This article first appeared in The Edge Financial Daily on September 25, 2017

UMW Oil & Gas Corp Bhd
(Sept 21, 34.5 sen)
Maintain hold with an unchanged target price of 32 sen: On May 4, UMW Oil & Gas Corp Bhd (UMW-OG) proposed to raise RM1.8 billion in cash, via the issue of 6,054 million new rights shares, at a price of 30 sen each. Of the RM1.8 billion, RM1.5 billion will be used to pare down debt, with the residual amount used for working capital and to defray issue costs. The settlement of the debt will free up some restricted cash, which will be used to pay back the RM308 million in shareholder’s loan from UMW Holdings. The remaining debt will be refinanced into long-term loans, with the revolving credit balance cut down.

UMW-OG needed to issue the rights because of the severe downturn in the jack-up drilling rig industry, with day rates halving from US$140,000/day in 2014 to just US$70,000/day (RM294,000) currently. These low rates may persist for the foreseeable future, despite UMW-OG's jack-up utilisation recovering from 27% last year to our forecast of 67% this year. As such, UMW-OG will not be able to generate sufficient operating cash flow to pay off its bank borrowings taken to buy new rigs at peak pre-2014 prices.

Together with the rights, 1,513.4 million free warrants will also be issued. UMW-OG's share price traded ex-rights on Sept 20, and the rights shares and warrants shall be provisionally allotted to the shareholders whose names appear in the record of depositors of the company as at 5pm today. The rights shares will commence trading tomorrow, and will cease being quoted on Oct 3. The last day and time for acceptance, renunciation and payment is on Oct 10.

The free warrants have a seven-year validity period, and can be converted to new shares at 39.5 sen per warrant. They can be converted six months after they are issued, i.e. from March 25, 2018.

Should minority shareholders of UMW-OG choose not to subscribe for the rights, Permodalan Nasional Bhd (PNB) has given a guarantee to UMW-OG that it will still be able to raise its target of RM1.8 billion. However, in the interest of maintaining sufficient public spread for UMW-OG, PNB will not raise its shareholding in UMW-OG to above 65% (from 45.5% currently), but instead, PNB will subscribe for Redeemable Convertible Preference Shares (RCPS) at the same issue price of 30 sen per RCPS.

Each RCPS can be converted to new ordinary shares in UMW-OG at zero cost, and has a maturity period of five years. RCPS not converted at the end of its maturity period will be automatically converted to new ordinary shares. The RCPS also entitles PNB to warrants with an exercise price of 39.5 sen per warrant. — CIMB Research, Sept 21