- UMW recently secured a new contract for its Naga 2 jack-up rig from PetroVietnam Drilling & Well Services. Naga 2 is currently deployed in Indonesia’s Ujung Pangkah field in the Pangkah PSC-Offshore (East Java) via a contract with Hess (Indonesia-Pangkah) Ltd . The contract with Hess is a 1 year + 1 year contract that will expire in April this year and the rig is expected to be moved to Vietnam waters in May.

- Based on our chat with industry players, we identify two key positives from the new contract:-

- (1) The new contract entails much higher day rates of circa USD150K-156K/day, 11%-16% higher versus the current day rate with Hess of USD135K/day;

- (2) The new contract with PetroVietnam is a direct deal, which should entail better margins than the current contract with Hess, which is a back-to back arrangement.

- However, this new contract entails a much shorter contract period of 6 months + 6 months given that PetroVietnam is an entirely new client. We also suspect that the client would want to avoid locking in the current high day rates for too long a period.

- UMW is also currently negotiating a contract for its Naga 4 jack-up rig – Naga 4 entails higher specs compared to Naga 2 and Naga 3, i.e. 400ft rated operating water depth capability vs. 350ft for the existing jack-up rigs. The much higher day rates currently would have a positive bearing on Naga 4’s prospective earnings.

- Our call is currently Under Review, but we see upside bias to our fair value of RM13.20/share currently as we have factored in much lower day rates for Naga 2 and Naga 4 in our projections versus the actual rates secured.

- Valuation is not exactly cheap at 15x FY13F earnings currently. However, we believe the share price may hold up in the near term as investors flock into UMW for exposure to the listing of its O&G unit. Implied valuation of UMW O&G is c.18x FY13F earnings, at a slight discount to O&G asset-owner operators’ valuation of 19x-20x, e.g. Bumi Armada.

Source: AmeSecurities