Mega deal loss spells joy for UMW Oil & Gas

  • Business
  • Friday, 12 May 2017

For UMW Oil & Gas president Rohaizad Darus, cash flow is a top priority for the company

KUALA LUMPUR: After abandoning a deal to create one of the largest oil and gas services providers in Malaysia, UMW Oil & Gas Corp. expects to return to profit next year with the return of full utilization of its drilling rigs.
Company President Rohaizad Darus said contracts have jumped, with rig utilisation climbing to 71 percent from 20 percent in the fourth quarter as oil firms operating in Southeast Asia resume spending on exploration and production.

Activity by state-controlled companies, including Petroliam Nasional Bhd., Indonesia’s Pertamina Persero PT and Thailand’s PTT Pcl is increasing, based on tender invitations the firms have received, he said.

“We are currently bidding for 35 tenders totaling 3.4 billion ringgit” ($783.1 million), Rohaizad said in a May 9 interview at the company’s Kuala Lumpur headquarters. “We hardly hit 20” at the same point last year.

A rebound in crude oil after OPEC cut output targets along with price stability have buoyed confidence among firms to resume investing, Rohaizad said, noting that the pick-up in utilization comes less than six months after the reductions were agreed. 

UMW Oil & Gas shares have slumped 30 percent this year, making the stock the worst performer on the FTSE Bursa Malaysia Top 100 Index of the nation’s top large and mid cap companies.

The gauge has added 10 percent. The oil price has erased most of its gains since the Organization of Petroleum Exporting Countries agreed to cut supply from January. Saudi Arabia and Russia, the world’s largest crude producers, signaled this week they could extend production cuts into 2018.

The company on May 4 abandoned a plan to buy its rival petroleum service providers Icon Offshore Bhd. and Orkim Sdn. as part of a 2.9 billion ringgit deal to scale up and weather a downturn. 

Instead, it’s planning to raise 1.8 billion ringgit to pare debt and boost working capital.

“To me, its a blessing in disguise to be left alone, as the recovery has not been very clear for the industry and us to be a bigger entity to land large contracts,” Rohaizad said. 

The enlarged entity would have comprised more than 50 assets including rigs, vessels and tankers, compared with its current fleet of seven rigs.

Pare Debt

The rights shares underwritten by its major shareholder Permodalan Nasional Bhd., Malaysia’s largest state-owned asset manager, would generate about 80 million ringgit in annual interest savings for at least five years, while freeing about 600 million ringgit in cash that will enable the company to get better terms from suppliers, Rohaizad said.

“Charter rates are still depressed,” he said. “We want to be a lean company with the financial stamina to weather this slow environment, rather than trying to be over ambitious.”

AmInvestment Bank Bhd. downgraded the stock to hold from buy on May 5, citing the company’s operational challenges amid lower utilisation and depressed rates. 

“The group’s losses and negative cash flow are unlikely to abate in the near term, unless there’s a significant reversal” in regional rig utilization rates, said analyst Alex Goh.

For Rohaizad, cash flow is a top priority for the company’s longer term survival.

“We will be there when the big recovery comes along,” he said.- Bloomberg
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