Although the low crude oil price environment has seen Uzma Bhd’s share price more than halve within a year, the oil and gas service provider is expecting resilient earnings growth for at least three more years.

The stock dove 64.87% to a 52-week low of RM1.32 in December last year from a peak of RM3.75 in the same period. It has since regained 26.55% and closed at RM1.71 on Aug 28.

Uzma CEO Datuk Kamarul Redzuan Muhamed tells digitaledge Weekly that the group is in a safe spot because it is involved mainly in a business that caters for fields in production.

“They [oil companies] need to produce regardless [of the price environment] and they probably need to produce more with the drop in prices. So, Uzma is in the right kind of market [brownfield services],” he says.

Kamarul acknowledges the dramatic change in the industry over the past three months but he believes Uzma can weather the storm that is expected to blow for a while.

His confidence stems from the group’s order book — which stands at RM2.7 billion and will keep the group busy until 2021 — and its ability to provide services to oil companies so that they can produce oil economically.

“There are basically no activities in exploration at the moment, which is why rig counts are down. The budget for exploration has been slashed but production has to continue and the products that Uzma has to offer support existing production. That’s why we feel we are slightly different from the others,” Kamarul remarks.

He explains that Uzma is not only involved in exploration but also in the provision of services for already producing fields. On top of that, it has recurring income from its chemical business, amongst others, which is in demand as long as production continues.

“The country needs the production; there is no point in slowing down. If Petroliam Nasional Bhd does not keep up with production, it won’t have any money — that’s its revenue,” says Kamarul.

It bears noting that the current market is much more challenging than when Uzma got listed in 2008. However, Kamarul says the company is doing well and is still looking at 30% to 40% revenue growth in the next three years.

Uzma (fundamental: 1.10; valuation: 1.80) reported a 7.05% year-on-year increase in net profit to RM9.26 million or 3.44 sen per share in its second quarter ended June 30, 2015 (2QFY2015). Revenue, especially from secured long-term contracts, rose 31.45% to RM104.09 million.

In the first half of FY2015, the group posted a 1.35% y-o-y increase in net profit to RM17.31 million on revenue that rose 41.28% from the previous corresponding period to RM288.62 million.

Kamarul sees a stronger second half for the group, thanks to its risk-service contract and D18 water injection facility (WIF), among others, which will spill over into FY2016.

Uzma’s revenue growth projection is backed by its contract wins this year. It kicked off the year with a RM50 million contract from Petronas Carigali Sdn Bhd for the provision of through tubing downhole tolls and services. It was later awarded a contract for the provision of cased hole electric-line logging perforation and other services for RM59 million. 

Petronas Carigali also awarded the group two contracts for the provision of helicopter services in Sabah for an aggregated value of RM166.5 million and one for the leasing, operating and maintaining of the D18 WIF for the oil company. The latter, which has an estimated value of RM400 million, involves the complete engineering and construction, installation and commissioning of the WIF and providing operational and maintenance services.

Apart from these jobs, Uzma also entered into a memorandum of understanding with the East Coast Economic Region Development Council to develop an integrated offshore supply base in Kemaman, Terengganu, for the group’s use that has a potential investment of RM471.48 million over 15 years.

“While everybody has been quiet, we have been getting quite a few jobs and all the contracts that we announced recently are related to existing oil production. Existing oil is the cheapest to produce and at this point in time, everybody has come to the realisation that things are challenging.

“Our biggest challenge at the moment is margin pressure. Not only Petronas but everybody else is pushing for lower margins. In the first quarter of this year, everybody was negotiating contracts or renegotiating existing contracts,” says Kamarul.

Although he does not state the group’s margin, according to The Edge Research, Uzma saw its net margin rise to 8.14% in FY2013 from 7.66% in FY2012. Currently, it has a lower rolling 12-month net margin of 6.62%.

Kamarul points out that Uzma goes through three “health checks”: the health of its bid book, the utilisation of its assets and the value rates of its services. “But the problem with rates is that they are going down everywhere. The only way to manage the rates is to actually manage our subcontractors.” 

He sees a healthy bid book after the completion of the group’s three acquisitions and the establishment of three new companies last year. “The three new companies, which include our RSC, will bring in income this year. These income streams did not exist before. Then, we made three acquisitions last year. These six things will spur our growth this year,”

In 2014, Uzma acquired Well Services (Thailand) Ltd and MMSVS Group Holdings Ltd for a total of RM95 million. It also took over Premier Enterprise Corp (M) Sdn Bhd, which is involved in the supply of chemicals for oil recovery, for RM20.60 million.

Kamarul notes that the group is still in acquisition mode and is looking at a few technology companies to acquire this year.

Investing in technology-based companies will enable the group to offer efficiency in an environment that is cost-sensitive. “When Petronas tells us to cut cost, we do, and it’s because we feel that it’s a moral obligation. Everyone is obligated to share the burden at the moment. What we can do now is to improve our efficiency, renegotiate with our sub-vendors and come up with better technology,” says Kamarul, adding that although more capital is needed to improve technology-wise, there will be no recurring cost. “Technology will drive cost down.”

On Uzma’s crème de la crème project, the Tanjung Baram RSC in Sarawak, the group announced along with its 2QFY2015 results that the first production flowed in June.

Kamarul says there have been delays, though just by a month or two, in seeing first oil and that the RSC will start contributing to the group’s earnings by the end of the year.

“Investors should know that the oil price does not have a bearing on our rent fee for the RSC. Our rent fee is fixed regardless of the oil price. So, the risk is on Petronas. But cost recovery has a bearing based on how quick capital expenditure and operational expenditure is recovered as that is based on the oil price,” Kamarul explains.

He adds that if the RSC’s capex and opex are low in the current environment, it can survive. Uzma had previously announced a RM100 million capex for its RSC and to date, that is the lowest to be spent on such a project.

“It [the RSC] is still commercially viable; it’s just that people are not getting the same rate of returns as us. We are probably still going to get the same rate of returns, regardless of the oil price.”

To recap, Uzma’s wholly-owned subsidiary Uzma Energy Venture (Sarawak) Sdn Bhd and EQ Petroleum Developments Malaysia Sdn Bhd in March last year signed a small field RSC with Petronas to carry out the development and production for the Tanjung Baram fields.

Kamarul sums up that Uzma has the capability to produce oil economically, which is what is needed in the current industry environment.

Note: 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. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.