Is the worst really over for UMW Oil & Gas?

FOLLOWING the recent release of UMW Oil & Gas Corp Bhd’s (UMW-OG) financial results, the main question on most investors’ mind would be if the worst is truly over for the upstream drilling and oilfield services company.

While a turnaround was seen in UMWOG’s close peer in the upstream segment of the oil and gas industry - Bumi Armada Bhd - UMW-OG doesn’t really appear to be out of the woods just yet. In their latest quarterly financial results released in the week, Bumi Armada recorded a turnaround for the second quarter ended June 30 from a year ago, netting a bottom line of RM116.6mil as opposed to UMW-OG which continued to bleed with a second quarter net loss of RM51mil.

The turnaround at Bumi Armada had been anticipated by investors as evident by its share price climbing out of its historical low of 51 sen in November last year to yesterday at 75 sen. On the contrary, strong buying into UMW-OG seen throughout the week and the previous week may have been premature.

Investors evidently started to nimble UMW-OG’s shares at the end of the previous trading week ending Aug 18 with the shares topping the top ten actives toward the end of the week and seeing strong gains as well.

In that week, UMW-OG climbed in active trade from the weekly low of 28 sen to a high of 34 sen on Aug 18 on speculation that there may be some kind of an improvement in its results but it gave up almost half of those gains until yesterday to trade at 31.5 sen.

The market was left disappointed when the bottomline did not recover as much as they had anticipated with research houses still staying somewhat sombre on the stock.

“While the bottomline had improved slightly as seen from the narrowed losses, it was somewhat still a disappointment for most of the market. Losses at a time where other players are already starting to see a recovery may be an inconvenient matter for some investors to digest,” says a dealer with a local brokerage.

UMW-OG was strongly impacted from the dramatic correction in oil prices some 2½ years ago and sentiment was further eroded when it announced a rights issuance to raise RM1.8bil in January.

It was a double whammy for the company when share prices tumbled even further after recovering to the year’s high of 88.5 sen in the beginning of this year just prior to the announcement of the rights issuance.

Since then shares had fallen throughout the year until in recent weeks where it had seen some sort of stabilisation at the 30 sen level.

The RM1.8bil rights issuance at 30 sen per rights share was approved by shareholders yesterday.

In their recent reports, analysts continue to be sombre in their assessments of the company noting that losses were still continuing.

Most analysts covering the stock are now neutral on UMW-OG (55.6%) while the remainder held buys and sell calls at an equal proportion of 22.2%.

Sentiment among analysts have markedly improved from a year ago when 81.8% of analysts covering the stock were rating it a sell.

This time around, there was one upgrade to the stock with CIMB Research revising their call to a hold from a sell or reduce call prior but with a reduced target price of 33 sen from 43 sen prior.

In CIMB Research’s report, it says that UMW-OG’s first half core net loss made up 62% of its and the consensus’ previous full year forecast which is 25% above expectations and that the second half will likely be stronger.

“As a result, we reduce our loss forecasts, and raise our ex-rights target price from 31 to 32 sen, although our cum-rights target is lowered to 33 sen on a technicality. We upgrade from a reduce to a hold as the share price had already corrected significantly since it announced the highly-dilutive rights issue to raise RM1.8bil,” CIMB Research says.

Meanwhile, Hong Leong Research which had maintained its hold call on UMW-OG with a target price of 32 sen says in its report that it sees the recent net loss of the company above its expectations and in line with the consensus.

“We expect UMW-OG to record a lower loss in the second half of 2017. Second quarter core loss came in at RM51mil, bringing the first half core loss to RM155.1mil accounting for 50.7% of Hong Leong Research’s and 60.7% of streets’ estimates,” the research house says.

Hong Leong Research says that it believes the worst is over for UMW-OG due to expectation of an improvement in rig utilisation, but also says that the rights issuance would keep the company as a going concern in the medium term.

Despite these sombre assessments of the company, main shareholders remained committed to the company more so after its major and biggest shareholder Permodalan Nasional Bhd’s (PNB) says it will absorb their portion and the excess rights issuance that the other shareholders did not want to subscribe to.

Since then the Employees Provident Fund (EPF) had increased their stakes in the company even post the capital distribution.

The EPF had increased their stakes to 9.545% from 9.167% after the capital distribution was effected.

While the Retirement Fund Inc (KWAP) had also seen their stakes increased to 6.698% after the capital distribution was taken into account.

Given these circumstances and after the reiteration of PNB’s commitment to the company, it is quite likely that the worst is over for UMWOG. After all, a strong shareholder is what is most important to a company during volatile times such as this.