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UMW OG’s Shares Up 58.2% Since Debut; Aims To Double Revenue In 5 Years
By: Ong Qiuying
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By: Brian Brinker
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UMW Oil & Gas Corporation (UMW OG) appears to be in a great position to take advantage of the growing oil and gas sector. With offshore drilling on the rise, demand for rigs and drilling technologies is increasing. UMW OG should be able to tap into this to secure strong returns and generate solid profits.

Globally, the oil and gas sector is set to enjoy a sustained boom. Oil and gas activities are projected by Douglas-Westwood to grow 26 percent per annum over the next six years. Between 2013 and 2018, some 26,063 new wells will be drilled in order to meet rising demand for petroleum.

Demand for jack-up oil rigs will rise over this period, with companies like UMW OG well positioned to tap into this growth. Most jack-up oil rigs are now in use and few units are sitting unused. This is because more complex drilling environments are creating demand for additional oil rigs.

In Malaysia, the oil and gas sector is projected to grow 5 percent per year through 2020 by the Malaysian Investment Development Authority. By 2020, the sector should account for some RM131.4 billion in national income. While UMW OG primarily focuses on the Malaysian market, the company has also been expanding in other regional markets.

South East Asia’s oil and gas sector as a whole is well-positioned to enjoy sustained growth over the coming years. Douglas-Westwood is expecting growth of 11 percent per annum from 2012 to 2018. The company projects that across South East Asia about 455 wells will be drilled annually from 2013 to 2018.

As both the Malaysian and South East Asian oil sectors develop and expand, UMW OG should be able to tap into rising demand to generate profits. The development of the oil sector may also allow the company to diversify into upstream activities.

Company Profile

UMW OG, a Malaysian multinational oil and gas company, supports two main activities in the upstream sector: Drilling services (offshore drilling and hydraulic workover services), and Oilfield services (threading, repair, and inspection services). The company’s key focus is servicing and operating jack-up rigs.

UMW OG’s core revenue contributor is its offshore drilling services. The company is the sole Malaysian company operating in the offshore drilling space and has a strong track record of success in Malaysia.

UMW OG currently owns four jack-up rigs, which constitutes 24 percent of the market share in Malaysia. The company also owns one of the four semi-sub rigs in Malaysia. The company has been aggressively expanding its fleet and plans to add more units.

Financial Highlights

The company’s 9M13 yielded RM530.6 million worth of revenue, with drilling accounting for RM496.8 million. Oilfield services generated another RM33.3 million with other services accounting for the rest of revenue. The EBITDA came in at RM150.9 million, representing a 177 percent year-over-year growth, with drilling accounting for the bulk RM127.5 million.

The company has been growing rapidly. In 2011, the company generated only RM550.4 million in revenue, but expanded to RM724.3 million in 2012. Core net profits declined from RM85 million to RM69.6 million during this period as the company reinvested its earnings.

In FY13, the company’s revenues are projected to stay relatively unchanged at RM745.2 million, but its core net profit will rise to RM140.1 million. In FY14, revenues should rise to RM965.2 million with net profits expanding to RM287.4 million.

Key Developments

• UMW OG’s focus is on building its asset base. It acquired one oil rig in May 2013 and is expected to take delivery of two new jack-up rigs in 2014, which would elevate its jack-up fleet to five.
• UMW OG awarded a US$218 million contract to Keppel FELS for a rig vessel, slated for delivery in September 2015.
• The company is planning a RM1 billion capital expenditure in 2014 for its expansion plan in the South East Asia region.
• The company has a strong contract backlog of approximately RM1.4 billion as of December 2013. It also secured a PetroVietnam contract in 2013. This helps to provide a strong cashflow stability.
• The company is currently bidding for RM3 billion worth of Malaysian government contracts.

Brokers’ Recommendations & Catalysts

Maybank Investment Bank believes that growth in the overall oil and gas industry will propel UMW OG forward. The company has given a “Buy” recommendation and set a target price of RM4.80.

Maybank also notes that UMW OG is taking advantage of Malaysia’s import-substitution opportunities. Further, the company is well-positioned to take advantage of jack-up rig demand and the replacement cycle. According to Maybank, both regional and global trends will support the company’s growth in the near future.

CIMB Bank is also ranking UMW OG as a “Buy”, citing its plans and progress in regards to expanding its fleet as catalysts. CIMB notes that the company’s expansion plans are on schedule. The company also notes that there is a shortage of rigs in Malaysia and that Petronas gives preference to Malaysian-owned assets.

Source: FactSet

In The Spotlight
Since its listing on 1 November 2013 at RM2.80, UMW OG’s shares have soared to RM4.43 as of 7 February 2014, representing a significant 58.2 percent jump. UMW OG’s president, Rohaizad bin Darus, sheds light on UMW OG’s business with Shares Investment during the “Spotlight On Malaysia” event.

UMW Oil & Gas Corporation's President, Rohaizad bin Darus

Shares Investment: What do you think are some of the key growth drivers for UMW OG this year?

Rohaizad Darus: The main driver would be the higher demand in the Asia Pacific region for drilling services as there are increased oil and gas exploration activities. On top of this, there is a shortage of drilling rigs in this region, as there are also increased drilling activities all over the world such as Mexico and North Sea where much of the international players are in.

There is a shortfall where we can tackle the growth by adding more assets to our portfolio. Furthermore, this trend is significant in Malaysia, where only two out of 18 rigs are local.

SI: What is your view on the current rig building space and will the high demand lead to higher premiums for rigs and erode margins?

RD: Indeed, the tight building space in the industry has led to premiums for the purchase of rigs. There are three ways to get the rigs: to build from scratch in yards, which will take 24 months; buying from speculators who have rigs that are semi-completed; and from larger companies which are exiting the jack-up rig space to move into deepwater activities.

There is certainly a tradeoff to either pay a premium to get a rig in a shorter timeframe or to wait for the delivery of the rig from a yard. In my view, the rig, if delivered earlier, will be able to rake in more earnings and take advantage of the strong demand, making the extra premium worthwhile. Nonetheless, in our long-term plan, we are aiming to build one rig from the yard every year and to purchase rigs by speculators if such opportunities arise and resources permit.

SI: On revenue breakdown, the bulk comes from drilling activities and 6 percent from oilfield services. Geographically, 66 percent of revenue comes from Malaysia while 34 percent comes from overseas. How do you see the revenue composition change going forward?

RD: Drilling services remain our main focus and driver of our revenue and earnings. Notably, with every rig added to its asset base, we are able to expand the revenue base by a significant 20 percent. Oilfield services, on the other hand, is expected to grow organically as we look to increase market share and create a presence in the markets where we are currently at.

We expect our revenue pie to continue growing both in Malaysia and in the region to spread out evenly going forward. This diversification in the region will help cushion any negative impact if a slowdown happens in any country.

SI: Where do you see the company in the next five years?

RD: I foresee the company to more than double its rigs and revenue as well as to go beyond Asia Pacific in its geographical reach. In the next five years, we will also prepare the company to move towards deepwater activities, which is our ultimate target.

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.


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