UMW OIL & GAS CORP BHD

By CIMB Research Rating: Hold Target Price: 32 sen

UMW Oil & Gas (UMW-OG) has proposed to raise RM1.8bil in cash, with the issuance of 6,054 million new rights shares at a price of 30 sen each.

CIMB Research said the company needed to issue the shares because of the severe downturn in the jack-up drilling rig industry, with day rates halving from US$140,000 per day in 2014 to just US$70,000 per day presently.

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, the research house said.

“As such, UMW-OG will not be able to generate sufficient operating cashflow to pay off its bank borrowings taken to buy new rigs at peak pre-2014 prices,” it said.

Should minority shareholders of UMWOG choose not to subscribe for the rights, PNB has given a guarantee to UMW-OG that UMW-OG will still be able to raise its target of RM1.8bil.

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.

It noted that 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 entitle PNB to warrants with an exercise price of 39.5 sen per warrant.