Uzma’s low costs keep it going


The company leverages on technology to ensure competitiveness and viability

DESPITE the ongoing downcycle in the offshore oil and gas exploration industry, Uzma Bhd says its Tanjung Baram marginal oilfield venture remains a feasible project, thanks to the group’s ability to keep costs low.

Dismissing concerns that more risk-service contracts (RSC) for the development of marginal oilfields in Malaysia could be cancelled amid the ongoing cost-rationalisation initiative of Petroliam Nasional Bhd (Petronas), Uzma says production from all sources remains vital to the country, regardless of the prevailing market conditions, for both economic and strategic reasons.

“The drop in global crude oil prices means volume production now plays an important role in minimising the impact of reduced oil revenue to the country; hence, production from all fields plays an important role,” Uzma Bhd managing director Datuk Kamarul Redzuan Muhamed says.

“The key factor is the cost of production and in the case of Uzma’s Tanjung Baram RSC, we believe our low operating expenditure for the project makes the field viable despite the current low oil price environment,” he explains in an e-mail to StarBizWeek.

Uzma, however, could not state the viability threshold for the project, citing confidentiality clauses.

The company has a 30% stake in the Tanjung Baram RSC in a partnership with UK-based EnQuest plc, which owns the remainder 70% interests in the project.

Having achieved first oil in June 2015, the Tanjung Baram field, offshore Sarawak, is now producing at a rate of about 2,000 barrels per day (bpd).

Uneconomical venture

Since 2011, Petronas had begun a process of awarding RSCs for the development of marginal oil fields in Malaysia to local companies that are partnered with international players, and Uzma has been one of the beneficiaries.

The other RSCs included the Kapal, Banang and Meranti cluster of small fields, located offshore Terengganu, in which Petra Energy Bhd has 30% interests; the Ophir project, located offshore Terengganu, in which Scomi Energy Services Bhd has a 30% stake and Vestigo Petroleum Sdn Bhd has 20%.

Two RSCs saw some changes this year: One is the cessation of the Balai Cluster project, located offshore Sarawak, operated by a consortium comprising Dialog Group Bhd , ROC Oil Ltd and Petronas Carigali Sdn Bhd in February.

The other is transfer of the Berantai RSC project, located offshore Terengganu, from the the consortium of SapuraKencana Petroleum Bhd (SapKen) and the United Kingdom’s Petrofac Energy Developments Sdn Bhd, to Vestigo Petroleum Sdn Bhd last month.

Vestigo is a wholly-owned subsidiary of Petronas.

Around the Malaysian peninsula, Petronas has identified 106 marginal oil fields representing more than 580 million barrels of crude oil. These marginal oil fields are said to have reserves of less than 30 million barrels of oil.

But marginal oil fields are generally uneconomical venture, as such projects may not be able to produce enough net income to make it worth developing at a given time.

And when there is a prolonged weakness in global crude oil prices, the viability of these projects will come into question.

The award of RSCs by Petronas happened when oil prices were over US$90 (RM363.19) per barrel.

It is notable that the national oil company had last year already announced that it would not award any new RSC as long as crude oil prices remained below US$80 (RM322.68) per barrel.

“RSCs are not really favourable to Petronas, which has to pay fixed fees to the operators, regardless of the level of global oil prices,” an industry source says.

“Some RSCs are just way too costly for Petronas to continue under the current low oil price environment, hence the cessation,” he explains.

He points out that the cost-effectiveness of such projects is therefore the main point of consideration for continuation.

According to TA Research, Uzma’s Tanjung Baram project has a significantly lower breakeven price given lower capital expenditure and lifting costs.

For comparison, the brokerage notes that Uzma spent around US$50mil for its platform, while Dialog’s capital expenditure (capex) for the Balai project was estimated at around US$200mil-US$250mil.

“We believe the lower capex (of Uzma) was due to the field having shallow water depths of only 10m-20m,” TA Research says in its research note on the company.

It adds that Uzma’s Tanjung Baram RSC will provide a boost to the company’s earnings upon capex recovery.

“Capex spent is fully recoverable and remuneration fees will be accrued pending full repayment of capex.

“In essence, costs for developing the field are incurred by Uzma upfront and capitalised.

“After the field starts producing, oil revenues generated are used to offset field opex and reimbursement of upfront capex.

“Thereafter, any remaining profits are paid to Uzma as remuneration fees.

“Finally, surplus profits net of fees are allocated to Petronas, as field owner,” TA Research explains.

Eventual upside

In a briefing organised by the Malaysia Petroleum Resources Corp early this year, Kamarul had stressed the importance of deploying innovative technology to keep operating costs low to navigate through the downturn of the oil and gas industry.

“We need to use technology to try to get the cheapest barrel of oil,” he said.

Expressing optimism over the long-term potential of the oil and gas industry, Kamarul points out that the continued easing of the global oil glut will lead to recovery of the commodity prices.

“There will be a natural decline in oil production as companies stop investing in exploration (as is happening),” he argues.

TA Research notes that there may be upside to Uzma’s earnings if oil prices recover sooner than expected.

For instance, based on its per barrel oil price assumptions of US$45 for financial year (FY) ended April 30, 2016, US$50 for FY2017, and US$55 for FY2016, TA Research says remuneration fees for Uzma are only expected to flow in by FY2020.

However, if oil price increased US$10 per barrel, full capex recovery would be possible by 2018.

“Subsequent to this, Uzma will be able to receive remuneration fees of RM11mil-RM14mil earlier, in 2019-24. On the flipside, if our oil price assumption is lowered by US$10 per barrel, remuneration fee is only expected to kick-in by FY2021,” TA Research says.

Th brokerage recently initiated coverage on Uzma, with a “buy” recommendation and target price of RM2.29, based on 11 times its FY2017 earnings.

TA Research says it favours Uzma for the group’s diversified and resilient earnings, given its exposure to both the upstream and downstream sectors of the oil and gas industry.

“Uzma has the best of both worlds with both greenfield and brownfield exposure.

The former enables it to ride the capex upcycle when oil price rebounds. Meanwhile, the latter provides stable earnings during a downcycle,” it says.

“Valuations are attractive as Uzma is currently trading in-line with peers despite superior earnings growth. In addition, it is also trading two times below its historical price-earnings ratio,” it adds.

Uzma’s shares closed unchanged at RM1.82 yesterday.

That represented a year to date decline of 9%.

Uzma , oil and gas , RSC