• 9M23 core net profit of RM33m was 69% of our full-year forecast, which is inline given that 4Q23F should be stronger on higher utilisation rates.

• Upgrade from Hold to Add, with a higher DCF-based TP of 27.5 sen, as we roll forward to end-CY24F, and raise our FY24-28F DCR assumptions.

• We expect Velesto to secure higher DCRs of at least US$130k/day for new contracts next year, up from this year’s US$105k/day.

Poor 3Q23 Results Largely Expected by the Market

3Q23 core net profit of RM1.2m was a significant 93% decline qoq, as utilisation of Velesto’s jack-up (JU) rigs fell from 88% in 2Q23 to about 60% in 3Q23, in our estimate. The qoq drop in utilisation during 3Q23 was on account of the Naga 3 and Naga 6 rigs being in between jobs, and the Naga 2, Naga 4 and Naga 8 rigs requiring repair and maintenance, special periodic survey (SPS), and underwater inspection in -lieu of dry docking (UWILD), respectively. These were not unexpected and had been flagged by Velesto for several months. The positive news for 3Q23 was that Velesto made good progress in its Integrated Rig, Drilling and Completion (i-RDC) services for Hess Malaysia with respect to 14 wells in Block PM 302, in partnership with Halliburton. The i-RDC work delivered to Velesto an after-tax profit of RM7m in 3Q23, vs. an after-tax loss of RM7.1m in 2Q23, due to faster work progress, and helped mitigate the qoq decline in drilling posttax profit to just RM4.6m in 3Q23, down from RM39.3m in 2Q23.

The New Naga 8 DCR Is Higher Than Expected…

Velesto is currently negotiating for a new 2-year umbrella drilling contract with Petronas Carigali at between US$125k/day and US$135k/day, according to Velesto, from Feb 2024F to Feb 2026F. Previously, Velesto had told analysts that it was gunning for US$130k/day for the new umbrella contract, but Velesto recently announced that it has renegotiated the rate for the Naga 8 drilling contract to US$135k/day, which will last for 18 months from 19 Apr 2024, which is higher than our previous estimate of US$130k/day. As a result, we think that Velesto may have some ammunition to negotiate a higher umbrella contract rate with Petronas Carigali than our assumption of US$130k/day. The outcome of the negotiations will only be known in Dec 2023F, in our estimate.

…which Sends Out Positive Signal for Petronas Umbrella Contract

Upside risks include stronger DCR going forward, as other rig contractors had negotiated contracts in the past six months at US$150k/day to US$168k/day. While we do not expect Velesto to secure such high rates for its new umbrella contract with Petronas Carigali, the robust DCRs show just how tight the market is for JU rigs, as the Middle East, India and China drilling activities remain robust. Downside risks include the potential for Velesto’s operating cost inflation to exceed our expectations, due to the shortage of trained crew members and materials cost inflation, while an unexpected decline in oil prices may cause a pause in the pace of upstream drilling capex spending by the oil majors.

Source: CGS-CIMB Research - 30 Nov 2023