UMW OG---NO GOOD

It is confident that it will be cash-flow positive after its rights issue is completed by the third quarter of 2017, with major shareholder PNB committed to taking up its full entitlement.

On May 4 2017, UMW-OG proposed to raise up to RM1.81 billion via a rights issue of up to 6.05 billion new shares together with up to 1.51 billion free warrants at an issue price of 30 sen per rights share.

Out of the total gross proceeds from the rights issue, UMW-OG is planning to utilise RM1.5 billion to repay borrowings, RM310 million for working capital and the rest for expenses of the corporate exercise.

UMW Holdings Bhd, which holds a 55.73% stake in UMW-OG, is exiting its oil and gas business and will refocus on its core businesses of automotive, equipment, and manufacturing and engineering. This will see PNB turn major shareholder with a 45.5% stake in UMW-OG post-demerger, while the EPF will own 12%.

With PNB agreeing to absorb rights shares not undertaken by other shareholders, it may well fork out a minimum of RM826.3 million. It is unclear whether EPF will answer the cash call.

The lower issue price of 30 sen is to make it more attractive to investors. But at that kind of price, the group’s share capital will increase from two billion to eight billion.

UMW-OG has bagged two contracts worth a combined US$34.81 million (RM150.38 million) to provide jack-up drilling rig services for Petronas Carigali Sdn Bhd in mid May 2017.

One of the contracts involves providing Naga 3 jack-up rig to drill five firm wells for Petronas Carigali, while another contract is to provide its Naga 4 jack-up rig to drill two firm wells, both commencing in June 2017.

The provision of the drilling rig services is expected to contribute positively to the earnings and net assets of UMW-OG group during the contract period principally for the financial period ending Dec 31, 2017 and the financial period thereafter.

The contracts won’t [significantly improve Streets’ valuation] as charter rates are not at a rate that is going to be very profitable.

Other key concerns dragging the share price down is the overhang with the rights issue. 

The counter may also face a one-off selldown after UMW Holdings completes the distribution of its stake in UMW-OG to its shareholders.

However the rights issue is the best way for UMW-OG to source its fund right now, lest risking a jump in gearing. The rig market is not cash generative at the moment. The only other way is by equity funding or rights issue. Or unless its major shareholder agrees to the issuance of preferred stock, which is what they are doing now (May 2017). From the rights issue, any additional rights shares undertaken by PNB beyond its 65% shareholding limit will be converted to Islamic RCPS.

Meanwhile, its CEO said UMW-OG will have secured full utilisation of its seven rigs under management come June 2017, but subdued charter day rates remain a dead weight for the struggling downstream oil and gas player.