Investment Highlights

• We downgrade our recommendation on the soon-to-be rebranded UMW Oil and Gas Corp (UMWOG) from HOLD to SELL as the share price has rebounded above our unchanged fair value of RM0.30/share, based on a 40% discount to the diluted book value of RM0.50/share.

• The group has secured the contract to provide hydraulic workover units (HWUs) to Petronas Carigali under an umbrella contract. These services involve maintenance and/or remedial treatments on an oil or gas well.

• This could involve the use of all or any of UMWOG’s 5 HWU, namely UMW Gait 1, UMW Gait 2, UMW Gait 3, UMW Gait 5 and UMW Gait 6 to undertake workover services.

• The contract, commenced on 22 December last year, is under an umbrella framework which may comprise a series of individual orders and call-outs. It has a term of 3 years with an option to extend for another year.

• At present, there has not been any call-out or work order, which will be made at stipulated price, for those HWU services.

• Currently, HWUs represent a minor part of the group’s asset base and currently register losses for the group given that the HWUs are largely idle over the past year.

• While this award is mildly positive for the group, our forecasts are maintained as the utilisation of these HWUs do not have a high degree of certainty.

• Separately, even at near full rig utilisation 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 utilisation 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 last year. However, these may be short-term charters to replace current contracts which are expiring in 2018.

• However, full utilisation at current day 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 recapitalisation 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 19% share price discount to its estimated diluted book value as too low.

Source: AmInvest Research - 17 Jan 2018