This article first appeared in The Edge Financial Daily on August 13, 2018

Velesto Energy Bhd
(Aug 10, 29 sen)
Maintain buy with an unchanged target price of 35 sen: Velesto Energy Bhd announced that it had secured two drilling contracts from Petronas Carigali Sdn Bhd, mobilising both its Naga 3 and Naga 5 jack-up rigs.

Naga 3 will be assigned to drill two firm wells with the option to renew for another one plus one years, which is expected to begin between mid-July and August 2018. Meanwhile, Naga 5 will also be drilling two firm wells with an additional extension option of two wells, expected to begin sometime in August 2018. We estimate that two firm wells for both rigs will provide two to three months of work visibility, and a total of six months’ visibility, if extensions are exercised.

Naga 3 was previously with the same client (Petronas Carigali), while Naga 5’s contract with Repsol was not extended, and in turn mobilised for Petronas Carigali.

Based on a 40-day per well calculation, daily charter work (DCR) could turn out to be US$68,000 (RM278,120), in line with the current market rates and our expectations.

We make no changes to our earnings forecasts as this falls under our full-year FY18 DCR and average rig utilisation assumption of 72%.

We reaffirm our “buy” rating and 12-month TP, based on the discounted cash flow of 35 sen per share.

We believe Velesto’s second half of 2018 jack-up rig utilisation looks secured, on track to turning around from FY18. On top of the better utilisation rate, the post-impairment lower depreciation and finance cost with the restructured balance sheet will likely lift the burden off Velesto.

Key risks to our call are weaker-than-expected DCR and utilisation rates, and strengthening of the ringgit. — Affin Hwang Capital, Aug 10