Velesto Energy Bhd
(April 23, 31.5 sen)
Downgrade to hold with an unchanged target price (TP) of 32 sen: Velesto Energy announced on Monday that Petronas Carigali Sdn Bhd had awarded it four contracts that may keep the Naga 2, Naga 3, Naga 5 and Naga 6 occupied for three years each until 2022 forecasts. Each contract is firmly for a year, followed by two annual renewal options. The contracts for Naga 2, Naga 3 and Naga 5 will commence in April or May 2019, and the Naga 6 contract from June or July 2019. These contracts are notable because they marked the return of long-term contracts — a rarity since the start of the 2014 oil price downturn.
The average daily charter rate (DCR) for the Naga 2 and Naga 3 contracts is US$69,700 (RM287,861), the Naga 5 contract (US$71,700), and the Naga 6 contract (US$75,700). The average DCR for all four contracts is US$71,700, representing a 2% to 5% hike from the average DCR of US$68,000 to US$70,000 per day of contracts awarded in 2018. The higher DCRs suggest Petronas is willing to provide a stronger support to its domestic service champions, sharing the benefits of stronger oil prices.
Separately, Petronas may have also agreed to pay Velesto Energy for rig mobilisation and demobilisation costs, suggesting the contract terms may be even better. On the other hand, we believe that “zero-rate” periods would continue to apply to the said contracts, meaning Velesto Energy would not be paid if the rigs were not performing actual drilling work during the time-charter period, although Velesto Energy may have succeeded in negotiating for a cap to the duration of the “zero-rate” periods.
Assuming an uninterrupted time charter, and a full exercise of the option periods, we estimate Velesto Energy’s utilisation rates for its seven-strong jack-up rig fleet would rise to 83% for financial year 2019 (FY19F) and 77% for FY20F. However, if we assumed each contract year would entail a 60-day “zero-rate” period, the utilisation rates would fall to 74% for FY19F and 67% for FY20F, based on contracts secured to date. This is on track to achieve our 80% utilisation assumption for all forecast years.
Meanwhile, the average DCR for contracts in hand is US$71,000, more or less in line with our US$70,000 per day forecast. Based on contracts in hand, we expect Velesto Energy’s first half of 2019 forecast (1H19F) utilisation rate to average at 71% versus 62% for 1H18, and 2H19F utilisation may rise to 95% versus 83% in 2H18. For FY19F, we estimate the utilisation is set to reach 83%, exceeding FY18’s 73%. — CGSCIMB Research, April 23