Highlights

• Following are the salient points from analyst briefing yesterday.

• Given the current weakness in oil price, UMW O&G started to see pressure on charter rate with average 6% to 7% reduction and number of new tender also dropped by 50%.

• Among its portfolio, 5 rig’s contracts (Naga 2, 3, 5, 6 & 7) will expired in FY15 and it expects lower utilisation rate as compared to FY14.

• 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. Out of 16 rigs operating in Malaysia, only 2 rigs are local owned. Of the 14 foreign-owned rigs, we understand that 9 will be expired in 2015 which provide opportunities for UMW O&G.

• Current low oil price environment also provides opportunity to expanding asset. There are 58 new rigs being built in Asia Pacific yards but only 29 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 RM1.8bn as of Dec 14 and is bidding 22 drilling contracts in local and oversea worth about RM5.4bn. Naga 8 is 76% completed and will be delivered in Sep 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 coupled with lower utilization.

• 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 and US$134/day in FY16.

• Net gearing remain comfortable at 0.34x, which still provides room for asset acquisitions.

• According to Pareto Securities, drilling composes circa 50% of E&P total costs. In a declining oil price environment, exploration activities will tend to be impacted first with number of drills decreasing. Hence, any extended decline in oil price will likely dampen charter rate and utilization for jack up rate.

Forecasts

• Unchanged.

Risks

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

Rating

SELL

Positives

• : Market leader in domestic drilling sector withstrong balance sheet to expand further.

Negatives

• : Increased competition.

Valuation

• We maintain our SELL call and TP of RM2.50 based on unchanged 14x FY16 P/E.

Source: Hong Leong Investment Bank Research - 25 Feb 2015