CIMB Research upgrades UMW Oil and Gas to Add, TP 33c

In its published note, the research house noted that UMW was actively negotiating to divest some of its remaining 14 unlisted O&G assets, following the disposal of Arabian Drilling services in Oman and a China O&G asset.

KUALA LUMPUR: CIMB Equities Research has upgraded UMW Oil and Gas (UWM-OG) from Hold to Add on the back of a recent sharp sell-off in its share price, which it believes is unwarranted in view of its improving fundamentals. 

It said on Wednesday its discounted cashflow-based target price has been raised to 33 sen (unchanged cost of equity of 13%), as it back-loaded its dry docking assumptions, based on company guidance. The last traded price was 25 sen.

“Re-rating catalysts include a continuing recovery in utilisation rates, with Petronas preferring local owners to provide for its drilling needs, and a return to profitability.

“Downside risks include oil price decline which could lead to a reduction in Petronas’ capex spending,” it said. 

CIMB Research said UMW-OG suffered net losses for the past three years, due to the sharp drop in charter rates and utilisation rates in the aftermath of the oil price rout in mid-2014. 

UMW-OG’s worst year, operationally, was in FY16, when its utilisation rate fell to only 20%. Average charter rates fell from US$153,000 a day in FY14 to just US$71,000 a day in FY17. 

In addition, UMW-OG also had to make substantial asset impairments of RM2.1bil over the past three years, significantly affecting its net profit report card.  

However, utilisation rates rebounded sharply to 68% in FY17, which helped UMW-OG narrow its losses substantially. Losses were also reduced by way of UMW-OG implementing wage cuts for its expensive rig-based crew, in line with a fall in global crew wages, and other measures to reduce costs. 

“Management has planned more cost cuts for FY18F and expects average utilisation rates to rebound to a sustainable level of 80% for FY18-20F. As a result, we expect UMW-OG to report FY18F net profit of RM49mil,” it said.  

CIMB Research said in addition to topline and operating cost savings in FY18F, it expects UMW-OG to also see lower depreciation costs in FY18F after asset impairments made last year, as well as savings in interest expense from the reduction in borrowing levels after it successfully raised RM1.82bil via a rights-cum-redeemable-convertible-preference-share issue, of which RM1.5bil was used to repay existing borrowings.  

The remaining RM1.9bil in debt was refinanced into two bullets – one in five years (US$145mil) and another in 10 years (US$220mil) – with the remaining in revolving credits and trade facilities that can typically be rolled over. 

“As such, the immediate pressure on UMW-OG has eased in our view, and the company has the next four years to accumulate cash for its first bullet debt repayment,” it said. 

The research house pointed out that global jack-up (JU) rig utilisation rates have recovered from a low of 63% in February 2017 to 67% in February 2018, although the charter rates have not budged from their lows given the stilllarge oversupply. 

Utilisation rates in Southeast Asia have jumped from a low of 35% in November 2016 to a high of 62% in August 2017, before weakening to 55% in February 2018, probably due to the monsoon season. 

Clarksons is forecasting global utilisation rates to rise from 66% at end-2017, to 71% at end-2018F and 74% at end-2019F. 

This is on the back of expected higher levels of offshore oil and gas production. 

Meanwhile, the outstanding JU orderbook of 85 units as at end-December 2017 represents 15.3% of the 555-strong fleet of JUs, which is a substantial drop from the peak of 27% in mid-2014. 
“We believe this is positive for the JU market balance, as most of these units should be delivered in the next three years,” said CIMB Research.
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