KUALA LUMPUR (July 3): Oil rig operator Velesto Energy Bhd needs to replenish its drilling contracts urgently as its utilisation rate is expected to fall to a full-year average of 53% for the financial year ending Dec 31, 2020 (FY20), below CGS-CIMB’s assumption of 60% for FY20-FY22F, on the back of a significant oil price decline caused by the Covid-19 pandemic and the Saudi Arabian-Russian price war.

In a note today, analyst Raymond Yap said he expects utilisation rate to drop to 64% in the second quarter of the financial year ended June 30, 2020 (2QFY20) from 86% in the previous quarter, then to 41% and just 21% in the subsequent quarters, if it fails to secure new jobs.

According to Yap, Velesto’s existing contracts imply a utilisation rate of a mere 17% in FY21F and 14% in FY22F.

“One possibility is for Velesto to ask Petronas to give it the work that would otherwise have gone to foreign-owned rigs. However, Riglogix data suggests that such opportunities are also limited, and Velesto may have to wait for Petronas and other oil companies to increase their drilling capex before rig utilisation can increase to a more significant degree,” he noted.

Yap pointed out that the drop in oil prices have triggered “devastating” cuts of 20% to 30% in the capex of oil majors worldwide, including Petronas.

“Spending on drilling activities saw a sharp drop during the 2014-2016 price downturn, and this cycle has been no different. The outstanding number of drilling contract days in Malaysia across the whole drilling industry has declined by almost 80% in the past nine months from Oct 1, 2019 to July 1, 2020, on account of the completion of existing drilling work and the non-exercise of optional contracts, as well as possibly some level of work cancellations,” he added.

Yap said options on four of Velesto’s seven rigs were not exercised by Petronas since May 20, and no new work has been secured by the rig operator.

Meanwhile, one of the rigs — Naga 7 — has not been assigned further work after it completes its work for Sarawak Shell by mid-November, whereas another rig — Naga 8 — is postponing its three-year charter by Carigali Hess to April next year from October this year at the request of the client.

“Furthermore, the earlier-contracted US$98,000/day daily charter rate for the Naga 8 is apparently being renegotiated lower, and we have pencilled in a rate of US$80,000 a day in our model,” he said.

On the bright side, its Naga 4 JU started its one-year charter to Mudabala Petroleum in the middle of last month.

It maintains its “reduce” call on Velesto Energy, with no change to the DCF-based target price of 10 sen, adding that potential de-rating catalysts include progressively weaker results for the rest of FY20F.

At 11.51am, shares of Velesto Energy were unchanged at 15 sen, giving it a market capitalisation of RM1.23 billion. About 3.27 million shares were traded.

The share price has recovered 57.9% from a low of 9.5 sen on March 19, but year to date, the counter has decline 60.5% from 38 sen on Dec 31, 2019.