UMW Oil & Gas : Short-term charter for Naga 2 jack up Hold

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UMW Oil & Gas : Short-term charter for Naga 2 jack up Hold

We maintain our HOLD call on UMW Oil and Gas Corp (UMWOG) with unchanged forecasts and fair value of RM0.80/share, based on book value with a 20% discount on the cost of the group’s rigs. UMWOG has secured a short-term charter for its Naga 2 jack up rig, starting in 2Q2017, from Ophir Production Sdn Bhd (OPSB) for the marginal Ophir Field, Terengganu, Malaysia.

The contract involves 3 firm wells which will cover a minimum of 50 days. While the announcement did not indicate Naga 2’s daily charter rate, we expect it to be similar to the weak South East Asian jack-up rates which have fallen to US$70k from US$90k in mid-2015 on utilisation below 50%. Additionally, the new contract would not significantly change the group’s rig utilisation, which is currently only at 25% and still far from the breakeven level. At this stage, we understand that only Naga 6, which is chartered to Petronas Carigali for 2 years with an option for extension for another year, is in operation while the other 6 rigs (including Naga 1) in the fleet are warm-stacked. Late last month, the group managed to secure an 18-month charter for its Naga 8.

As a result, there will only be 2 rigs in operation in 4QFY16 – Naga 6 and Naga 8.

With a fleet utilisation of only 25%, the group’s losses and negative cashflow are unlikely to abate in the near-term unless there is a significant breakthrough in securing new charters. UMWOG’s short-term debt has fallen by RM810mil QoQ to RM1.3bil from refinancing to longer tenures. However, its parent UMW Holdings may be raising RM700mil in Islamic bonds in addition to the RM308mil inter-company loan earmarked for working capital purposes. With an EBITDA of RM19mil in 1HFY16, the group still requires further refinancing for its short-term debt. We do not discount the possibility of a dilutive corporate exercise arising from a likely restructuring of the group’s debt profile. Hence, the stock currently trades at a 37% discount to its latest book value of RM1.38/share, which could be eroded by further losses.

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