Investment Highlights

• We maintain our HOLD call on Velesto Energy (formerly UMW Oil and Gas Corporation) with an unchanged fair value of RM0.24/share, based on a 25% discount to its book value of RM0.32/share. As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.40/share, is currently trading at half its book value.

• Velesto has secured a US$25mil charter for its Naga 7 jack-up rig to drill 4 confirmed wells with an option for 3 more from Sarawak Shell/Sabah Shell Petroleum Company Limited, commencing between 1 August and 30 September 2018.

• Assuming each well could take 40 days to drill and mobilisation costs of US$5mil, we estimate that the daily charter rate could reach US$70K, which has remained relatively stable for the past 1 year.

• As this charter is a for a rig with charter which has just expired in June this year, we estimate that Velesto's rig utilisation could reach 5 out of its existing 7 rigs, which is likely to struggle to break even in 4QFY18. Recall that Velesto's 1QFY18 net profit of RM5mil would have been a loss of RM2mil-RM3mil, excluding realised forex gains of RM18mil.

• Also note that Velesto has recently secured a US$31mil replenishment charter for its Naga 4 jack-up rig from Roc Oil (Sarawak) Sdn Bhd for its 11-well D35 Phase 2 Infill Drilling Programme, beginning next month.

• However, the group's 2QFY18 rig utilisation is likely to be similar to 1QFY18's 65%, which will potentially mean that the group will not be able to break even with daily charter rates still soft around US$70K.

• Naga 2 and 6 are currently warm stacked while the charter of Naga 3 expired in June this year. The Naga 5 charter will likewise expire by September this year unless Repsol exercises its option to renew another year.

• With regional daily rig charter rates at US$55K-US$65K, management affirms that Petronas does not foresee any increase in 2018-2019. We understand that Naga 2, 3 and 6 may be close to securing short-term charters of around 4-5 months while Naga 5 could have a 6-month charter until early 2019.

• The group is tendering for 23 short-term charters and 7 longterm charters which have a combined value of US$660mil vs. its current firm order book of US$359mil and optional extension worth US$426mil. However, the major portion of these tenders stems from overseas which have lower charter rates compared to Malaysia's.

• In our view, weak charter rates of short-term duration, comprising a significant portion of its tenders and order book, continue to cloud Velesto’s earnings visibility. Hence, we view the PBV of 0.9x as high given that MMHE and Sapura Energy are trading at half their book values.

Source: AmInvest Research - 30 Jul 2018