Thursday 28 Mar 2024
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KUALA LUMPUR (Nov 30): CGS-CIMB Research has upgraded Velesto Energy Bhd to a “hold” call, from “reduce” previously, while raising its target price (TP) for the counter to 14 sen, from 10.5 sen previously, assigned due to lower core net loss forecasts.

Analyst Raymond Yap revealed in a note that Velesto president Rohaizud Darus informed analysts in a briefing on Sunday that some of its ongoing jobs will last longer than what offshore rig intelligence RigLogix had reported.

Given the new information, it raised its jack-up (JU) rig utilisation forecast for the fourth quarter ending Dec 31, 2020 (4QFY20) to 52% from 36% previously. Yap mentioned that this would still be the lowest in FY20, compared with 1QFY20’s 84%, 2QFY20’s 67% and 3QFY20’s 60%, but would not be as steep a quarter-quarter (q-o-q) drop as feared earlier.

“The Naga 6 contract with Petronas Carigali did not end on Nov 8 as reported by RigLogix, but will instead be extended until the end of 2020. Also, while RigLogix reported that the Naga 7 contract with Sarawak Shell ended on Oct 7, Velesto said that the drilling work was actually extended to late October and the rig cannot be demobilised until early December due to rough seas. Sarawak Shell will continue to pay Velesto the daily charter rate (DCR) up to its actual demobilisation,” Yap noted.

As such, the research house narrowed its 4QFY20 core net loss forecast to RM9.1 million, from RM15.3 million, while FY20 is expected to have a lower core net loss of RM7.5 million from RM13.7 million previously.

For FY21, Yap forecast a net loss of RM44.06 million, followed by a RM5.68 million net loss for FY22.

The analyst viewed that Velesto’s FY21 outlook is still highly uncertain as it had only locked in a utilisation rate of 18%, with only the Naga 4 and Naga 8 having contracts in hand.

That being said, the research house raised its utilisation rate assumptions to 65% from 60% for FY21 onwards on the back of reports that OPEC+ may be looking to extend its current 7.7 million barrels per day (mbpd) oil production cut into end-March or end-June 2021 instead than tapering the cut to 5.8 mbpd as planned earlier.

He opined that the roll-out of Covid-19 vaccines would help to restore demand for transportation fuels. Following Petroliam Nasional Bhd (Petronas)’s capex prudence in 2020, there is a reasonable chance that Petronas may do more drilling work from the second half of 2021 (2H21) onwards to offset natural depletion rates.

A key upside risk to Velesto is the potential for oil prices to rally above US$50 (RM203.45) a barrel, resulting in Petronas accelerating drilling work.

However, a near-term downside risk is that Velesto’s 1QFY21 utilisation rate is expected to fall to only 14%, according to Yap, who also viewed that this may result in a large quarterly loss.

“This is because new contracts can only begin work from April onwards after the monsoon season is over. Also, Velesto’s clients may ask for lower DCRs; we have pencilled in US$68,000/day for new FY21F (forecast) contracts versus US$72,000/day during FY20F. The delayed impact of the March 2020 oil price crash will be seen in Velesto’s 1QFY21 report card; we expect 1QFY21 to be the trough from which Velesto will recover,” he augured.

Velesto shares were trading unchanged at 14 sen at 9.42am today, resulting in a market capitalisation of RM1.15 billion. It saw 1.45 million shares traded.

Edited ByLam Jian Wyn
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