This article first appeared in The Edge Financial Daily on December 2, 2019

Velesto Energy Bhd
(Nov 29, 38.5 sen)
Maintain buy with an unchanged fair value of 46 sen: Our financial year 2019-2021 forecast (FY19F-FY21F) earnings have been raised by 16%–8% from a five-percentage-point (ppt) increase in rig utilisation in FY19 together with a 2% increase in our average charter rate assumption.

Velesto Energy Bhd’s cumulative nine months of financial year 2019 (9MFY19) core net profit of RM23 million came in above our expectations, accounting for 95% of our earlier FY19F earnings, but within consensus.

The group’s 9MFY19 core net profit rebounded from a 9MFY18 core net loss of RM47 million due to a 10ppt year-on-year increase in rig utilisation to 77% together with higher utilisation of hydraulic workover units (HWU).

Likewise, Velesto’s third quarter of financial year 2019 (3QFY19F) core net profit surged three times quarter-on-quarter to RM34 million while rebounding from a RM12 million loss in 3QFY18 as rig utilisation rates rose to 92% from 74% in 2QFY19 and 75% in 3QFY18, which was further supported by an increased HWU utilisation.

We caution that the group’s strong rig utilisation of 92% in 3QFY19, in which only Naga 6 had undergone a Special Periodic Survey (SPS) out of the seven units in the fleet, may not recur in 4QFY19.

Naga 3 and Naga 7 are currently undergoing a mandatory five-yearly SPS which could mean four to eight weeks of idle downtime. This could mean that 4QFY19 rig utilisation could drop to 85%, which should remain above break-even for the group.

As we highlighted in September this year, rig charter rates are beginning to track upwards on tightening utilisation rates while older rigs are being retired amid slowing new units from China yards.

In the North Sea, Borr Drilling Ltd has recently secured rig charter rates of above US$100,000 (RM418,000) versus currently US$70,000 in Malaysia.

Recently, Velesto secured a fresh charter at a sharply higher daily rate of US$90,000-US$100,000 (excluding mobilisation charges) for its Naga 8 jack-up rig from Carigali Hess Operating Company Sdn Bhd for a firm three-year period with three extension options of six months each to be deployed at Block A-18 of the Joint Development Area administered by the Malaysian-Thailand Joint Authority. This is 29%-32% higher than the US$70,000-US$76,000 for the four fresh jack-up rig charters worth US$105 million which were secured in April this year.

While Velesto’s FY21F price-earnings ratio of 29 times may appear high, this is justified given the inflective earnings escalation following years of negative sentiments. — AmInvestment Bank, Nov 29