Uzma Bhd 
(July 15, RM2.50)
Maintain buy with a higher target price (TP) of RM2.91: We attended Uzma’s briefing and walked away feeling positive. The water injection facility (WIF) will be used to rejuvenate the D18 brownfield off Sarawak by improving the recovery rate from the existing 20%-30% to 35%. To recap, Baker Hughes Inc was awarded a long-term contract by Petronas Carigali Sdn Bhd to enhance production in the D18 field in 2013. 

The duration of the WIF contract is for a five-year leasing period effective from March 31, 2016 with a contract value estimated at RM350 million to RM400 million. This also translates to circa RM200,000 leasing rate per day. 

An old rig will be used for the conversion with estimated capital expenditure of US$70 million (RM266 million). This will be funded by 80% debt and 20% equity (funded by private placement). By the end of the five-year leasing period, Petronas Carigali has an option to buy the WIF. 

First oil from Tanjung Baram is expected to delay to August 2015 (initially at end-April 2015) mainly due to a longer-than-expected rig demobilisation period and liquid carry-over in West Lutong gas outlet. Uzma is taking the necessary measures such as cleaning up the well and rectifying the gas outlet. 

In addition, Uzma is looking at deploying another two or three units of UzmaAPRES (a unit to reactivate idle oil wells) from the existing nine units. 

We are positive on the WIF contract won amid a low oil price environment. This re-emphasizes our investment thesis that Uzma’s exposure to exploration and production (E&P) operating expenditure (opex) instead of capital expenditure should help it to weather this challenging period.  

We believe this maiden WIF project in Malaysia, if it is executed well, will provide plenty of opportunity for other mature fields in Malaysia. We estimate the payback period for this WIF at circa five to six years. 

Earnings per share (EPS) for the financial year ending December (FY15) reduced by 10% after we conservatively factored in only one quarter earnings contribution from the Tanjung Baram risk service contract (RSC)  [versus two quarters previously]. EPS for FY16 rose by 8% after we incorporated nine months contribution from WIF and the enlarged share base due to the proposed private placement. 

We maintain our “buy” call with TP raised from RM2.69 to RM2.91 based on unchanged 11 times FY16 price-earnings ratio to reflect a higher forecast. — Hong Leong Investment Bank, July 15

This article first appeared in The Edge Financial Daily, on July 16, 2015.