Earlier today, UMW-OG took delivery of US$223m Naga 5 from Keppel (KEP SP, Add) in Singapore, a month ahead of the original schedule, as the company taps the rising demand for jacks-up in Southeast Asia. On 3 May, Naga 5 will leave for the Philippines to service a 6-week US$7m drilling contract awarded by Nido Petroleum. The contract value translates into an attractive daily charter rate of approximately US$165,000 due to the short work period. Management is already scouting for a second contract for Naga 5 as well as first contracts for Naga 6 and Naga 7. Naga 6 is scheduled to join the fleet in Sep while Naga 7 may be delivered earlier than Dec. UMW-OG expects the daily charter rate to reach US$180,000 for short-term contracts. The company will add around 100 more employees to support the new rigs. 

What We Think 

We are encouraged by the pace of UMW-OG's fleet expansion and the positive scheduling surprises given that delays are common in the industry. The company is currently bidding for 17 contracts - six of which are in Malaysia, and the rest in other Southeast Asian markets - for Naga 5, Naga 6 and Naga 7, underscoring the high demand for this asset class in the region. The outcome of negotiations for Naga 5's second contract could come over the next few weeks. We expect the daily charter rate to normalise to around US$150,000, which is still appealing if the jack-up is put on a long-term charter. 

Accumulate the stock as UMW-OG embarks on an aggressive fleet expansion to take advantage of the shortage of Malaysian-flagged jack-ups as well as the rising demand for jack-ups in Southeast Asia, with the hotspots being Vietnam and Myanmar.

Source: CIMB Daybreak - 30 April 2014, Full PDF Report