- We maintain our HOLD rating on UMW Oil and Gas Corp (UMWOG) with an unchanged fair value of RM1.05/share, based on a 0.7x FY16F P/BV. The group is expected to announce its 3QFY15 results later today.

- The group has confirmed that SapuraKencana Petroleum has awarded a contract, which commenced on 28 September 2015, for UMW Naga 8 to drill 18 wells with an option to extend for 3 additional wells. Assuming that it takes about a month to drill a well, this could mean that this contract could be completed in up to 21 months (if the option was exercised).

- The newly built UMW NAGA 8 is a premium independent-leg cantilever jack-up rig that has a drilling depth capability of 30,000 feet and has a rated operating water depth of 400 feet.

- As with the recent Petronas Carigali’s charter for UMW Naga 7 on 28 October 2015 to drill 7 wells with an extension of 2 more wells, the group did not indicate the contract value or charter rates.

- However, we understand that the daily rates are well below US$100,000, compared to Naga 4’s US$144,000 charter from Petronas Carigali until 2Q2016.

- Currently, half of UMWOG’s fleet of 8 rigs does not have a charter. Naga 2 and 3 have not been employed since May this year while the charters of Naga 5 and 6 expired last month.

- The outlook for UMWOG remains challenging in the near-term as a slowdown in the sector resulted in continued downward pressure on day rates, which are exacerbated by an influx of uncontracted newbuilds. Furthermore, utilisation is expected to contract further as more rigs are completing their contracts this year.

- We are cautious on the stock given that there is a high risk of asset impairment provisions as the market values of jackup rigs have declined, in tandem with lower charter rates and utilisation. The stock currently trades at a high FY16F PE of 20x due to its weak earnings prospects.

Source: AmeSecurities Research - 24 Nov 2015