THE three-party merger between UMW Oil & Gas Corp Bhd (UMW-O&G), Icon Offshore Bhd and Orkim Sdn Bhd has set tongues wagging on which companies will be next in line for the government-driven consolidation.
Industry sources say the merged entity, which has yet to be named, will be the one to lead the consolidation exercise in the oil and gas (O&G) sector.
“The merged entity is the mothership. The three companies — UMW-O&G, Icon and Orkim — are quite big, and should have the muscle to swallow up more assets once things stabilise,” an O&G executive familiar with industry-wide consolidation tells The Edge.
UMW-O&G officials have said the merger will be completed in the third quarter of the year.
Nevertheless, apart from government-linked companies, individual controlled-companies could prove more difficult to merge, for many reasons. Simply put, it would take a lot for them to give up control.
To recap, UMW Holdings Bhd is looking at distributing its entire 56% stake in UMW-O&G to its shareholders in the form of dividend-in-specie. After the exercise, the shareholders will own shares directly in UMW-O&G.
In the proposed merger, UMW-O&G will take over Icon and Orkim by issuing shares. UMW-O&G is paying 80 sen apiece at a 10% discount to market price for Icon. Icon shares are valued at 50 sen each — a 15% premium to the current market price. On the other hand, Ekuinas’ 95.5% stake in Orkim will be sold to UMW-O&G for RM472.7 million through the issuance of new shares.
UMW-O&G will buy 497.8 million Icon shares, or a 42.3% stake, for RM248.9 million via the issuance of 311.1 million UMW O&G shares at an issue price of 80 sen apiece, which, in turn, will trigger a mandatory general offer for all the remaining Icon shares.
A rights issue of new UMW-O&G shares, with free warrants on the basis of one for four, is expected to raise gross proceeds of RM1.8 billion, mainly to repay borrowings, with part of it to be used for the acquisitions.
However, some analysts are not sanguine about the deal. For instance, TA Securities says “the news comes as a negative surprise for us. This is due to the acquisitions being rather expensive, heavy dilution after the rights issue and share sale, and minimal synergies from Orkim and Icon”.
Likewise, CIMB says, “We are negative on this [proposed merger] as the acquirees are priced much higher than UMW-O&G and the rights issue is unnecessarily large and dilutive … Yawning valuation gap does not favour UMW-O&G shareholders.
“UMW-O&G plans to buy Ekuinas’ 42.3% stake in Icon at a price-to-book value of 0.82 times in exchange for new UMW-O&G shares valued at only 0.59 times. The subsequent mandatory general offer will offer Icon shareholders a choice of new UMW-O&G shares at the same low valuation or a cash payment. UMW-O&G also plans to buy Orkim at P/BV of 3.56 times in an all-cash deal.”
However, the more pertinent question is whether UMW-O&G could weather the current downturn alone.
For the nine months ended September, 2016, UMW-O&G suffered a net loss of RM267.75 million from RM267.34 million in sales. The company has been making losses for the fourth consecutive financial quarter.
Much of the losses were recorded in the third quarter ended Sept 30, 2016, (3QFY2016) during which UMW-O&G suffer a net loss of RM135.43 million from RM49.65 million in turnover.
In its notes accompanying its financial results, UMW-O&G says, “The group recorded low revenue in 3Q2016 due to low asset utilisation … as most of the group’s assets were idled. Two of the group’s seven jack-up rigs have since commenced operation in 4Q2016.”
For the nine months ended September 2016, Icon suffered a net loss of RM2.24 million from RM173.71 million in sales. In its notes accompanying its financials for the nine-month period, the company says it had a vessel utilisation rate of 52.7%.
O&G senior executives say while the deal may have drawbacks, it is a necessity.
“Sometimes you take one step back to take many steps forward,” a market watcher explains.
Post-merger, UMW-O&G will be the leading drilling company, tanker operator as well as one of the largest offshore support services players in Malaysia, with the ability to provide integrated exploration and production upstream services.
Abdul Rahman, Amir behind the merger
A factor the companies have in common is Datuk Abdul Rahman Ahmad, the CEO of Permodalan Nasional Bhd (PNB), the parent of UMW Holdings Bhd,and its 55.73%-unit UMW-O&G. UMW Holdings, in turn, is close to 56% controlled by PNB and its funds.
Before his move to PNB as president and CEO last October, Abdul Rahman was the president and CEO of Ekuiti Nasional Bhd (Ekuinas), which has a 42.28% stake in publicly traded Icon and 95% in Orkim.
“(Abdul) Rahman knows what he’s doing. He’s familiar with both companies. He and Amir Azizan (Icon CEO) are very capable individuals,” a long-time O&G industry chief familiar with both of them says.
Amir has good credentials as well. In 2003, he played a key role in the integration of MISC Bhd (then Malaysia International Shipping Corp Bhd) and AET Tankers Sdn Bhd (then American Eagle Tankers Inc), after MISC acquired the company from Singapore’s Neptune Orient Lines Ltd for US$445 million (RM1.69 billion then).
“At [Petronas] Dagangan [Bhd] he revamped the company. The share price more than doubled under his watch, and Petronas Lubricants [International] turned to profitability when he helmed it. He grew the business internationally, so I think he will grow the merged UMW-O&G as well,” a former O&G analyst says.
During Amir’s stint in Petronas Dagangan from June 2010 to September 2012, the company’s share price gained 196%, from RM6.68 to more than RM19 apiece.
Petronas Lubricants has a tie-up with Mercedes-Benz, which is at the top spot in F1 championship.
So, while it is not clear if Abdul Rahman and Amir will drive the merged entity, it is likely that they will.
Oil prices stablising
While waiting for the merger to be completed, the price of oil may stabilise further, from the current level of US$52, and hopefully inch upwards. Since December last year, oil prices have moved in the range of US$47 to US$55.
The World Bank forecasts crude oil to average US$55 a barrel in 2017, an increase of 29% from 2016 prices, and strengthen to an average of US$60 a barrel in 2018.
It is also likely that the merged entity may obtain more contract awards as a way for national oil company Petroliam Nasional Bhd (Petronas) to show its support for the merger.
While there seems to be a lack of jobs, Petronas could be awarding maintenance, construction and modification (MCM) contracts in the next couple of months. These involve topside maintenance, hook-up and commissioning and facilities improvement works. The MCM contracts, split into six packages, are estimated to be worth between RM5 billion and RM6 billion.
How the merged entity will fare in this bid can give an indication of the way forward for the other companies.
And the jobs could be a boost for the merged entity.
What next
But what more assets can the merged entity look at acquiring after the initial merger is concluded?
Market watchers suggest that TH Heavy Engineering Bhd, an ailing fabricator that is 29.81% controlled by Lembaga Tabung Haji, could be next on the list, but some industry sources beg to differ.
TH Heavy Engineering has a 57-acre yard in Pulau Indah. However, yards need a constant supply of jobs to make ends meet.
Besides TH Heavy Engineering, other fabrication yards licensed by Petronas include those owned by KKB Engineering Bhd, Muhibbah Engineering (M) Bhd, SapuraKencana Petroleum Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd, Brooke Dockyards Sdn Bhd, Boustead Heavy Industries Corp Bhd and Labuan Shipyard & Engineering Sdn Bhd.
“If you ask me, a merger with TH Heavy [Engineering] may help the pilgrim fund get rid of its problematic investment, [but] if I were running the merged entity [UMW-OG, Icon and Orkim], I would opt for Indonesian company PT Gunanusa Utama Fabricators, which is partly Malaysian owned and is a well-run company with a regional presence,” the O&G industry chief says.
It seems that Gunanusa has a Malaysian shareholder, Datuk Wan Ariff Wan Hamzah. While it is not known how much control Wan Ariff has in Gunanusa, the company seems to have the right credentials.
Besides being a well-run and profitable entity, Gunanusa has bagged contracts regionally, including engineering, procurement, construction and installation jobs for two offshore wellhead platforms, associated pipelines and tie-ins for the Zawtika Development off Myanmar.
However, it is likely that local players will feature prominently in merger and acquisition activities in the government-driven consolidation. This is one way to help build stronger and more resilient O&G players locally so that they can get a slice of the action in the international arena, rather relying on Petronas for jobs.
Better still, these merged entities could follow Petronas abroad and win overseas contracts from the national oil firm at arm’s length.
Some of the local companies have been approaching banks and government institutions for help, and others are understood to be owned by Singaporeans, with Malaysian owners fronting for them.
“There are myriad factors to look at before talks can commence, especially if it is a consolidation mooted by the government and GLCs, but let’s hope there’s more than this … there are many huge egos in the O&G industry,” the former O&G analyst says.
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