UMWOG (5243) - UMW Oil & Gas - Courting justice
Target RM2.78 (Stock Rating: ADD)
UMW-OG announced on Friday that it is taking Frontier to court and seeking, among other things, an early termination fee of US$19.2m following an alleged breach of contract in relation to the deployment of Naga 7. We understand that UMW-OG’s chances of winning the case are good. It is business as usual for management that is gunning for 22 contracts worth RM5.4bn in Southeast Asia and the Middle East. We continue to value the stock at 15x CY16 P/E, on par with our target market P/E. We keep our Add call, with a successful Middle Eastern foray as potential re-rating catalyst.
What Happened
UMW-OG has started arbitration proceedings against Frontier Oil Corp to seek, among other things, an award for damages and/or compensation for all losses arising from Frontier’s alleged breach of contract, but not limited to an early termination fee amounting to US$19.2m. Frontier was to have arranged a bank guarantee of US$5m and an advance payment of US$15m for the services of UMW-OG’s Naga 7, but has failed to do so.
What We Think
While this is a negative surprise to the market, the case appears clear-cut and we understand that UMW-OG’s chances of winning the case are good. Nonetheless, it may take some time for the company to receive the US$19.2m early termination fee. In the meantime, management has been busy scouting for a new contract for Naga 7. As at Feb 2015, management was after 22 contracts worth RM5.4bn. The company’s order book stood at RM1.8bn as at 31 Dec 2014. We maintain our forecasts as we have factored in one-to-three-month gaps in between contracts for five jack-ups - Naga 2, Naga 3, Naga 5, Naga 6 and Naga 7 – as we highlighted in our 15 Mar update. Naga 2 and Naga 3 will be out of action for up to three months following the completion of their respective contracts this month and next month. The operations of Naga 1 and Naga 4, the contracts for which will expire in FY16 and FY18, respectively, are going smoothly. Naga 8 is slated for delivery in Sep 2015. We think that the jack-up may be deployed to facilitate UMW-OG’s venture into the Middle East by year-end.
What You Should Do
The arbitration may cause some weakness in the share price. We advise investors to take the opportunity to accumulate.
Source: CIMB Daybreak - 14 April 2015
Target RM2.78 (Stock Rating: ADD)
UMW-OG announced on Friday that it is taking Frontier to court and seeking, among other things, an early termination fee of US$19.2m following an alleged breach of contract in relation to the deployment of Naga 7. We understand that UMW-OG’s chances of winning the case are good. It is business as usual for management that is gunning for 22 contracts worth RM5.4bn in Southeast Asia and the Middle East. We continue to value the stock at 15x CY16 P/E, on par with our target market P/E. We keep our Add call, with a successful Middle Eastern foray as potential re-rating catalyst.
What Happened
UMW-OG has started arbitration proceedings against Frontier Oil Corp to seek, among other things, an award for damages and/or compensation for all losses arising from Frontier’s alleged breach of contract, but not limited to an early termination fee amounting to US$19.2m. Frontier was to have arranged a bank guarantee of US$5m and an advance payment of US$15m for the services of UMW-OG’s Naga 7, but has failed to do so.
What We Think
While this is a negative surprise to the market, the case appears clear-cut and we understand that UMW-OG’s chances of winning the case are good. Nonetheless, it may take some time for the company to receive the US$19.2m early termination fee. In the meantime, management has been busy scouting for a new contract for Naga 7. As at Feb 2015, management was after 22 contracts worth RM5.4bn. The company’s order book stood at RM1.8bn as at 31 Dec 2014. We maintain our forecasts as we have factored in one-to-three-month gaps in between contracts for five jack-ups - Naga 2, Naga 3, Naga 5, Naga 6 and Naga 7 – as we highlighted in our 15 Mar update. Naga 2 and Naga 3 will be out of action for up to three months following the completion of their respective contracts this month and next month. The operations of Naga 1 and Naga 4, the contracts for which will expire in FY16 and FY18, respectively, are going smoothly. Naga 8 is slated for delivery in Sep 2015. We think that the jack-up may be deployed to facilitate UMW-OG’s venture into the Middle East by year-end.
What You Should Do
The arbitration may cause some weakness in the share price. We advise investors to take the opportunity to accumulate.
Source: CIMB Daybreak - 14 April 2015
