News

• UMWOG has secured contracts from Petronas Carigali with a combined value of US$34.8m (RM151.1m).

• For Naga 3, the contract is to drill 5 firm wells with option of 1+1+1+1+1 well, commencing in June 2017.

• For Naga 4, the contract is to drill 2 firm wells with option of 1+1+1 well, also commencing in June 2017.

Financial Impact

• A slight positive to UMWOG as the contracts would help to stem the cash burn from its rigs.

• Based on the assumption of 40 days duration/well, we arrive at an implied DCR of up to US$58,000/day, which is above its average cash cost per rig (daily operating cost and interest cost).

• Based on our estimations, the average rig utilisation rate would improve significantly from 21% in 2016 to 60.7% in 2017.

• With the 2 additional rigs commencing operations in 2H17, the group is expected to achieve positive EBITDA in 2017, a big turnaround from its negative EBITDA registered in 2016.

• However, we still expect the group to register P&L losses for 2017, dragged by the high depreciation charges.

• We believe jack up rig market will continue to be depressed due to oversupply of rigs and rates are expected to remain at current level for 2017, assuming global oil prices stay at US$50-60/bbl range.

Pros/Cons

• Contract secured helped the group to achieved cash flow positive position.

• Daily charter rates are insufficient to cover non-cash costs.

• Utilisation of rigs still depends on actual rig utilisation by clients during contract period and could be termination prematurely if market goes south.

Forecast

• Maintain forecast pending results announcement.

Rating HOLD ( ↔ )

• While it’s implied upside is at 15.8%, we believe share overhang from upcoming rights issue and potential selling pressure from shareholders post demerger from UMWH would limit the group’s upside in the near term. In addition, rig market is expected to remain weak in 2017.

Valuation

• We maintain HOLD with TP unchanged at RM0.72 based on FY17 PBV multiple of 0.8x

Source: Hong Leong Investment Bank Research - 16 May 2017