Results

• Below expectations: 1QFY16 losses amounted to RM92.4m (excluding RM27.3m unrealised FOREX gain). It was better than ours (RM129m loss) but below consensus forecast (RM80.8m profit).

Deviations

• Mainly due to lower than expected charter rate of drilling rigs coupled with downtime incurred by plunge in rig utilisation post contract expiry in 1H15.

Highlights

• 1Q16 core earnings swung into loss of RM92.4m vs. RM32.2m profit in 1Q15. This is mainly attributable to deterioration of DCR amid low oil prices and lower rig utilisation due to non-extension of rig contract (Naga 2 and Naga 6 expi red in 2Q15). On the other hand, 2 new jack ups (Naga 7 & 8) has helped to partially mitigate the impact of DCR and utilisation rate drop but were insufficient to reverse the company’s losses.

• QoQ, losses widened to RM92.4m from RM71.4 in the preceding quarter as more assets were idle during the quarter due to lack of available wells and new drilling contracts. Interest cost has also surged by 17.5% QoQ due to higher borrowing levels contributing negati vely to the group’s earnings performance.

• The group’s earnings outlook in 2016 remai ns bleak with Naga 6 cont ract expected to expi re in 2Q16, potentially putting further strain on group’s earnings . Prospects of securing new rig contract remain uncertain with Petronas and other ASEAN NOCs looking to reduce its CAPEX further as announced earlier in the year

• At current rate of circa US$100k/day, EBITDA remain positive but in order to be P&L positive, we estimate rig utilisation rate needs to be as high as 90-95%, a tall expectation especially during current difficult times in the industry.

• In the current oversupplied rig market, we opine that charter rates and utilisation rates could remain low in the near term until a sustained oil price recovery is seen.

Forecasts

• We adjust our FY16 earnings to loss of RM255.9m from RM129m after adjusting for lower average rig utilisation.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Rating

SELL

Positives

• Market leader in domestic drilling sector.

Negatives

• Oversupply in jack up rig market, high asset overhead, and high short term borrowings.

Valuation

• We maintain our SELL call with TP maintained RM0.69 pegged to unchanged 0.5x FY16 BVPS.

Source: Hong Leong Investment Bank Research - 24 May 2016