Dear Mr Koon Yew Yin,
I am writing here to give you a suggestion to look at UMWOG, which it can become like Hengyuan. This stock is even more attractive than other public listed O&G companies in Malaysia, except for Hibiscus and Serba Dinamik.
I also believe this stock can be valued higher than conservative analysts' valuation. Analysts' valuation always laggard. They always wait for the next result to confirm to increase their target price and upgrade their call.
Like UMWOG recent results, few brokers upgraded the stock after the results turned to positive rather than they upgraded the call before the results. They should know better as they know how to forecast, unless their forecast were missed expectations as they were too conservative, traumitizing from the sinking of oil prices in years before.
My suggestion is based on your method which you have been practicing so successfully in buying Latitude, Lii Hen, VS Industry before and the latest one is Hengyuan.
Below is what I have read from your previous article of this, https://klse.i3investor.com/blogs/koonyewyinblog/142353.jsp.
We check UMWOG's latest financial report, its revenue jumped 29% and its bottomline returned to black of core net profit of RM5.8 million from huge net loss in the last two quarters and corresponding quarter last year. This was the first quarterly profit posted by the company in the recent 2 years.
This thanked to higher and stability in oil prices in 3Q17 period that led to stronger demand for drilling services as a result of higher levels of oil and gas activities for the quarter due to greater certainty. YTD rig utilisation rates have improved from 26% in 1Q17 to 90% in the latest quarter.
# Note that their principal activities are the provision of offshore drilling services to the upstream oil and gas sector. They own and operate a fleet of offshore drilling rigs that are designed to meet the recent demands of the industry.
# For Oilfield services, the Company offer state-of-the-art-threading, inspection and repair services to support the petroleum and petrochemicals industry.
In the next 15 months of earnings prospect
As the benchmark Brent oil price stabilising above USD60 per barrel for 4Q17 (relatively higher than average between USD47 and USD56 in 3Q17, and also stronger than 4Q16 of average between USD46 and USD56), this will give more confidence in the upstream sector, resulting in more activities especially in drilling for this quarter and in the coming months.
Crude oil prices this time are expected to stable due to OPEC's promise for the production cut for the whole 2018 and drawdown in U.S. crude oil inventory.
Therefore, we could expect relatively higher both revenue and net profit in 4Q17 for sure.
All seven jack-up drilling rigs of the Group are currently under contracts serving multiple oil and gas operators. The Group is continuously bidding for new contracts to replace expiring ones and also negotiating for extension of existing contracts.
At least 12 jack-up rig contracts will be needed in the Malaysian rig market. This is positive for UMWOG being one of the only two local players in the industry.
According to Petronas Activity Outlook 2018-2020 report, about 7-10 jack-up rigs are required by Petronas Group of Companies and other Petroleum Arrangement Contractors.
This is positive for UMWOG as being one of the only two local players in the industry, the company stands a fairly good chance to secure sufficient amount of contracts to replenish its order book.
At this juncture, the Company is participating in 25 rig contract bids (of which 15 is in Malaysia) worth a total of USD802m, indicating potential winning of more rig contracts by the Company.
Recently, UMWOG has received a Letter of Award from ConocoPhillips Sarawak Limited for a contract for the provision of Jack-Up Drilling Rig Services for COPSK. The Contract is to drill two firm wells with the option of an additional two wells commencing in second quarter of 2018.
Based on the contract value of USD6.8 million for the 2 firm wells and assumption of 50 days duration per well, the implied daily charter rate is about USD68,000/day which is consistent with the current market rate.
Favourable prices and cost cutting will continue to result better margin for the bottomline
In 3Q17, EBITDA margin came in at 55%, which is higher than the margins during the good old days of 40%. With oil prices remains favourable, the ramp-up in drilling activities will result the Company to price in their services at good margin.
Management also guided continuation of cost rationalisation exercise and is targeting to cut another RM30 million costs in FY18.
Balance sheet gaining traction
The Company is presently on a stronger financial footing with the completion of the recapitalisation and refinancing exercises in October and November 2017, respectively.
Total borrowings of the Group has reduced significantly and the loan repayment profile is now more in line with the remaining useful life of the Group assets, resulting in an improved cash flows for the Group.
Backed by strong shareholders
Below are largest shareholders in UMWOG as of 2016 annual report.
But latest filing from channel check, every major shareholders in the list have increased their stake in the Company this year. Surprisingly, BlackRock has emerged in this stock and putting more money just about in this month.
BlackRock is the world's biggest asset manager, overseeing about USD6 trillion in client money as of the end of November 2017, and its investment decisions create ripples that roll through every major global market.
BlackRock is ranked 29 of the world's most admired companies.
Conclusion
I have done my own compilation and analysis, and my note here is for your reference. My opinion is neither recommending BUY, HOLD nor SELL.
