This article first appeared in The Edge Financial Daily on December 13, 2019

Velesto Energy Bhd
(Dec 12, 36.5 sen)
Upgrade to buy with an unchanged target price (TP) of 42 sen: The charter visibility extension of the Naga 4 rig at decent day rates was not entirely unexpected, in view of rising demand for jack-ups worldwide. Risk-reward has turned positive following our recent downgrade in recommendations, along with a 7% correction in Velesto Energy Bhd’s share price. We upgrade our call to “buy” (from “hold”) with an unchanged TP of 42 sen based on one times enterprise value/replacement value. Velesto, with its resilient financials (three times net debt/earnings before interest, taxes, depreciation and amortisation) is the best proxy for Petroliam Nasional Bhd’s drilling programmes.

Velesto has secured a letter of award from Mubadala Petroleum for the charter of the Naga 4 rig. The contract, valued at US$30 million (RM124.8 million), is for drilling seven firm wells, expected to start from the second quarter of 2020 (2Q20).

We understand that the US$30 million contract comprises day rates and several add-on items. We posit that the estimated day rates for this contract are about US$72,000 to US$75,000. While the daily charter rate (DCR) of Naga 4 is not as compelling as that of Naga 8’s recent contract (DCR: US$99,000), the new DCR is still comparatively higher by 6% to 10% from its existing charter from Roc Oil. Also, Naga 4 will experience zero downtime in 2020. Based on the work schedule, Naga 2 will be immediately redeployed for Mubadala’s job once its current contract for Roc Oil ends in 1Q20. All in, our estimates are unchanged. We have incorporated the following into our model: i) DCRs of US$75,000 to US$83,000; and ii) 84%-90% utilisation rates estimated for financial year 2020 (FY20) to FY21.

Velesto should enjoy near full utilisation for all of its seven jack-ups in 2020 on condition that four of them (Naga 2, 3, 5 and 6) secure extensions, which is likely a foregone conclusion. Following Naga 4, Velesto’s immediate focus would be to secure a contract for Naga 7, whose existing charter is set to end by 4Q20. We expect Velesto’s upcoming contracts to show higher DCRs (a minimum of US$75,000) and longer tenures (one year and above), in view of rising offshore activity. — Maybank IB Research, Dec 12