This article first appeared in The Edge Financial Daily on July 26, 2018
Velesto Energy Bhd
(July 25, 30.5 sen)
Maintain buy with an unchanged target price of 35 sen: To recap, Velesto Energy Bhd (previously known as UMW Oil & Gas Corp Bhd) sued Frontier Oil in April 2015 for an early termination of UMW Naga 7 for a total of US$19.2 million (RM77.95 million) as well as Frontier’s failure to issue a US$5 million bank guarantee and a US$15 million advance payment. Velesto recently announced that the claim was successful and the company was entitled to a total damage claim of US$19.9 million, inclusive of accrued interest during the period. We are of the opinion that the amount received will be deployed for future working capital requirements or utilised to repay loans in an effort to lower its finance costs. As at the end of the first quarter of financial year 2018 (1QFY18), net debt stood at RM1.02 billion at a 0.39 times net gearing level.
Velesto is bidding for US$660 million worth of jobs, which consist of 77% short-term and 23% longer-term contracts. Of the total 30 contracts, 15 are from Malaysia, while the rest are from overseas tenders. Daily charter rates in Malaysia remain on the higher end, ranging from US$68,000 to US$70,000 per day, compared with US$55,000 to US$65,000 per day for the overseas contracts. We remain optimistic about the group’s near-term outlook as Petronas has only started drilling nine out of its targeted 22 to 24 exploration wells thus far, signalling more drilling contracts to be awarded.
We maintain our forecast that Velesto will report a profit in FY18. We expect utilisation rates in 2QFY18 to be similar to 1QFY18, due to a lower contribution from UMW Naga 7 as it underwent scheduled maintenance. But the second half of FY18 will likely see utilisation rates rise to 80% to 85%, boosted by contract extensions and new contracts secured. This will result in a full-year utilisation rate of 72%, in line with our existing forecasts. — Affin Hwang Capital, July 25