapuraKencana
Energy Sarawak Inc. and
SapuraKencana Energy
Sabah Inc (collectively as
SKPetro), awarded the
company a contract for
the provision of its NAGA
8 drilling capabilities. The
work is for up to 18 wells
with an extension option for
3 additional wells. So far
6 wells have been drilled.
The programme runs until
Nov 2017. NAGA 7 is also
on contract with Petronas
Carigali S/B (PCSB) to drill
7 wells with an extension
option of 1 plus 1 well
starting from Oct 2015.
PCSB is the exploration and
production arm of Petroliam
Nasional Bhd, the national
oil company of Malaysia. The
estimated duration of 1 well
is 1 month. This contract is
nearing its end.
In May 2016, the
company received a letter
of award from PCSB for its
NAGA 6 to participate in
its drilling programme. The
contract which will start in
4Q 2016, is for 2 years with
a 1-year option to extend.
While this is expected to
contribute positively, drilling
rigs are charged based
on their daily charter rate
(DCR). The higher the
number of days the rigs is
used, the higher the number
of days UMW OG can charge
the customer the DCR and
vice versa. If the customer
does not use the rig, UMW
OG is not able to charge the
DCR. With activities having
been cut drastically, the
utilisation is not expected
to be high over the contract
period. In addition, due to
the oversupply of jack up
rigs as mentioned earlier,
the DCR has also fallen
drastically.
Table 1
shows its
respective rigs and
contracts.
Unlike Perisai Petroleum
Bhd which has been
delaying the delivery of its
second and third jack up
rigs thereby avoiding to
recognise the respective
expenses and borrowings on
its balance sheet, UMW OG
already has taken delivery
of its rigs and therefore
recorded them onto its
books. It is in an even more
desperate situation to get
contracts to justify its sunk
costs and investments. Even
though its jack up rigs are
being warm stacked, UMW
OG still needs to account for
the annual depreciation and
interest cost over the life of
30 years and the term of the
loan respectively.
Already having seen its
total borrowings ballooned
from RM860 mln in
FY2013 to RM3.6 bln as
of 1Q FY2016 and in dire
need for cash, its parent
company, conglomerate
Principal activities
Provides offshore services
to oil & gas exploration and
production industry.
Major shareholder/s
UMW Holdings Bhd, Skim
Amanah Saham Bumiputera.
Latest paid-up
2.162 bln shares of RM0.50 each
Market capitalisation
RM2.119 bln @ RM0.98
2016 P/E Ratio:
NA@ RM0.98
Sources: UMW OG, Capital Dynamics
1st quarter RM mln
31/03/16 31/03/15
Sales
87.68 312.5
Pretax profit
-68.42 42.46
Net profit
-65.08 32.15
Finance cost
26.03 11.80
Depreciation
68.36 48.98
Cash and cash
equivalent
887.9 973.8
UMWOG is
mainly involved
in
providing drilling rigs for the oil and
gas industry.
Financial highlights (RM mln) – 31 December
2011
2012
2013
2014
2015
Sales
550.3
724.3
737.8
1,015
839.9
Pre-tax profit
102.1
74.38
206.9
284.2
-348.4
Net profit
78.31
61.83
190.6
252.0
-369.3
Adjusted net profit
80.33
63.70
172.0
218.7
-353.4
Depreciation
49.63
57.10
89.34
133.1
246.1
Finance cost
31.46
40.15
23.74
26.09
64.06
Current assets
401.7
519.5
1,626
1,718
1,557
Current liabilities
835.0
978.4
498.4
1,533
2,555
Fixed assets
1,258
1,477
2,247
4,022
6,081
Total assets
1,709
2,065
3,891
5,756
7,646
Total debt
799.8
798.5
859.6
2,255
4,004
Return on equity (%)
156.3
37.86
70.48
7.719
NA
Source: UMW Oil & Gas Corporation
Naga 4 .
Table 1 UMW OG’s Rigs
Rig name Rig type Delivery
Builder
Current client and contract
NAGA 1 Semi-
sub
1974 Mitsubishi Heavy Industries On hire with PCSB from Nov 2010 to Aug 2018
NAGA 2 Jack up
2009
PT Drydocks
Warm stacked
NAGA 3 Jack up
2010
PT Drydocks
Warm stacked
NAGA 4 Jack up Feb 2013
Keppel FELS
Warm stacked
NAGA 5 Jack up May 2014
Keppel FELS
Warm stacked
NAGA 6 Jack up Sep 2014 Tianjin Haiheng Shipbuiliding
With PCSB for 2 years + 1 year. To start in 4Q 2016
NAGA 7 Jack up Dec 2014 Tianjin Haiheng Shipbuiliding Contract with PCSB nearing its end. No subse-
quent contract.
NAGA 8 Jack up Sep 2015
Keppel FELS
With SKPetro for 18 wells + 3 wells ending Nov 2017.
Source: UMW OG
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