KUCHING: UMW Oil and Gas Corporation Bhd (UMWOG) is expected to face challenging times ahead with a bear market ahead, lower charter rates and utilisation and extra pressure from global deliveries.
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), the continued weakness in crude oil prices has prompted it to move UMWOG’s earnings and valuations to its bear case scenario.
“We now expect crude price to average US$70-80 per barrel in 2015 instead of US$95,” the research house said.
With expectations of lower charter rates and utilisation, AllianceDBS Research noted that 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.
It noted that NAGA 3 comes off charter in March 2015 while NAGA 2, 5, 6 and 7 have optional extensions lined up over the second quarter (2Q) to 3Q of 2015 (3Q15).
“Extensions could materialise but possibly at lower DCR. NAGA 8 (September 2015 delivery) has still not been contracted out,” the research house said.
With a softer market outlook, AllianceDBS Research noted that the impact of new rig deliveries will hit the rig market harder than previously thought.
The research house said that Clarksons data indicate 61 and 45 new jack-up (over 300 feet water depth) deliveries slated for 2015-2016.
“This compares to only 19 year to date-October. Some slippage is expected but deliveries will still be stronger year on year (y-o-y),” it said. Overall, AllianceDBS Research cut its financial year 2015-2016 (FY15-FY16) earnings by 20-25 per cent.
It explained that this was after reflecting lower DCR (from US$172,000 per day to US$161-165,000) and utilisation (90 per cent to 79-84 per cent) over FY15-FY16.
As such, AllianceDBS Research downgraded the rating on UMWOG to ‘hold’ and cut the target price to RM2.70 per share from RM4.15 per share previously, after downgrading earnings and target price-earnings (PE) (to 18-fold from 22-fold).
“This is a slight premium to the sector’s large cap trough valuation of 16-fold and reflects UMWOG’s healthy growth and clean balance sheet.
“The re-rating catalysts for UMWOG would be a sustained rebound in crude oil prices to above US$80 per barrel levels,” it said.
The research house added that the group might also take advantage of its strong balance sheet for merger and acquisition (M&A) or continue to grow its fleet as rig prices are likely to decline.