News

• UMWOG announced that it has received a Letter of Award from Hess Exploration and Production Malaysia B.V. ("Hess") for a contract for the provision of a High Pressure High Temperature Jack-Up Drilling Rig and Services for North Malay Basin, Malaysia.

• The Contract is for the provision of Drilling Rig Services for Hess' Drilling Programme, whereby UMW-OG Group will assign its UMW NAGA 8 for this contract. The Contract is for a duration of eighteen (18) months with option to extend for further twelve (12) months.

Financial Impact

• A timely win for the group as Naga 8 has come off contract since mid-May 2016. Some earnings contribution could be seen in 4Q16 assuming the contract commences in November.

• Although no contract value is disclosed, DCR of the asset is expected to be similar previous contracts, i.e. US$80- 90k/day, which is consistent with the current day rate for jack up rigs.

• It is deemed within our assumptions as we have factored in similar day rates for the rigs of the group.

Pros/Cons

• While we still expect the group to register full year loss in 2016, we opine that the group’s earnings may have bottomed out in 1Q16 and losses could be narrower in the coming quarter premised on resumption of Naga 6 into operation with contract expected to start in Oct.

• Cash flow remains an issue for the group with high asset burn rate and impending obligation to settle its RM1.3bn worth of short term borrowings before end of this year. The group may need to resort to dilutive equity fund raising or help from its parent co. to avoid refinancing its short term debt at significantly higher interest cost.

• 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.

Risks

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

Forecasts

• Maintained.

Rating

SELL (↔)

• While the stock is currently trading significantly below its book value, we believe near term cash flow risk remains elevated with high level of short term debt obligation unable to be fulfilled from internally generated funds.

Valuation

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

Source: Hong Leong Investment Bank Research - 28 Oct 2016