VELESTO has secured 2-year contract extension for 3 of its jack-up drilling rigs, with a combined value of USD265mn. We estimate that the renewed DCR for the rigs is around USD130k-140k, higher than the estimated USD100k-110k before renewal. The new rates will take effect for any new jobs for PCSB that commence after 7 Feb 2024. As some of the rigs have existing jobs, Naga 2 and Naga 4 will enjoy the higher rates from 2QFY24, while Naga 6 will only commence on new rates in 1QFY25. No change to earnings forecasts. Maintain Buy with an unchanged TP of RM0.33/share based on 12x CY25 EPS. VELESTO is expected to continue benefiting from escalating DCR amidst tight jack-up drilling rig market.

Secured 2-year Contract Extension for a Combined Value of USD265mn

Velesto Energy Berhad (VELESTO) has received Notice of Assignment for 3 of its jack-up drilling rigs, namely Naga 2, Naga 4, and Naga 6, from Petronas Carigali Sdn Bhd (PCSB) for 2 years, commencing from 7 Feb 2024 to 6 Feb 2026, inclusive of the continuation from the current drilling campaign, for a contract value of USD73.0mn, USD94.9mn and USD97.1mn respectively. The total value for the umbrella contract extension amounts to USD265mn.

Our View

We view the news positively as the contracts not only would provide recurring income up to 2026, but would also bump up the daily charter rate (DCR) for VELESTO. We estimate that the renewed DCR for the rigs is around USD130k-140k, higher than the estimated USD100k-110k rate before renewal.

The new rates will take effect for any new jobs for PCSB that commence after 7 Feb 2024. As some of the rigs have existing jobs as shown in Figure 2, Naga 2 will enjoy the new rates from end-2QFY24, Naga 4 will be on the new rates from 2QFY24 onwards, while Naga 6 will only have the new rates from mid- 1QFY25.

Impact

No change to our earnings forecasts as the contract extension is still within our utilisation rate assumptions and average DCR assumptions for FY24-FY26.

Except for Naga 2 that was “waiting on weather” until early-Feb 2024 and Naga 5 that is negotiating for contract extension after completing existing job in early-2QFY24 (Figure 2), the other rigs are all on a job in 1HFY24. We estimate that the utilisation rate will be above 90% in 1QFY24 and 2QFY24, before dropping to below 85% in 2HFY24 as Naga 2, Naga 3, Naga 5, and Naga 6 have SPS scheduled during this period.

Valuation

Maintain Buy on VELESTO with an unchanged TP of RM0.33/share based on 12x CY25 EPS. VELESTO is expected to continue benefiting from escalating DCR amidst tight jack-up drilling rig market.

Source: TA Research - 25 Mar 2024