Difficulties continue

The tough drilling market environment continues to take a toll on UMWOG financials, with 3Q16 the weakest results since IPO at a core net loss of RM134.8m. We lower our FY16-18E earnings significantly as we widen our loss assumptions given the weak 3Q16. Maintain SELL on UMWOG with lower TP of RM0.63 as we roll forward our valuation year to 2017, pegged to an unchanged 0.5x 2017E P/BV.

Net loss widens

UMWOG reported a larger headline net loss of RM135.4m in 3Q16. As of 9M16, we have yet to see UMWOG recognise any impairment on its fleets of jack-up drilling rigs. 9M16 core net loss widened to RM292m, missing our and street expectations. The results were disappointing and continue to be affected by declines in jack-up utilisation rates and daily charter rates, as exploration activities continue to be put on hold.

3Q16 revenue falls to lowest level since IPO

Revenue in 3Q16 fell to the lowest level since the IPO, to RM49.7m (-61.8% qoq, -76.7% yoy), as most of the NAGA jack-up rigs continue to be idle. In its total fleets of 8 rigs, only 1 unit (NAGA 1) was working in 3Q16 as compared to 4 rigs (NAGA 1, 4, 7 and 8) that were working in both 2Q16 and 3Q15.

Earnings expected to rebound in 4Q16

NAGA 6 has been deployed for work end September 2016, while NAGA 8 has commenced operations early November 2016. As such, we expect 4Q16 earnings to rebound from 3Q16 low. Currently, 3 out of 8 rigs are contracted – NAGA 2 is to commence work some time in 2Q17 for Ophir field (minimum of 50 days), NAGA 6 will be working for Petronas Carigali for 2 years (contract awarded in June 2016), and NAGA 8 with Hess was awarded in October 2016 (contract period for 18 months plus 12-month extension option).

Debt-level concerns continue; TP lowered to RM0.63

Net-gearing level increased to 0.89x in 3Q16 (from 0.85x in 2Q16). The proportion of short-term borrowings to total debt remains relatively unchanged qoq at 38%. We maintain our SELL rating on UMWOG with a lower 12M TP of RM0.63, based on an unchanged 0.5x 2017E P/BV.

Risks

Key risks to our call would include a sharp recovery and stabilisation of oil prices leading to a recovery in demand for jack-up rigs.

Source: Affin Hwang Research - 29 Nov 2016