• 2Q20 core loss missed our and consensus expectations. 2H20 is expected to weaken further
• Near-term prospect remains weak on oil majors’ cautious capex despite recent stabilization of global oil prices. More contracts needed to raise 2021 utilisation, with existing contracts in hands translating to <25% utilisation thus far.
• 61%/65%/75% utilisation rates assumed for 2020-22E. Maintain Sell until clearer visibility in sight. Lowering target price to RM0.13.

Earnings Miss

2Q20 core net loss of RM8.3m erased profits earlier in the year, narrowing 6M20 core net profit to RM12m. However, this was still a vast improvement against 6M19’s core loss of RM20m, with the average rig utilisation higher by 7ppts to 77%. However, 2020 will be a tale of two halves as 2H20 utilisation is unlikely to match 2H19’s level of 89% due to global oil majors’ cautious capex given the plunge in global oil prices in March 2020. The real near-term challenge will be on the timing of contracts awarded in order to turn around the operation in 2021.

Sequential Rig Utilisation Fall

2Q20 revenue declined 20% qoq on a lower rig utilisation of 67% (1Q20: 86%), as Petronas decided not to exercise any of the renewal options upon expiry of the firm contracts given the uncertain environment and clients holding back on drilling activities. This pushed the EBITDA margin lower by 8.4ppts, resulting in core losses in 2Q20.

Lowering Our Rig Utilization and DCR Assumptions

We now forecast a net loss for 2020 (from a net profit) to reflect a lower rig utilisation of 61% vs 72% previously. Based on the current status, assuming none of the rigs secure any new contracts and factoring in Naga 2 and 8’s recent 3-month contracts, 2020 rig utilisation should average 65% at best. We widen our 2021 loss forecast as we lower the utilisation to 65% vs 67% previously. We maintain our view that utilisation should improve by 2022, hence we maintain our existing utilisation assumption of 75% but cut the EPS forecast by 3% to factor in higher costs. We have factored in US$70-71k/day charter rates for 2020-22E.

Maintain Sell

We lower our DCF-based target price to RM0.13 (from RM0.15), and maintain our Sell rating given the uncertain outlook. Upside risks: better-than-expected rig utilisation and daily charter rates

Source: Affin Hwang Research - 26 Aug 2020