UMW O&G (Valuation Exceeded Its Peers)

Its market cap stood at rm9 billion on Jan 22 2014.

Its president said that the incoming deliveries of new jack up drilling rigs will boost the group’s earnings substantially over the next two years from Jan 2014. Drilling services contributed 94% to its total revenue for the first nine months of 2013.

It also said that NAGA 5, the group’s latest premium JU rig is scheduled for delivery in May 2014. It has already secured a USD7 million contract from Mido Petroleum Philippines Pty Ltd for the provision of drilling services by the new rig.

Apart from its JU fleet, the group is also the sole Malaysian operator of hydraulic work over units with four currently (Jan 2014) being deployed in three countries on short and long term tenures.

Coupled with a rm1 billion war chest from its IPO proceeds after decuting 2013’s expenses, it is confident that the group can leverage on its working relationship with Petronas and other oil majors to secure new contracts for its JU rigs and HWUs.

It believed that it is able to finance a significant number of new rigs and also secure new contracts due to the increasing regional demand.

The bullish view argues that the delivery of another two JU rigs – NAGA 6 and NAGA 7 – by 2015 warrants premium valuation on the stock.

Moreover its core net profit and core earnings per share will triple within two years from Jan 2014 after taking account the additional revenue boost from the three upcoming JU rigs.

However it is worth noting that new contracts are lifeblood of oil and gas companies. UMW O&G’s contract backlog stands at rm1.45 billion, a small figure compared with the order books of other big caps such as SKPetro and Bumi Armada.

UMG O&G’s valuation has exceeded its peers whose shares are currently (Jan 2014) trading at lower PER.

At the moment (27 Jan 2014), a huge chunk of UMW O&G’s revenue comes from contracts awarded by Pertronas Carigali Sdn Bhd with three out of four rigs deployed for the upstream player’s needs.

Apart from PCSB, UMW O&G’s client base for the JU rigs consists of HESS, Japan Vietnam Petroleum Co and Nido Petroleum.

Underlining its regional expansion plans, the group is working towards achieving a 50:50 revenue contribution from domestic and overseas operations. For 9MFY2013, 66% of its revenue came from Malaysia.

NAGA 3 will be moved to Vietnam while NAGA 5 will be operating in the Philippines.

The bullish outlook is mainly supported by the upcoming expiration of a whopping 41 JU rig contracts in SEA in 2014. In Malaysia, there are currently (Jan 2014) 18 Jus of which 16 are foreign owned.

However it is apparent that the group will have to aggressively expand its operations and secure new contracts in a consistent basis, either one of which is no small task.

The drilling servies industry also remains highly competitive, and there is no shortage of international oil and gas operators bidding for the same projects that UMW O&G is gunning for.

UMW O&G will be spending its cash pile on two new rigs – NAGA 6 and &. Will Petronas which is the company’s major client, also deploy the new jack up rigs? That will determine whether the bullishness on the stock is justifiable.