Thursday 28 Mar 2024
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UMW Oil & Gas Corp Bhd (UMWOG) is entering choppy waters again.

Six of its seven jack-up rigs are seeking new charter contracts this year. It would not be much of a problem a year ago when crude oil prices were trading at above US$90 per barrel, but certainly not now.

Worse still, new rigs are entering the market at a time when oil majors are scaling down production as demand for the commodity falls. Already, Petroliam Nasional Bhd is renegotiating its contracts awarded earlier, in line with its decision to cut capital expenditure.

As at February, 67 jack-up drilling rigs are set for delivery this year, according to data compiled by oil and gas research firm Clarksons. The oversupply of rigs is exacerbated by the deferment of drilling activities due to weak oil prices, with jack-up utilisation rates down to 72.4% in April from 83.3% six months ago, according to offshore rigs data provider Rigzone.

In view of the gloomy outlook, a large earnings shortfall is a dire possibility, some analysts say.

Maybank Investment Bank Research, in a research note, says UMWOG will face near-term earnings uncertainty until it secures contracts for its fleet.

“It will be a lessee’s market over the next 18 months as rig operators will be affected by lower daily charter rates and fewer operating days for the jack-ups. In all, we expect sequential weakness in earnings over the next three quarters, from 1QFY2015 to 3QFY2015,” it says.

With Naga 7 delivered in January and Naga 8, later this year, UMWOG is actively bidding for new contracts to enable its newbuilds to start generating revenue.

New premium jack-up rigs, which cost US$210 million to US$240 million each, are partly financed by borrowings. This exerts pressure on UMWOG to get charter contracts.

Without contracts, the assets will lie idle and incur high dry-docking costs, effectively burning up UMWOG’s cash.

According to CIMB Research, Naga 2 and Naga 3 will be out of action for up to three months following the expiry of contracts in the first quarter. The dry-docking cost for each jack-up is about US$15 million (RM54.75 million), or RM109.5 million in total.

UMWOG is currently embroiled in a suit after a client breached its commitment to utilise Naga 7.

In an April 10 filing with Bursa Malaysia, UMWOG says it is suing Manila-listed Frontier Oil Corp for breach of contract. It is seeking an early termination fee of US$19.2 million after Frontier failed to issue a bank guarantee for US$5 million and make an advance payment of US$15 million within a stipulated time.

Frontier had cancelled its initial public offering in the Philippines in June last year before the signing of the contract for Naga 7 in September. Some say the botched IPO plans could have caused a cash-flow problem for Frontier, leading it to default on its payment obligations to UMWOG.

While the loss of business could be a big blow to UMWOG, president Rohaizad Darus paints a slightly positive picture.

In a reply to The Edge, Rohaizad says the company remains “cautiously optimistic” about the outlook of the industry. However, he points out that market surveys and tender invitations are trickling in again from national and independent oil companies in Asia-Pacific and the Middle East.

“Naga 7 and Naga 8 are also being offered for these tenders, and we hope to secure some contracts,” says Rohaizad.

He says the group is reconsidering its aggressive expansion drive in light of the prevailing market environment. “The company remains on track with its medium to long-term strategy to grow its fleet to cater for global expansion. At present, we are watching the market closely before making any firm commitment, as there are still elements of volatility in the industry.”

UMWOG is currently bidding for 22 contracts worth RM5.4 billion. As at Dec 31, 2014, its order book stood at RM1.8 billion.

The recent rebound in crude oil prices may be a silver lining. After nearly six months of bearish market as well as numerous rig shutdowns in the US and elsewhere, drilling demand could be on the rise again.  

While UMWOG’s reputation and its quality fleet should ensure that it is one of the firsts in line to qualify for new jobs, it will have to contend with the oversupply of new rigs, which could cause charter rates to fall.

 

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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