News

• UMW-OG has received a conditional Letter of Award from PETRONAS Carigali Sdn. Bhd. ("PCSB") for a contract for the provision of a Jack-Up Drilling Rig for PCSB. The Contract is for the provision of Drilling Rig Services for PCSB's Drilling Programme, whereby UMW-OG Group will assign its UMW NAGA 6 for this contract. The Contract is for duration of two (2) years with one (1) year option to extend.

• UMW NAGA 6 is a premium independent-leg cantilever jack-up rig that has a drilling depth capability of 30,000 feet and has a rated operating water depth of 375 feet.

Financial Impact

• Deemed within expectations as we have assumed overall 50% rig utilisation for the group.

• DCR is not disclosed for the contract announcement but it is expected to be at the range between USD100,000-110,000/day given that is a premium jack-up rig with better drilling capabilities.

• After this contract win, UMWOG operating rigs would still be maintained at 4 rigs in 2H16 as Naga 7 has come off-hire by 2Q16. To note, Naga 6 has been off-hire since Sept 15.

• On top of that, Naga 2, 3 and 5 are still idle for the moment with the group currently looking for charter.

• While the contract win is mildly positive, we believe further prospect of UMWOG to fill up all its rigs by solely depending on Petronas’ demand is bleak as Petronas is expected to require only 2-4 rigs per year to meet their drilling needs under the current oil price scenario.

Outlook

• The group’s earnings outlook in 2016 remains bleak. Prospects of securing new rig contract remains uncertain with Petronas and other ASEAN NOCs looking to reduce its CAPEX further as announced earlier in the year.

• Recent talks of venturing into the Middle Eastern drilling market is also taken with reserves as it is currently overcrowded by foreign rig owners despite the high drilling activity in the region.

• At current rate of circa US$100k/day, EBITDA remains positive but in order to be P&L positive, we estimate rig utilisation rate need to be as high as 90-95%, difficult to be achieved 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 sustainable oil price recovery is seen.

Catalysts

• Positives: Market leader in domestic drilling sector

Risks

• 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 - 1 Jun 2016