Highlights

Following are the salient points from analyst briefing yesterday.

QoQ, 3QFY14 revenue increased by 7% mainly due to full quarter utilisation of Naga 3 coupled with additional contribution from new hydraulic workover units, GAUT 6 which commenced operation in Aug 14.

Despite the current weakness in oil price, it expects capex for upstream from national oil companies to remain intact given the need to maintain production.

Current low oil price environment also provides opportunity to expanding asset. There are 70 new rigs being built but only 30 are built by operator while the rest are for speculative built. As an operator, UMW O&G stand to benefit from the opportunity to purchase these assets at discount.

The company has an orderbook of RM1.9bn as of Oct 14 and is bidding 29 drilling contracts in local and oversea worth about RM5.4bn.

Naga 7 is 97% completed and will be delivered in Dec 14 while Naga 8 at 57% completion stage and slated for delivery in Sep 15. Naga 7 has secured contract in Philippines and expected to commence in mid Jan 15.

Comments

Despite benefiting from localisation of rigs, we are cautious on the near term outlook given pressure on charter rate amidst declining oil price. We understand that some new contract’s charter rate have seen 3-5% drop.

In view of the softening charter rate in near term, we have already factored in lower average charter rate of US$142k/day in FY15 (vs. US$147k/day previously).

After the recent acquisition of Naga 6 and 7, a total of 8 ri gs will be operating in FY15. Net gearing is expected to remain comfortable at 0.4x by end of FY14, which still provides room for asset acquisitions.

According to Pareto Securities, drilling composes ~50% of E&P total costs. I n the declining oil price en vironment, exploration activities will tend to be impacted first with number of drilling decreasing. Henc e, any extended declining in oil price will likely dampen charter rate and utilization for jack up rate. However, UMW O&G should be less impacted as compared to other rig service providers in the region due to shortage of locally owned rigs .

Forecasts

• Unchanged.

Risks

• Global recession hitting O&G price; Technology advancement; relaxation of Petronas’ domestic Policy.

Rating

HOLD

Positives

• Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives

• Increased competition for the markets.

Valuation

• We maintain our HOLD call and TP of RM2.90 based on unchanged 16x FY15 earnings.

Source: Hong Leong Investment Bank Research - 26 Nov 2014