KUALA LUMPUR: UMW Oil & Gas Bhd’s (UMW-OG) share price received a minor boost after the loss-making company bagged two jack-up drilling services, but there are no signs that there will be any significant change in sentiment towards the stock in the near term.
On March 10, UMW-OG was awarded a jack-up drilling rig services contract by Petronas Carigali Sdn Bhd’s subsidiary Vestigo Petroleum Sdn Bhd to drill one well. Four days later, the company received a similar contract from British oilfield company Petrofac Ltd for two wells.
UMW-OG’s shares rose 3.17% to 65 sen yesterday on news of the second drilling contract, but the gain is hardly significant considering that the stock was at the 70 sen level after the announcement of the company’s demerger from UMW Holdings Bhd on Jan 19. The stock in fact has been lingering between 63 sen and 65 sen since Feb 28.
UMW-OG did not disclose the value of both charter contracts, which are set to commission this year, but said that the contracts should contribute to its book in the current financial year ending Dec 31, 2017 (FY17). This adds to its existing contract value worth RM833 million, and lower depreciation following major impairments done in the fourth quarter of FY16.
Analysts, however, have opined that contribution from the two contracts — being spot contracts averaging 30 days per well — will not be significant. “It is positive, but the contract is small in value, and they are only there for very short term. I think it will only marginally impact its share price,” an analyst told The Edge Financial Daily.
For many, concerns remain about UMW-OG’s restructuring plan which involves the demerger from UMW Holdings and the acquisition of Icon Offshore Sdn Bhd and Orkim Sdn Bhd. A week after the Jan 19 announcement, UMW-OG’s share price dived 23.6% from 89 sen in just a week before hitting an all-time low of 63 sen on Tuesday.
According to analysts, the acquisition plan is burdened with pricey valuation of the two companies. Even less attractive is the rights issue at 50 sen per UMW-OG share to raise up to RM1.8 billion, which will be used mainly for the acquisition.
AmInvestment Bank said the acquisition is “value-destructive” for UMW-OG, with the unjustified price-to-book value of Icon and Orkim at 0.7 times and 3.6 times respectively. “Without these acquisitions, we estimate that the merged entity’s much-needed recapitalisation plan could have been cut by 60%,” it said.
TA Securities opines there is another side to the merger. “UMW-OG’s cash flow difficulties will be alleviated by Icon and Orkim. Furthermore, after the rights issue, the merged entity’s net gearing will reduce to 0.91 times from 1.69 times currently,” it said in a note.
Overall, restructuring will be good for the company and industry in the long run, but another bigger issue looms for the jack-up rig service provider — oversupply.
“The mergers will make our industry players stronger and more competitive,” the analyst said. “But the main concern is jobs. If there is no job in the jack-up rig charter market, it will not help,” he added.