· We maintain our HOLD rating on UMW Oil and Gas Corp (UMWOG) with an unchanged fair value of RM1.05/share.

· Our fair value, which is based on a 0.7x FY16F price/book value, remains unchanged even though we have cut our forecasts to a loss of RM50mil for FY15F and lowered FY16F-FY17F earnings by 9%-34% on lower utilisation and rig charter rates.

· We have also removed our FY15F dividend assumption given the expected overall loss for the year.

· As forewarned in our report yesterday, the group’s earnings came in below expectations. Excluding one-off foreign exchange gains from the ringgit depreciation on the group’s US$ cash, UMWOG suffered a 3QFY15 loss of RM36mil as Naga 2 and 3 have been off charter since May this year.

· For 3QFY15, the drilling division suffered a loss of RM19mil with 3 rigs – Naga 2, 3 and 7 - being off charter.

· For 9MFY15, the group managed to just breakeven with a minor core net profit of RM3mil as the drilling pre-tax profit plunged 87% YoY to RM25mil while oilfield services dropped 25% to RM4mil. The reported 9MFY15 net profit of RM37mil came mostly from forex gains.

· UMW Naga 8 jack-up rig has secured its maiden charter for SapuraKencana’s drilling programme, while Naga 7 will be deployed later for Petronas Carigali’s 7-well contract plus the option for 2 more.

· However, Naga 6 and 5 completed their charters in Vietnam in September and October respectively, and are currently unemployed.

· Hence, half of UMWOG’s fleet of 8 rigs currently does not have a charter. As such, we expect the group’s losses to widen further in 4QFY15.

· The outlook for UMWOG remains challenging in the near-tomedium 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 rates are likely to contract further as more rigs reach the end of their charter contracts this year.

· We are cautious on the stock given that there is an additional risk of asset impairment provisions, as the market valuations of jack-up rigs have declined, in tandem with lower charter rates and utilisation.

· The stock currently trades at a high FY16F PE of 30x due to its weak earnings prospects. 

Source: AmeSecurities Research - 25 Nov 2015