In its published note, the research house noted that UMW was actively negotiating to divest some of its remaining 14 unlisted O&G assets, following the disposal of Arabian Drilling services in Oman and a China O&G asset.
KUALA LUMPUR: UMW Oil and Gas (UMW-OG) delivered a core net loss of RM148mil for the nine months ended Sept 30, 2017 which made up 78% of CIMB Equities Research’s previous full-year core net loss forecast, and 42% of consensus.
The research house said on Monday the outperformance was mainly due to lower-than-expected operating costs.
“We now project a quarterly profit in 4Q17F, as with 3Q17, thus we narrow our FY17F core net loss and core EPS loss forecasts by 23% and 8%, respectively.
“We revise up our DCF-based target price to 33 sen from 32 sen, rolling forward to end-CY18F, and maintain our Hold recommendation,” it said.
To recap, CIMB Research said UMW-OG delivered its first quarterly profit in 3Q17 after eight consecutive quarters of deep losses.
This was achieved on the back of a sharp increase in rig utilisation rates, rising from a mere 7% in 3Q16 (which was the absolute bottom) to 90% in 3Q17, which more than compensated for a relatively minor on-year decline in average daily charter rates.
UMW-OG’s rig utilisation rose sharply over the past four quarters as Petronas and other production sharing contracts resumed drilling activity in Malaysia during 2017.
“The better utilisation worked hand-in-hand with lower cash operating costs, which we think probably declined from US$60,000 a day in 3Q16 to just US$35,000 a day in 3Q17 due to sustained efforts by UMW-OG to reduce its costs.
“While the return to profit is significant, we highlight that 3Q17’s core net profit was only RM5.7mil against cumulative core net losses of RM661mil over the past two years and against quarterly profits of c.RM60m in 2014 prior to the oil price crash, when rig utilisation was also in the 90s.
“Profitability continued to be hampered by low daily charter rates (DCR), which averaged c.US$70,000 a day in 3Q17, down from US$150,000 to US$160,000 a day in 2014.
“Global utilisation of jack-up rigs stood at just 66% in October 2017, barely budging from the low of 64% in Februrary 2017, and still much lower than the peak of 95% seen during 2014. As a result of the global overcapacity, DCRs may remain weak over the foreseeable period.
On Oct 25, 2017, UMW-OG successfully raised RM1.82bil in cash proceeds from the issue of RM1.45bil worth of new ordinary shares and RM37mil worth of redeemable convertible preference shares. Of the proceeds, RM1.5bil was used to repay existing borrowings.
The remaining RM1.9bn in debt has been refinanced into RM600mil that is due in five years and RM900mil that is due in 10 years while the remaining RM400mil is in the form of revolving credits and trade facilities that can typically be rolled over.
As such, UMW-OG has been given temporary respite from repaying its borrowings until the first tranche is due in five years’ time.
“We expect UMW-OG to have enough cash resources to pay its debts as and when they fall due. This is based on our assumption that UMW-OG will be able to maintain a consistent 80% utilisation rate over the long term even though we have assumed that DCRs will remain at no more than US$80,000/day until FY22F, then stay at US$90,000/day until FY32F, and US$100,000/day thereafter.
“The main upside risk to our target price for UMW-OG is if global offshore capex picks up faster than expected over the next few years on the back of higher oil prices, which may lead to higher global DCRs for jack-up drilling rigs.
“With abundant onshore shale resources in the US, however, we believe our current assumptions are reasonable, for now. The main downside risk is if the rig utilisation rates fall back from current high levels,” it said.
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