UMW Oil & Gas Corp Bhd
(Nov 25, RM3.22)
Maintain hold with target price of RM3.29: Core profit for the third quarter of financial year 2014 ending December (3QFY14) increased by 10% quarter-on-quarter (q-o-q), bringing core profit for the first nine months to RM180 million, making up 66% of Hong Leong Investment Bank and 69% of consensus full-year estimates.

Despite full contribution from Naga 5, a higher-than-expected tax rate and lower margin from oilfield services have resulted in the shortfall against our expectations.

Revenue for 3Q increased by 7% q-o-q mainly due to full quarter utilisation of Naga 3 coupled with additional contribution from new hydraulic workover unit, GAUT 6, which commenced operation in August this year. Earnings before interest and tax (Ebit) margin rebounded from 26% to 29% after Naga 3 finished a scheduled repair to a few of its ballast tanks in May with full quarter utilisation.

To recap, Naga 6 was awarded US$46.5 million (RM155.77 million) worth of contracts from Petrovietnam to drill four firm wells and three optional wells. All six drilling rigs will be fully utilised in 4QFY14.

On the other hand, oilfield service remains weak due to soft demand but is expected to improve going forward. After the recent acquisition of Naga 6 and 7, a total of eight rigs will be operating in FY15. Naga 7 will be delivered this December and Naga 8 in September next year. Net gearing is expected to remain comfortable at 0.4 times by end-FY14, which still provides room for asset acquisitions.

According to Pareto Securities, drilling composes about 50% of the total cost of  exploration and production. In the declining oil price environment, exploration will tend to be impacted first by a decrease in drilling. Hence, any extended decline in oil price will likely dampen charter rates and utilisation for jack-up rigs. However, UMW-OG should be less impacted than other rig service providers in the region due to shortage of locally owned rigs.

We maintain our “hold” call and target price is reduced from RM3.29 to RM2.90 based on unchanged 16 times FY15 earnings, post earnings adjustment. — HLIB Research, Nov 25

This article first appeared in The Edge Financial Daily, on November 26, 2014.