Is UMW’s good O&G run ending?

  • Business
  • Saturday, 18 Sep 2010

UMW Holdings Bhd’s promising performance in the oil and gas (O&G) industry hit a snag when its O&G division suffered losses in the first and second quarters of the year mainly hampered by weak demand.

For the six months ended June 30, the division recorded a RM32.7mil loss attributable to shareholders versus a RM23.2mil profit in the same period last year.

There was also speculation that the O&G arm could suffer large losses or provision for losses due to a setback in investment returns which UMW has vehemently denied.

Are these signs that the conglomerate’s good run in the O&G business is coming to an end?

President and group chief executive officer (CEO) Datuk Abdul Halim Harun, however, remains unfazed by the O&G division’s worrying performance this year.

He is still confident of the division’s growth potential and ability to contribute to bottomline once the O&G industry picks up and contributions from its various investments come in.

He expects losses to be on the downtrend in the third and fourth quarters boosted especially by contributions from 34.3%-owned Zhongyou BSS in China, which is fully operational, and 31%-owned United Seamless Tubulaar Private Ltd (USTPL) in India.

According to Abdul Halim, pipe manufacturer USTPL had its first shipment of 200 tonnes of pipes for the Indian market at the end of last month.

Moreover, its 22.3%-owned associate company, WSP Holdings Ltd, which incurred losses in the first and second quarters due to the imposition of counter-veiling and anti-dumping duties by the US on seamless pipes made in China, has secured new markets especially in South America, thus helping to reduce its losses.

“WSP is in the midst of setting up a plant in Thailand which is expected to start operations early next year.

“The Houston pipe manufacturing plant is almost ready as well.

“These will enable us to focus on the US market and other markets if we have any excess capacity,” Abdul Halim says.

Contribution to bottomline is also expected to come from UMW’s jack-up drilling rig, Naga 2.

The group recently secured a US$183.12mil (RM578.66mil) contract from Hess (Indonesia-Pangkah) Ltd in Jakarta for Naga 2 for exploration works in Indonesia.

“We should be able to reduce our losses in the third and fourth quarters and hope to see a positive figure from the division by year end,” Abdul Halim says.

UMW is currently in negotiations with two parties – one local and one foreign – to charter its other jack-up rig Naga 3, which is expected to be ready soon.

“The parties look interested. Negotiations are ongoing,” Abdul Halim says.

Abdul Halim sees better prospects for the O&G division next year as it benefits from the full contribution of USTPL and Naga 2, WSP’s expected turnaround and possibly a charter contract for Naga 3.

“The other O&G businesses are also showing signs of improvement. I believe 2011 and 2012 will be good years for the O&G division especially with the pick-up in the economy and in turn the industry,” he says.

There are also plans to review the potential for an initial public offering (IPO) for the O&G division next year.

Halim says there should be a clearer picture of how the O&G industry will perform by the middle of next year.

“If it picks up as projected, then we will look seriously at an IPO for the O&G division. The timing must be right for us to unlock value and fetch a good price from the listing,” Abdul Halim says, adding that the group is considering an IPO on the local or even a foreign bourse.

On more mergers and acquisitions (M&As) for the division, Abdul Halim says UMW is looking at consolidating its O&G division and may consider M&As again only after a year or so.

The division has been expanding very fast in the past few years and currently has nearly 100 companies in its stable.

“We have to tidy up the division and make sure that everything is in order and performing well. We will be looking at restructuring, reorganising and maybe even disposals,” Abdul Halim says.

AmResearch in a recent report thinks concerns on UMW’s O&G division has been overplayed.

It notes that a potential turnaround at WSP in the second half of the year, coupled with fresh earnings from USTPL and capacity build-up at Zhongyou BSS should lead to an earnings rebound of UMW’s O&G division.

Halim, who will be retiring as head honcho of UMW at the end of the month, is instrumental in restructuring the conglomerate to focus on four strategic business units – automotive, heavy equipment, O&G and manufacturing and engineering.

He spearheaded UMW’s foray into the O&G division nearly a decade ago when the group identified the industry as a core business.

Abdul Halim will remain as an adviser to the new president and CEO Datuk Syed Hisham Syed Wazir until Nov 15 to ensure a smooth transition.

  UMW :  [Stock Watch]  [News]

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