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Thursday, January 5, 2017

Brokers Report: UMW Oil & Gas - Naga 7 18 month contract



Retain HOLD with higher target price (TP) of RM0.91




News


  • UMW-OG has received a conditional Letter of Award from PETRONAS Carigali Sdn Bhd ("PCSB") for a contract for the Provision of Jack Up Drilling Rig Services for PCSB (“Contract”).
  • The Contract is for the provision of Drilling Rig Services for PCSB, whereby UMW-OG Group will assign its UMW NAGA 7 for this contract. The Contract is for duration of up to eighteen (18) months.
  • UMW NAGA 7 is a premium independent-leg cantilever jack- up rig that has a drilling depth capability of 30,000 feet and has a rated operating water depth of 375 feet. Financial Impact
  • This contract win is positive surprise to us as we did not expect 3 rigs (Naga 6, 7 & 8) to be locked in for whole year of 2017.
  • Expected charter rate for Naga 7 in this contract to be circa US$100,000/day, given its just 2 year old coupled with higher specifications. P&L breakeven of this rig would require at least 70% utilisation rate.
  • Post this contract win, UMWOG will have at least 3 working rigs in the whole year of 2017 with one more (Naga 2) working in 2Q17, implying that close to 50% of the total fleet would be working in 2017, higher utilisation than 36% expected utilisation of rig fleet in 2016.


Pros/Cons


  • The group’s earnings outlook in 2017 remains bleak. Prospects of securing new rig contract in 2017, however, has improved due to expected recovery of oil prices in 2017 post OPEC’s commitment for production cut.
  • In the current oversupplied local jack up rig market, we opine that charter rates and utilisation rates could remain low (US$70,000-100,000/day) in the near term until drilling activities pick up more significantly.


Forecast


  • Raised FY17/18 forecast to -RM191m loss)/+RM42m profit) (from -RM236m loss)/+RM24m profit) to account for higher overall rig utilisation rate upon better expected demand for rigs.


Rating


HOLD ()
  • While overall prospects for rig market has improved upon bottoming of oil prices, company specific risks (i.e. high short term debt obligation) are still present.


Valuation


  • TP is raised to RM0.91 as we raised target FY17 PBV multiple to 0.7x from 0.5x previously to account for the positive market sentiment.



Source: Hong Leong Investment Bank Research - 05 January 2017

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