Results

• Below expectations: 3QFY16 loss amounted to RM135.4m, bringing 9M16 core loss to RM267.8m. It was below our and consensus forecast (98.1% & 105% of estimated loss, respectively).

Deviations

• Higher than expected idling of rig assets.

Highlights

• YoY , the group posted a loss of RM135.4m in 3Q16 against RM23.9m core loss in 2Q15 mainly due to lower number of rigs being utilised and lower time charter rates observed in the quarter on the back of slump in oil prices. In addition, 4 more rigs have come off charter in the quarter worsening the situation.

• QoQ , core loss widened to RM135.4m against preceding quarter (-RM67.2m) as more rigs came off charter on QoQ basis resulting in lower rig asset utilisation (with only one rig working in the quarter).

• Ytd, the group raked in cumulative core loss of RM267.8m in 9M16 vs. core net profit of RM36.8m in 9M15 as a result of (i) lower number of operating rigs due to expiry and early termination of drilling contract (ii) lower time charter rates renegotiated in the financial period and (iii) higher asset overhead YoY due to delivery of Naga 7 and Naga 8.

• While we still expect the group to register full year loss in 2016, we opine that the group’s level of loss may have already bottomed in 3Q16 and could narrow in the coming quarter premised on (i) resumption of Naga 6 into operation with contract expected to start in Oct and (ii) resumption of Naga 8 contract in 4Q16.

• 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.

Forecasts

• Forecast is cut to RM-340/-236/+24m from RM-273/- 67.8/+54.5m for FY16/17/18 as we further reduce our asset utilization assumptions.

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

Rating

SELL ( ↔ )

• No near term recovery in drilling market is expected with oil prices expected to remain volatile and rig market to remain oversupplied. Near term liquidity risks remain high.

Valuation

• We maintain our SELL call with lower TP at RM0.64 (from RM0.69 previously) pegged to unchanged 0.5x FY17 BVPS.

Source: Hong Leong Investment Bank Research - 29 Nov 2016