January 18, 2018, Thursday
KUCHING: While analysts are mildly positive on UMW Oil and Gas Corporation Bhd (UMWOG) securing ane umbrella contract to provide hydraulic workover units (HWUs) to Petronas Carigali Bhd, uncertainty lies in its HWU utilisation rate.
In a corporate update, AmInvestment Bank Bhd (AmInvestment Bank) said the umbrella contract could involve the use of all or any of UMWOG’s five HWU units – UMW Gait 1, UMW Gait 2, UMW Gait 3, UMW Gait 5 and UMW Gait 6 – to undertake workover services.
“The contract, which commenced on December 22 last year, is under an umbrella framework which may comprise of a series of individual orders and call-out.
“However, at present, there has not been any call-out or work order which will be made at stipulated prices for those HWU services,” it guided in the update.
Due to this uncertainty of utilisation, the HWU segment currently registered losses for the group due to its units being largely idle over the past year, and contributes to the ongoing losses for the group.
Looking beyond the HWU segment, the group’s full rig utilisation rates and margins remained a large concern.
“Separately, even at near full rig utilisation of 90 per cent in the third quarter of financial year 2017 (3QFY17), UMWOG still suffered a minor core loss of RM14 million.
“As there will be three rigs out of charter in 1QFY18 or an utilisation rate of 60 per cent, we expect a resumption of losses for the group,” said the bank.
Similarly, Hong Leong Investment Bank Bhd (HLIB Research) also reported a resumption of losses for UMWOG in FY18-19 with forecasted profit after tax and minority interests (PATAMI) of RM102 and RM71 million loss respectively.
While UMWOG has guided that there may be 12 rig charters expected to materialise in 2018, AmInvestment Bank argues that these may be short-term charters to replace current contracts which are expiring in 2018.
Even with full utilisation at current day rates, the bank said UMWOG would only be barely breaking even, notwithstanding the group’s efforts to draw further cost efficiencies with a stronger credit profile amongst suppliers and financeiers.
“Hence, we do not expect any near-term re-rating for the stock,” said the bank.
With that said, AmInvestment Bank has decided to downgrade their recommendation on UMWOG to ‘sell’ from ‘Hold’ as its share price has rebounded above their unchanged fair value of RM0.30 per share.
Meanwhile, HLIV Research is maintain its ‘hold’ call with an unchanged target price of RM0.40 as the group’s completion of rights issue and removal of debt maturity overhang risks are expected to provide a catalyst for share prices while earnings outlook appear more encouraging in 2018.