News

• UMWOG has received a Letter of Award from Ophir Production Sdn Bhd ("OPSB") for a contract for the provision of a Jack-Up Drilling Rig and Services for Ophir Field, Terengganu, Malaysia.

• The contract is for the provision of Drilling Rig Services for Ophir's Drilling Programme, whereby UMW -OG Group will assign its UMW NAGA 2 for this contract.

• The Contract is to drill three (3) firm wells for a minimum duration of fifty (50) days, commencing in second quarter of 2017.

Financial Impact

• A timely win for the group as Naga 2 has come off contract since mid-May 2015. Aside from helping to pare down losses from the group, it would also help to partially stem the cash burn from loan repayment.

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

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

Pros/Cons

• 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 distressed 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 FY17 BVPS.

Source: Hong Leong Investment Bank Research - 11 Nov 2016