UMW O&G sees opportunities in sluggish market

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AFTER being badly hit by the 2007/08 financial crisis, UMW Oil & Gas Corp Bhd (UMW O&G) is not only prepared for a downturn in the market but also sees opportunities in the softer market condition.

The company, which is 55% controlled by UMW Holdings Bhd, encountered choppy waters prior to its flotation exercise on Bursa Malaysia on Nov 1 last year. In a nutshell, the shifting of its business focus — from pipe manufacturing to exploration and drilling via jack-up rigs — has bode well for UMW O&G. For the first six months of the financial year ended June 30, 2014, it posted a net profit of close to RM114 million and revenue of RM434.3 million.

Despite reporting better financial results at end-August, the company has been badly hit by negative market sentiment. The stock has shed almost 21% to RM3.20, from RM4.05 on Aug 22.

However, UMW O&G CEO Rohaizad Darus tells The Edge that he is unperturbed by the selldown and is prepared for such downturns.

“I look at the downturn [in the industry] positively. We are fundamentally strong as a company, with good contracts and marketable new rigs, so I believe we should be able to weather the storm,” he says.

He adds that the group is prepared for such uncertainties, with its development hinging on three strategies — having more clients globally, thus not relying on any one single client, expanding into more countries so as not to be dependent on a single market, and establishing good relationships with clients and leveraging on these relationships to secure future jobs.

“With these strategies, we are not only addressing the growth of the company but also managing the exposure to risks in the event of a slowdown,” he explains.

Rohaizad says there are still various opportunities available in the O&G market for the company to capitalise on. “During the storm, the industry will consolidate as there are companies that may not be able to sustain their operations. This opens the door to possible acquisitions.”

He notes that it will be a buyer’s market when the industry is consolidating. “If the opportunity presents itself at the right price, why not?”

UMW O&G may consider companies that are also in the drilling business — not necessarily limited to jack-up rigs businesses — and those with semi-submersible ships, drillships or tender rigs, says Rohaizad.

“We are close to becoming a regional player and we are actively looking at the Middle East, North Sea and Australasia [as part of our plan] to become a global player in 10 years.”

Rohaizad says it is essential for UMW O&G to continue adding more rigs to its fleet even with the sluggish market as building rigs during a peak cycle would be more costly.

“We are only two weeks into this uncertainty in the O&G market, so we have not seen the effects yet. But if this continues, then I believe we can get rigs at a cheaper price from the yard.”

At end-June this year, UMW O&G had deposits, cash and bank balances of almost RM1.1 billion. On the other side of the balance sheet, its short-term borrowings amounted to almost RM1.1 billion while long-term debt commitments were RM425.2 million.

UMW O&G, Rohaizad says, is maintaining its long-term plan of getting a minimum of one rig per year and expanding its business. “We are not going to slow down our international development or stop adding more rigs to our fleet due to the uncertainty in the market.”

He remarks that the perception that rigs tend to be chartered out at lower rates during a slow period is flawed. “It also depends on the type of rigs,” he says, adding that demand and rates for jack-up rigs are stable, while rates for semi-submersible ships and ultra-deepwater rigs are declining.

While many expect the market to soften, Rohaizad says UMW O&G will see sustainable future demand due to the small-scale field projects in Malaysia and regionally. Currently, there are 105 small-scale fields in Malaysia, which are divided into 24 clusters. Out of the 24, only six have been awarded through risk-sharing contracts.

The six are the Berantai field, Balai-Bentara cluster, Kapal-Banang-Meranti cluster, Tembikai-Chenang cluster, Tanjong Baram field and Ophir field.

“There are 18 more small-scale fields available. We don’t know when Petronas will develop the fields, but as long as Malaysia still relies on oil for its economy, it has to develop these fields,” says Rohaizad.

UMW O&G had an order book of RM2.1 billion as at Aug 31. This comprises two long-term contracts lasting until 2018 for two rigs (Naga 1 and Naga 4), while the remaining rigs (Naga 2, Naga 3, Naga 5 and Naga 6) will see their short-term contracts expiring next year.

The company’s bid book is at US$1.8 billion (RM5.9 billion) for 23 bids comprising both short-term and long-term contracts located locally and regionally.

This article first appeared in The Edge Malaysia Weekly, on October 20 - 26, 2014.