Review

• UMW Oil & Gas Corporation Bhd (UMW-OG) registered 9MFY16 core net loss of RM292.3mn, which was below ours and consensus expectations.

• The main cause for the variance was a lower than expected utilisation rate for UMW-OG’s jack-up rig fleet. We understand that in 3Q almost all rigs were idle. That said, 4Q should be better as two of the seven jack-ups have secured contracts.

• Higher finance costs of RM32.8mn (QoQ: +30.1%, YoY: +94.6%) further exacerbated UMW-OG’s losses in 3QFY16.

• Besides that, demand for UMW-OG’s hydraulic workover unit (HWU) declined as management reckons there was an increase in availability HWUs in the market. The increased competition likely drove down DCRs for HWUs.

• Additionally, UMW-OG is once again loss making at the EBITDA level in 3Q16, which is unsurprising given the status of its fleet.

• On a brighter note, UMW-OG currently has 3 rigs contracted. We understand that NAGA 2 will be moved to Kemaman for preparation works. Thereafter, it will be sent to the Ophir field in 2Q17 to begin operations. Meanwhile, NAGA 6 and 8 have already began operations in Sept and Nov respectively.

• According to management, there are 2-3 more contracts that may be clinched before the end of the year. We deem this mildly positive albeit tracts adopting “pay-per-use” basis remunerati

Impact

• We reduce utilization rates for UMW-OG’s jack-up rig fleet to 26%/35%/38% in FY16/17/18 (previously: 30%/38%/58%) to take into consideration the “pay-per-use” basis that will subdue real utilization rates.

• Furthermore, we predict slower recovery in DCRs in FY17/18 given UMW-OG’s clients are reducing costs in preparation for new crude oil price norm of USD50/bbl.
   
• Furthermore, we revise our USD/MYR assumption rate for FY17/18 to 4.25/4.25 from 4.1/4.1 previously to be in-line with in-house revision.
   
• All in, our earnings are reduced by 17%/>100%/>100% for FY16/17/18.

Outlook

• We expect the challenging environment to persist on the back of the current oversupply of jack up rigs in the market. Although tender activities have increased, we believe award of contracts will still be slow.

• On the bright side, Petronas favors local players, hence any local contracts would likely be awarded to UMW-OG. That said, we expect DCRs to be heavily discounted and remunerated under “pay-per-use” basis. Hence, UMW-OG’s earning remains uncertain going forward.

Valuation

• Following our change in earnings, our TP is reduced to RM0.55 based on unchanged 0.45x P/B. Maintain Sell as we continue to see earnings headwinds in the near term. A largely idle fleet bleeding cash remains a key challenge for UMW-OG.

Source: TA Research - 29 Nov 2016