Investment Highlights

• We maintain our HOLD call on the soon-to-be rebranded UMW Oil and Gas Corp (UMWOG) with unchanged forecasts and fair value of RM0.30/, based on a 40% discount to the diluted book value of RM0.50/share.

• As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.41/share but expected to register losses this year, is currently trading at half its book value.

• Our forecasts are maintained even though UMWOG has secured a short-term charter for its Naga 4 jack-up rig from ConocoPhillips Sarawak Ltd.

• The contract involves drilling 2 firm wells for US$6.8mil with the option of 2 additional wells. Assuming that each well takes 50 days to drill, the contract price works out to just around breakeven level at US$68,000/day over a 3- month firm period.

• Naga 4’s charter expires in January 2018 and will commence under the new ConocoPhillips contract in 2QFY18. However, the charters for Naga 2 and Naga 6 will expire by mid-to-end of this month while Naga 3 will expire in June 2018.

• Also, the initial 18-month charter for Naga 8 will end in March 2018 if Hess does not exercise its 1-year option.

• Even at near full rig utilization of 90% in 3QFY17, UMWOG still suffered a minor core loss of RM4mil. As there will be 3 rigs out of charter in 1QFY18 or a utilization rate of 60%, we expect a resumption of losses for the group.

• We understand that there may be 12 rig charters expected to materialize in 2018 vs. 5 this year. However, these may be short-term charters to replace current contracts which are expiring in 2018.

• The group's average rig charter rate of US$70K appears to have bottomed out with Brent crude oil price above US$60/barrel.

• However, full utilization at these rates will mean that UMWOG will just barely be breaking even, notwithstanding the group's efforts to draw further cost efficiencies with a stronger credit profile amongst suppliers and financiers. Hence, we do not expect any near-term re-rating for the stock.

• Given that the group will incur one-off recapitalization and rig impairment costs in 4QFY17 amid persistent losses against the backdrop of jack-up charter rates which are just about breaking even, we view the 40% share price discount to its estimated diluted book value as justified.

Source: AmInvest Research - 5 Dec 2017