UMW OIL & GAS CORP BHD

By HLIB Research Rating: Buy Target price: 38 sen

HLIB Research is positive on UMWOG, and maintained its “buy” call on the counter following the group’s first quarterly profit in two years.

The research house noted that the group’s bottom line for the third quarter of financial year 2017 (Q3’17) returned to the black as rig utilisation rates improved to 90% (from 68% in Q2’17).

Year-to-date rig utilisation rates have improved from 26% in Q1’17 to 90% in the latest quarter on the back of the stabilisation of crude oil prices owing to the Organisation of Petroleum Exporting Countries’ production cut.

UMW OG’s current average daily charter rate is hovering at around US$70,000 per day.

“We expect the rate to stabilise around this level in the near term as the supply glut of jack up rigs still persists while no significant improvement is seen in the near term.

“The number of new rigs to be delivered in 2018-2020 is expected to be around 98 units, which is about 18.1% of the number of global jack-up rigs available globally,” the research house said.

Notwithstanding this, it said, over 50% of the global rig fleet are aged above 30 years, indicating that a significant number of rigs could be scrapped in the longer run.

The research house added that in 2018, at least 12 jack-up rig contracts would be needed in the Malaysian rig market.

“This is positive for UMW-OG being one of the only two local players in the industry.

“We believe the company stands a fairly good chance to secure sufficient amount of contracts to replenish its order book,” it added.

It noted that the the group was currently participating in 25 rig contract bids, of which 15 are in Malaysia, worth a total of US$802mil, indicating potential winning of more rig contracts.

The group is also looking to continue its cost rationalisation exercise and plans to cut another RM30mil in costs in FY18.