UMW Oil & Gas Corp Bhd
(Oct 15, RM3.23)
Upgrade to buy from hold with target price (TP) of RM4.15: UMW Oil & Gas (UMWOG) is insulated from the recent decline in crude oil prices given their high exposure to the shallow water production market in Southeast Asia (SEA). Five of the group’s six drilling rigs are jack-ups which are for shallow water use where field operating costs are about US$50 (RM163) per barrel in SEA. UMWOG’s semi-submersible, NAGA 1, is on long-term charter to Petronas Carigali in Malaysia until August 2016.

UMWOG has full utilisation until the second quarter of 2015 (2Q15) with RM1.5 billion in order backlog. The fleet of six rigs are fully utilised until 2Q15 and UMWOG has also secured a charter for their seventh rig (NAGA 7) with target delivery date of Dec 15. The full utilisation will help the group through the period of new rig deliveries which will dilute daily charter rates (DCR). The management views that DCR will weaken with an expanding global rig fleet and softer crude oil prices. But since jack-ups remain the cheapest option for exploration and production drilling, longer-term charter rates will stabilise.

Our forecast earnings are intact with upside potential as we have yet to include NAGA 9.

UMWOG is maintaining its base case expansion plan of one rig per year, suggesting it will order the ninth rig for financial year 2016 (FY16) delivery soon. We bumped up FY14 to FY15 earnings by 4% to 9% respectively as the DCRs secured recently have been slightly above our expectations.

Upgrade to “buy” from “hold” with TP intact at RM4.15. Our TP is pegged to 22 times FY15F price-earnings; the valuation target has been reduced from 24 times previously, to capture weaker market sentiment and to value the stock on par with other large cap peers in our coverage like SapuraKencana. There could be downside risk if crude oil prices drop sharply again. — AllianceDBS Research, Oct 15

This article first appeared in The Edge Financial Daily, on October 16, 2014.