News

• UMW Oil & Gas’s Naga 7 secured a drilling contract from Petronas Carigali.

• The contract is for 7 firm wells with extension option of 1+1 well with estimated minimum duration of 7 months and commenced on 15 Oct 2015. Financial Impact

• No contract amount was disclosed. We estimate the daily charter rate for this contract to be around US$100k/day, in line with current market rate of US$90-100k/day.

Pros/Cons

• We are not surprised by the contract award and this is already factored in our assumption of rig’s utilisation. To recap, Naga 7 has been idled since 1Q15 after termination by Frontier Oil Corporation. Together with this contract win, UMW Oil & Gas currently has only 3 rigs (Naga 1,4,7) operating after Naga 5 and 6 completed their contract by end of 3Q15. We expect a weaker 2H15 due to lower utilisation.

• The Company just took delivery of Naga 8 in early September. Naga 8 is a premium jack up rig 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.

• 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 interest expense and principle repayment, cash flow is likely to be negative at current average charter rate of US$100k/day.

• 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 are 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 - 29 Oct 2015