UMW-OG  has  served  a  Notice  of  Arbitration  on  Frontier  Oil  to  seek  an award of damages and / or compensation for all loses arising from Frontier Oil's breach of contract amounting to US$19.2m. To recap,  UMW-OG and Frontier  Oil  had  on  15  September  2014  entered  into  a  Drilling  Contract where UMW-OG agreed to provide a drilling rig, UMW NAGA 7. According to  the  contract,  Frontier  Oil was  to  have arranged  for  the  issuance of the Bank  Guarantee  of  US$5m  and  an  Advance  Payment  of  US$15m  on  or before  15  December  2014.  Frontier  Oil  has  failed  to,  refused  to  and  /  or neglected to arrange for the said Bank Guarantee and Advance Payment. (Source: Bursa Malaysia)

Comment: We are negative on the announcement. While it is premature to predict  the  outcome  of  the  arbitration,  the  case  highlights  the  market weakness and business risks in the regional jack up rig market. It reaffirms our  cautious  view  on  UMW-OG's  business  environment  and  our  SELL rating.  We  maintain  our  earnings  forecast  for  now  pending  further management guidance on the status of UMW NAGA 7. Maintain SELL with an unchanged TP of RM2.00 based on 12x CY16E PE.

Source: Affin Hwang Capital Research - 13 Apr 2015