Highlights

• 4 out of 7 rigs are operating…UMW Oil & Gas currently has four rigs (Naga 1,4,5 and 6) operating in 3Q15 while Naga 2,3 and 7 are off charter. We expect a weaker 2H15 as Naga 5 and 6 will complete their contract by end of 3Q15.

• Delivery of Naga 8… The Company just took delivery of its Naga 8 in early September. Naga 8 is a premium jack up rigs and capable of operating in water depth up to 400 ft and drilling to a total depth of 30,000 feet. The rig is currently under preparation for mobilisation to a potential client in Southeast Asia.

• Daily charter rate plunged by 33% to 40%... Given the plunged in crude oil price, daily charter rate for jack up rigs has fallen from US$150k/day in one year ago to US$90-100k currently as compared to floater’s rate which declined from US$500k/day to US$275k/day.

• EBITDA po sitive but P&L negative… At current rate of circa US$100k/day, EBITDA remain positive but in order to be P&L positive, we estimate utilisation rate need to be as high as 85%. If take into account the interest expense and principle repayment, cash flow is likely to be negative at current average charter rate of US$100k/day.

• Scrapping is needed to adjust oversupply… According to Seadrill latest company presentation, worldwide newbuild orderbook is 130 units or 27% of existing fleet of 480 units. In order to adjust the oversupply situation, the industry needs higher level of scrapping activities. About 47% of the global fleets are older than 30 years, these will be potential candidates for scrapping.

• Challenging outlook to continue through 2016 … Given the current oversupply situation for jack up rigs market, we expect challenging outlook to continue through 2016. 2HFY15 result likely to be weaker given lower utilisation rate and charter rate. We also cautious on the potential impairment on asset due to declining asset value and weakening underlying cash flow.

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 with strong balance sheet to weather through the downturn.

Negatives

• Prolong low oil price and Increased competition.

Valuation

• We maintain our SELL call with unchanged TP of RM0.77 based on 11x FY16 EPS.

Source: Hong Leong Investment Bank Research - 28 Sep 2015