O&G results: Perdana Petroleum (PETR MK; BUY; TP: MYR1.70): No surprises, an M&A target, UMW Oil & Gas (UMWOG MK; BUY; TP: MYR3.45): 9M14: Dragged down by higher taxes

恭喜發財!

Perdana Petroleum (PETR MK; BUY; TP: MYR1.70): No surprises, an M&A target

• What's New? 4QFY14 core net profit of MYR15m (-46% QoQ, -32% YoY) took FY14 core earnings to MYR87m (+41% YoY), accounting for 102% of our full-year forecast but only 90% of consensus.

The QoQ weakness was expected, due to (i) lower utilisation following the immobilisation of two OSVs in 4Q14 (i.e. Horizon and Liberty) and (ii) higher opex from earlier-than-scheduled dry-docking works for three of its vessels – Liberty (169 pax workboat), Sovereign (169 pax workboat) and Expedition (10k bhp AHTS) in 4Q14, to take advantage of the low-activity monsoon period.

• Whats Our View?  Our forecasts are unchanged. Following the change in dry-docking schedule, only Marathon (12k bhp AHTS) is earmarked for dry-docking works in 2015. We expect softer YoY earnings for 2015 before rebounding in 2016 due to: (i) fewer OSVs in operation (16 units vs 17 in 2014) and (ii) lower utilisation. 

Fleet rejuvenation may be part of Perdana’s 2015 agenda as it targets to refresh its fleet (average profile: 5.5 years for 2015). The disposal of Enterprise (built in 2001, 241 pax AWB, currently chartered to UMW OG) will lower the fleet age profile to 4.9 years. 

Risk-reward ratio remains compelling following the recent weakness in its share price. Perdana offers resilient earnings visibility with 70% of its OSVs contracted on long-term charters (orderbook of up to MYR1.1b extending into 2019) for the stable ‘production phase’ segment of the O&G value chain.

UMW Oil & Gas (UMWOG MK; BUY; TP: MYR3.45): 9M14: Dragged down by higher taxes

• What's New? 4Q14 core net profit of MYR70m (+3% QoQ, +38% YoY) took FY14 core earnings to MYR249m (+49% YoY), accounting for only 93%/95% of our/consensus full-year forecasts.

Despite strong revenue growth of 29% QoQ, this quantum did not flow directly down to the bottom line largely due to (i) a higher-than-expected tax rate (+4.6ppts to 16.7% in 4Q14) largely stemming from Naga 6’s operation in Vietnam and (ii) higher opex and net interest expenses. Strong QoQ revenue growth was attributed to (i) contribution of two new rigs (i.e. GAIT VI and Naga 6 since Aug/Oct 2014) and (ii) full three-month contribution from Naga 5, which underwent installation of additional equipment to meet the specifications of its new contract in 2Q14.

• Whats Our View?  Our forecasts are unchanged pending a briefing today. We see opportunities for UMWOG to capitalise on new, premium rigs built on a speculative basis when oil prices were high. Such assets can now be procured at 10%-15% discounts to their prevailing market prices and they come with a shorter delivery period. However, rig operators may need to settle for lower day rates and lower utilisation for new/extension contracts in light of global capex cut. For UMWOG, we see limited downside to earnings as demand for premium JUs remains robust. We expect UMWOG’s JUs to hit a 82% utilisation, and average USD150k (-6% YoY) DCR for 2015. 

Valuations are undemanding at 15x FY15 PER and 1.7x FY15 P/BV. Its Shariah status has added to the scarcity premium. The recent weakness in its share price is an opportunity to accumulate. Our TP offers a 24% upside. Maintain BUY.