As UMWOG fell these few days, we not only did not cut loss, but we increased our positions, due to the 3 reasons below:
1) Before the recent rally, when UMWOG was around RM0.28-RM0.31; crude was lower than USD64 per barrel. And this was the bottomed out price which consolidated for around 4-5 months even when crude oil was way below USD64. Right now, crude is nearing its 3 years high, around USD70. The question for us was; how low can UMWOG go, with the crude oil rally still ongoing?
Even if UMWOG drops to RM0.28 (the all time low price) tomorrow, we can still sleep well because crude oil is still at 3 years high, which far exceeds the crude oil price when UMWOG has bottomed out at its all time low.
Therefore UMWOG just could not possibly violate its all time low of RM0.28 which is just few bids down from its closing price RM0.345 today.
The crude oil environment for UMWOG now is so rosy that it theoretically can't possibly be at a lesser than RM0.40 level. The selldown recently is merely profit taking and will shoot back to above RM0.40 or even RM0.50 any time.
Do you think UMWOG deserves a RM0.345 valuation in this scenario?
Therefore, we suggest that you should also do the same - ask yourself - how low can UMWOG go?
2) Technically speaking, we agreed that UMWOG has violated our previous 38.2% Fibo retracement rule. It has also violated 20 days EMA too. According to researches done, if a stock does not rebound at these 2 points, it is very likely to rebound at EMA50. And today, it is sitting directly on EMA50 at RM0.345. Is it ripe for a rebound tomorrow?
Also, according to researches about price - volume action, when we see that price goes down together with volume increase - that is likely a selling climax. You can see the chart below. For the previous 3 trading days, UMWOG has went down and along with it, the volume also increased for 3 consecutive days. The selling is likely to have climaxed today. Is it ripe for a rebound tomorrow?
3) We stand by two news report by The Edge as below, where the first is about UMWOG being one of the top picks for 2018 along with the reasons, and another report about O&G counters expected to stay upbeat at least for the 1st qtr of 2018.
http://www.theedgemarkets.com/article/og-counters-expected-stay-upbeat-least-first-quarter-2018-says-analyst
http://www.theedgemarkets.com/article/top-10-stock-picks-2018
For the convenience of all readers, we are copying and pasting the contents of the reports below:
KUALA LUMPUR (Jan 15): With the continued rally of crude oil prices, the oil and gas (O&G) space is expected to stay on a positive note and an upbeat momentum for at least the first quarter of this year, according to MIDF Research analyst Aaron Tan.
UMW Oil & Gas Corp Bhd (UMW O&G) could turn around in 2018 as its earnings recovery is on sight. The country’s biggest jack-up rig operator has returned to the black in the third financial quarter ended Sept 30, 2017 (3QFY17), with a net profit of RM3.4 million, or 0.16 sen per share, compared to a net loss of RM135.4 million, or 6.26 sen per share. UMW O&G has seen its fleet utilisation improve from a dismal average of 21% in the 1QFY16 to 68% and 90% in 2QFY17 and 3QFY17 respectively.
According to TA Securities analyst Abel Goon, UMW O&G’s management expects the utilisation rate to be greater than 90% in 4QFY17, while FY18 will realise at least 80% utilisation rate.
“For UMW O&G, one of the key risks is the idling costs incurred. With the utilisation rate now back to about 90% level, the company should see a turnaround in 2018. Although the rates remain at a fairly low level, the company would turn profitable if the management could maintain the utilisation rate,” Goon told The Edge Financial Daily over a phone call.
He added that UMW O&G should be able to secure more drilling contracts from Petroliam Nasional Bhd’s (Petronas) prioritising local content. Based on UMW O&G management’s feedback, Goon pointed that Petronas requires at least 12 rigs in Malaysia for FY18. UMW O&G currently has seven premium jack-up rigs generating 99% of the group’s revenue.
Further, it is on a stronger financial footing after the completion of RM1.8 billion rights issue.
UMW O&G has guided that a one-time write-off of unamortised transaction costs plus potential asset impairment loss arising from a year-end review in 4QFY17 could weigh on its annual earnings for the financial year ended Dec 31, 2017 (FY17).
Goon reckons the market has priced in a large impairment in 4QFY17, which is why the share price remains at a subdued level. At the current price, UMW O&G is trading at about 0.5 times its book value, one standard deviation below its historical average, despite the expected turnaround in its operations, alleviations of short-term liquidity risks and upwards trajectory seen in oil prices.
TA Securities has set a target price of 51 sen a share, indicating a potential upside of 67.2% from its closing price of 30.1 sen last Friday.
Nonetheless, there remains downside risks for O&G players, especially if the crude oil price sees another sharp decline, which could lead to low utilisation rate. The higher-than-expected finance costs, despite the reduction in borrowings, could also hurt UMW O&G, which has a relatively high gearing level. — By Billy Toh
http://klse.i3investor.com/blogs/changwt/144712.jsp
