Tough environment to persist for UMW Oil and Gas

CIMB Research said demand for jack-up rigs in Asean has more than halved since 2014

KUALA LUMPUR: The tough environment is expected to continue for UMW Oil and Gas (UMW-OG) as CIMB Equities Research upgrades the stock from Reduce to Hold as the share price had corrected significantly since the highly-dilutive rights issue to raise RM1.8bil.   

It said on Wednesday that UMW-OG’s 1H17 core net loss made up 62% of its and consensus’ previous full-year forecast, which is 25% above expectations as 2H will likely be stronger.  

“As a result, we reduce our loss forecasts, and raise our ex-rights target price from 31 sen to 32 sen, although our cum-rights target is lowered to 33 sen on a technicality,” it said. 

UMW-OG’s 2Q core net loss of RM49.3mil was one-third lower on-year on the back of a 7.6% on-year rise in group revenue. 

This was largely due to the improvement in drilling utilisation rates which led to higher drilling revenue. The oilfield services segment also saw a slight improvement in revenue, although its fundamentals remained soft. 

Also contributing to the lower loss was the reduction in operating costs as a result of the stringent steps taken to improve efficiencies. 

UMW-OG’s jack-up (JU) rigs saw its operating losses narrow by 61% on-year. During 2Q17, five out of its seven JU rigs were working, of which four were employed for the entire quarter. 

This led to a higher utilisation rate of 68% during 2Q17, which was a stark improvement from the 38% utilisation in 2Q16. 

CIMB Research also noted that all of its JU rigs were employed in Malaysia, and UMW-OG benefitted from increased production drilling activity among oilfield operators in Malaysia. Even exploration drilling has made a small comeback. 

However, UMW-OG also reduced the operating costs of the drilling business by almost 4% on-year. However, this was partially offset by the 32% drop in charter rates on-year, from an estimated US$104,479/day in 2Q16, to US$70,714/day in 2Q17.

“We expect these low charter rates to persist for the foreseeable future, despite a recovery in Malaysian JU utilisation rates, as the average Southeast Asian JU utilisation rate remains poor at just 57% currently, according to Clarksons, down from almost full utilisation in 2014,” it said. 

The semi-submersible rig Naga 1 was finally disposed of on May 9, and it had not contributed to drilling revenue during FY17F. 

The decision to dispose of the rig was made after considering its age and the low likelihood of securing work. The Naga 1 last worked in 2Q16 and 3Q16. 

The disposal reduced available capacity days from an annualised 2,928 days in FY16 based on eight rigs, to 2,555 days in FY17F based on seven rigs.

The research house said as for the Naga 4 and Naga 3 rigs commenced their charters to Petronas Carigali in the late July/early-August timeframe, while the currently idle Naga 5 secured a contract from Repsol Malaysia for a one-year firm and one-year option drilling programme beginning September. 

“UMW-OG guided that all of its seven JU rigs will operate at full utilisation by September 2017, although the short-term nature of the drilling contracts exposes UMW-OG to the risk of future idling. 

“As a result of the above developments, we forecast that UMW-OG is on track for full-year utilisation of 67%, with the expected 2H17F utilisation of 85% much improved from the 49% achieved for 1H17. 

“For FY18-19F, we forecast utilisation at 80%, based on UMW-OG’s assessment of Petronas’s requirements. 

“However, we expect charter rates to remain stuck at an average of just US$72,500/day for FY17-19F due to industry-wide overcapacity. Our target price is based on DCF, using cost of equity of 12.62%,” it said.