UMW Oil & Gas Corporation Bhd
(Dec 3, RM2.52)
Downgrade to “hold” with target price (TP) lowered to RM2.70: The continued weakness in crude oil prices has prompted us to move UMWOG’s earnings and valuations to our bear case scenario. We now expect crude price to average US$70 (RM240.80) to US$80 per barrel in 2015 instead of US$95.

In this scenario, there will be greater pressure on daily charter rates (DCR) and utilisation, as five out of seven units of UMWOG’s drilling fleet are currently on short-term charters. Naga 3 comes off charter in March 2015 while Naga 2, 5, 6 and 7 have optional extensions lined up over second quarter and third quarter of 2015. Extensions could materialise but possibly at lower DCR. Naga 8 (Sept 2015 delivery) has still not been contracted out.

With a softer market outlook, the impact of new rig deliveries will hit the rig market harder than previously thought. Clarksons data indicates 61 and 45 new jack-up (>300ft water depth) deliveries slated for 2015 and 2016. This compares with only 19 year to date in October. Some slippage is expected but deliveries will still be stronger year-on-year.

This was after reflecting lower DCR (from US$172,000/day to US$161,000-US$165,000/day) and utilisation (90% to 79%-84%) over financial year 2015 (FY15) and FY16.

We cut TP to RM2.70 from RM4.15 previously, after downgrading earnings and target price-earning ratio (PER) to 18 times from 22 times. This is a slight premium to the sector’s large cap trough valuation of 16 times and reflects UMWOG’s healthy growth and clean balance sheet. The rerating catalysts for UMWOG would be a sustained rebound in crude oil prices to above US$80/barrel levels. The group might also take advantage of its strong balance sheet for mergers and acquisations or continue to grow its fleet as rig prices are likely to decline. — AllianceDBS Research, Dec 3

This article first appeared in The Edge Financial Daily, on December 4, 2014.