THE country’s two most prominent jack-up drilling rig operators, UMW Oil and Gas Corp Bhd (UMWOG) and Perisai Petroleum Teknologi Bhd, seem confident of securing tenders in the coming months. This could allay concerns that their new rigs, which are set to be delivered, will sit idle amid a decline in exploration and production (E&P) activity.

UMWOG, which currently has six jack-up rigs in its fleet, is confident of securing tenders for its new-build Naga 7 and the soon-to-be-delivered Naga 8. The group does not intend to defer the delivery of the latter “as there are a number of potential contracts being bid with the upcoming rig,” its president Rohaizad Darus tells The Edge.

The drop in crude oil prices since last October started a downcycle in upstream E&P activities. With oil corporations such as Petroliam Nasional Bhd (Petronas) rationalising capital expenditure in anticipation of less revenue, the deferment of new tenders for drilling has dimmed the prospects for oil rig operators.

As a typical jack-up rig can cost up to a billion ringgit each, their purchase is typically financed by long-term borrowings. Thus, operators will try to secure charters before the delivery of the rigs to minimise idle periods, during which they will still need to service the debt associated with the rigs. An operator without a sound balance sheet could face severe cash-flow problems should the new rigs remain idle for too long.

In replies to The Edge, Perisai and UMWOG acknowledge the current difficulties in the market but are confident of securing new tenders in the coming months.

In a statement, Perisai (fundamental 0.65, valuation: 1.10) says it hopes to secure charters before taking delivery of Perisai Pacific 102, the second jack-up rig in its fleet. However, it may defer its delivery.

“We are exploring with the shipyard the possibility of deferring the delivery of our second rig while we pursue opportunities for it. In line with our cost-optimisation efforts, the primary objective is to ensure we remain financially secure and endeavour to keep our assets utilised and operational.”

UMWOG’s Rohaizad believes that the current downturn is only temporary.

“Significant reduction in investment by E&P companies to develop new fields will result in shortage of supply in the future. This is because current producing fields are being depleted daily, with insufficient replacement for future production. Even at the current oil price, there is still a fair amount of E&P activity that involves drilling,” he explains.

Nevertheless, he admits that fleet expansion will depend on how the market develops in the medium term. “At present, we are holding back on this [fleet expansion] until we see a significant recovery in the market.”

UMWOG seems to be in a tight spot as five of its six rigs will be available for new jobs by the third quarter of this year. However, given its track record and strong relationship with Petronas, analysts say it stands a good chance of securing new charters in the coming months.

In line with its plan to reduce reliance on local charters, half of the 18 tenders it is participating in are for overseas jobs, such as Indonesia and the more vibrant Middle East market. “We are leveraging our existing expanded client base to follow them on overseas projects,” says Rohaizad.

Perisai is adopting a similarly cautious approach to the management of its jack-ups, which is its primary focus for long-term growth.

The company adds that the market will begin to see fewer jack-ups being supplied as it is in the industry’s best interest to do so.

“As drilling activity has been substantially halted across the entire industry, a common reaction is to refrain from further supplying rigs until some form of clarity and stability emerges in the industry. This approach is shared by both the rig owners as well as the shipyard,” says a Perisai spokesman.

While Perisai had a good start in the jack-up business, thanks to a RM503 million three-year contract for Perisai Pacific 101 (PP101) by Petronas Carigali Sdn Bhd, it remains encumbered by its mobile offshore production unit (Rubicone) and pipelay barge (E3), both of which are seeking new contracts. The spokesman says Perisai is actively participating in new tenders for the assets.

Nevertheless, in Southeast Asia, daily charter rates (DCR) for top-of-the-line premium jack-up rigs have dropped to about US$120,000 from US$150,000 in late 2014. This means that Perisai and UMWOG would have to revise their earnings expectations to account for the tighter margins ahead, although they may still be confident of winning jobs.

From a fundamentals standpoint, UMWOG and Perisai seem well equipped to endure the current market conditions and may provide an attractive investment opportunity in the sector.

UMWOG and Perisai have cash piles of RM1.16 billion and RM67.08 million respectively, while their revenue base has grown substantially on a year-on-year basis.

For the latest financial quarter ended March 31 (1Q2015), UMWOG’s net profit dropped to RM32.65 million from RM54.16 million in 1Q2014, largely due to higher operating expenses relating to Naga 7. Perisai delivered RM7.03 million in net profit in 1Q2015 compared with a net loss of RM2.9 million during the same quarter last year, thanks to a new revenue contribution by PP101.

Asset impairment risks are also minimal given the two companies’ relatively youthful fleets. In the O&G sector, this puts them at an advantage over the larger integrated players such as SapuraKencana Petroleum Bhd (fundamental: 1.3; valuation: 1.4) and Bumi Armada Bhd (fundamental: 1.05; valuation: 0.8), both of which recently wrote down a chunk of their assets.

It is worth noting that the shares of both companies are trading at conservative valuations. UMWOG is trading at 1.27 times its price-to-book ratio and Perisai, at a steep discount of 0.5 times book.

UMWOG closed at RM1.96 last Friday, with a market capitalisation of RM4.26 billion, while Perisai ended at 43.5 sen, with a market capitalisation of RM512.9 million.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.