UMW-OG pure play on jack-up rig market

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UMW Oil & Gas Corp Bhd
(Oct 23, RM3.44)
Maintain reduce with target price of RM3.48:
As a pure play on the jack-up rig market, UMW-OG’s share price is vulnerable to any slowdown in exploration capital expenditure (capex). We believe the jack-up day rate is peaking and the weak oil price will lower investor appetite for oil and gas (O&G) stocks.

As such, we cut our 2016E earnings per share (EPS) by 14% and lower our target price-earnings ratio (PER) for UMW-OG to 18 times (from 21 times).

Maintain “reduce” with a lower target price of RM3.05 (-16%). At 21 times calendar year 2015 PER, UMW-OG’s valuation looks stretched (against peer average PER of nine times) and its earnings are more vulnerable to a pullback in exploration capex, compared with domestic O&G peers.

Brent crude fell by 13% month-on-month to US$85 (RM279) per barrel on Oct 21 due to strong production, sluggish demand growth and reluctance of key producers to cut output.

Given that producers have lamented the industry’s escalating costs, we believe they  will use this opportunity to negotiate lower rates for services chartering of assets.

UMW-OG is a pure play on the jack-up rig market. Therefore, the company’s long-term earnings outlook is highly dependent on day rates for jack-ups.

The group’s timely expansion into the Philippines, Myanmar and Vietnam has helped to ensure a high utilisation rate for its fleet of six drilling rigs (one more to be delivered at end-2014), estimated at 90% to 95% utilisation.

In our view, the company’s 2014/15E earnings are relatively insulated from any near-term weakness in day rates as all its rigs are contracted until mid-2015 to mid-2018.  — Affin Hwang Capital, Oct 23

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This article first appeared in The Edge Financial Daily, on October 24, 2014.