Friday, September 6, 2013

Coastal Contracts expands its horizon

Coastal Contracts expands its horizon
Posted on 6 September 2013 - 05:40am
Izwan Idris and Liew Jia Teng

PETALING JAYA (Sept 6, 2013): Drilling offshore for oil is often an expensive bet, but with crude prices showing surprising strength holding above US$100 (RM330) a barrel, companies including Coastal Contracts Bhd are jumping into the bandwagon for a piece of the action.

Earlier this year, the Sandakan-based shipbuilder ordered its first jack-up drilling rig costing US$200 million (RM660 million) from a shipyard in China for delivery in July next year.

"The demand for premium drilling rigs is growing, supported by offshore exploration successes and oil companies' preference to replace older rigs due to environmental and cost concerns," Coastal Contracts business development manager Kelvin Ng (pix) said.

"I think we should not have a problem to get a contract by the time our rig is completed,'' he told SunBiz in a recent interview.

At least four new oilfields have been discovered off the coast of Sabah over the past two years. Malaysia holds some of the most prolific hydrocarbon basins in the region and it is estimated that there are currently around 163 oilfields and 216 gas fields around the country.

Industry reports said Southeast Asia is one of the fastest growing markets for jack-up drilling rigs in the world.
"We are looking at every opportunity that is available to us,'' Ng said.

Coastal Contracts is among a growing number of Malaysian listed companies that are venturing into the lucrative drilling rig charter business.

The biggest tender rig operator in the world is a Malaysian company. SapuraKencana Petroleum Bhd now has 24 rigs worldwide in its fleet following the completion of Norwegian company Seadrill Ltd acquisition in April this year.

Another driller that is coming to the market is UMW Oil & Gas Corp Bhd, which is slated for a listing on Bursa Malaysia before the end of the year. The company has four jack-up drilling rigs in its fleet, and is planning to use proceeds from its listing exercise to acquire more assets. Part of UMW O&G longer-term plan is to set up a local drilling academy to ensure a steady supply of trained manpower for the industry.

The move to develope human capital for the industry bodes well for up-and-coming players such as Coastal Contracts and Perisai Petroleum Bhd.

Perisai is taking delivery of its first drilling rig in June next year, with a second rig coming in by the middle of 2015. The company, too, has yet to secure contracts for the rigs.

Ng concedes that Coastal Contracts lacks the experience in the drilling rig charter business, but he said that it is a risk worth taking.

"The rig could generate between RM30 million and RM40 million in additional profit a year based on prevailing daily charter rates,'' he said.

He also said that the company is looking to expand into the rig maintenance and support services.

"We have a big yard in Sandakan and we have the people to do it,'' he said.

A buoyant offshore market in the oil and gas industry has boosted Coastal Contracts' outstanding order book to RM1.2 billion, with RM1.03 billion worth of orders for new offshore support vessels (OSVs) and barges secured this year.

Ng said that the company could potentially add RM400 million worth of new orders before the end of the year.

"We are getting orders for everywhere. The client can be a Singaporean-based company, but the vessels they ordered can be deployed anywhere whether it is in the Middle East or South America,'' Ng said.

He said demand for technologically advanced and deepwater-capable OSVs that can withstand harsher operating conditions is rising, as new wells are found in deeper and more challenging environments.

Ng said more than half of its new builds are sub-contracted to yards in China due to supply issues and constraints faced by its Sandakan yard. "We have a team there working in the Chinese yards to ensure that everything is up to specification."

The outsourcing strategy has worked well for Coastal Contracts.

Second quarter ended June 30, 2013 (Q2FY13) net profit increased 11% to RM32 million from RM28.9 million a year ago, despite an 11% decline in revenue to RM143 million.

Analysts are projecting earnings to grow to RM128 million, or 27 sen a share, this year and reach RM141 million, or 29 sen a share in FY14.

At RM2.69, the stock is valued at less than 10 times in projected earnings, which is a huge 30% discount to most of its bigger peers.

Ng said the group's existing order book is expected to sustain the company well into 2014. After that, he expects contribution from the rig business to kick in in a big way.

That or the company might even consider selling the rig, if there is a good offer for it.

Publish date: 06/09/13

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