Thursday 28 Mar 2024
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KUALA LUMPUR: Drilling and oilfield services provider UMW Oil & Gas Corp Bhd (UMW-O&G) said it had factored in the risk of lower crude oil prices in its long-term plans despite the expiration of charters for a good many of its oil rigs this year.

“This (low crude oil price) is not something we did not expect. We are aware that the oil and gas (O&G) sector is cyclical. So, we have already provided for this risk in our expansion plans," UMW-O&G president Rohaizad Darus told a press conference after the company’s annual general meeting yesterday.

He said UMW-O&G (fundamental: N/A; valuation: N/A) has a two-pronged strategy to mitigate the impact of lower oil price. They are to progressively expand beyond Malaysia in Southeast Asia and the Middle East to capture a bigger market, as well as  undertake cost-cutting measures.

Despite the group’s long-term plan to stay intact, most of UMW-O&G’s rigs are at risk of being idle at the end of this year.

UMW-O&G has a fleet of six premium jack-up rigs and one semi-submersible rig in its drilling service segment. The division accounts for 97% of the group’s earnings last year.

However, only two (Naga 1 and Naga 4) of the group’s rigs have secured long-term contracts which run to 2018, while another four rigs (Naga 2, Naga 3, Naga 5 and Naga 6) are on short-term spot contracts which will expire between May and October this year.

UMW-O&G has also taken delivery of Naga 7 in February and is expected to receive Naga 8 in September. Both rigs have yet to secure a contract.

Nevertheless, Rohaizad is confident that the group’s rigs will be able to secure contracts on the back of a tender book for 18 projects worth RM3 billion this year to replenish the RM1.8 billion order book it currently holds.

Eight of these bids are for Malaysian projects, while another three are located in the Middle East. The remainder of the bids are for Southeast Asian works.

“Both (Naga 7 and Naga 8) have bid for a number of tenders in Malaysia and abroad. At present, we believe there is a fair chance for us to secure some contracts for those rigs because each of them are tendered for multiple projects,” said Rohaizad.

He also said UMW-O&G is in no position to be “choosy” over the work it gets, given the drop in crude oil price.

Rohaizad said the O&G industry has seen a 30% decline in the number of tenders open locally and internationally. Day charter rates have also slid to US$100,000 (RM359,000) to US$130,000 per day versus US$140,000 to US$160,000 a year ago.

“Previously, I can easily say that we can win four or five or even 10 [tenders]. Nowadays, with the challenges that we are facing and the competitors that we [are facing], I will be happy if all the rigs are being occupied,” said Rohaizad.

“Previously, we were offered two or three tenders for one rig and we would have had to decline some. This time, I think it would be good if we can get an award for each rig,” he said.

UMW-O&G has not been spared by the oil price decline. For the first quarter ended March 31, 2015, it registered a 40.1% decline in net profit to RM32.15 million. This came on the back of a 59.7% increase in revenue.

On the group’s earnings outlook, Rohaizad said: “It is difficult to see whether it (lower profits) will be a trend because the biggest factors are oil price, the availability of contracts, [and] the opportunity to secure these contracts.”

“If we secure new contracts, then the [earnings figure] will be different. If we do not, the numbers will be different. At this point, it is difficult for me to tell if this would be a trend or just a one-off,” he said.

UMW-O&G’s share price has been on a rapid decline and was hovering near its all-time low of RM1.91 in December 2014. Yesterday, it closed down 0.97% to RM2.04, giving it a market capitalisation of RM4.41 billion.


The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company's financial dashboard.

 

This article first appeared in The Edge Financial Daily, on May 20, 2015.

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