• Velesto Energy announced it secured US$31m worth of contract for NAGA 4 to drill 11 firm wells for ROC Oil’s D35 Phase 2 Infill Drilling campaign commencing in Aug 2018.

• The contract amount implies DCR of US$70k-80k/day (based on 35- to 40-day period to drill a well) which is within our forecast whilst also pointing to a sluggish recovery.

• We believe the company will be able to achieve healthy asset utilization rate of 75% for FY18 on the back of new contract which helps to replenish its existing orderbook to c.RM480m.

• Maintain BUY on Velesto with an unchanged TP of RM0.33 as we expect the company to benefit from the sector’s increasingly sustainable recovery.

Secured new contract for NAGA 4

Velesto announced that it had received a Letter of Award from ROC Oil Sarawak (ROC Oil) for the provision of a jack-up drilling rig and associated services for its D35 Phase 2 Infill Drilling Programme. The contract which shall commence in Aug 2018 is estimated to be worth c.US$31m. It expects to deploy its NAGA 4 rig for the contract which involves drilling of 11 firm wells. Currently, NAGA 4 is contracted to ConocoPhilips for 2+2 well-drilling campaign which would complete by end Jul 2018 for redeployment to the ROC Oil contract.

Charter rate remains challenging

We estimate the DCR for this new contract to be at c.US$70k-80k/day. This is based on c.35-40 days to complete the drilling of one well. The rate derived is also inline with management’s guidance which expects protracted tangible recovery in DCR. Notwithstanding, we are positive on Velesto’s outlook as the contract sustains its 75% utilisation rate, as per our assumption.

No change to our earnings forecast

With this new contract, Velesto managed to replenish its orderbook by c.RM120m (@ US$/MYR RM4.00) to c.RM480m. This is largely in line with our expectations. No changes to our earnings forecast.

Retain BUY, TP: RM0.33

The new contract win reaffirms our belief that Velesto would remain as the preferred jack-up operator leveraging on its local content advantage. We believe that sustainable utilisation rate could lead to higher DCR moving forward, benefitting jack-up rig operator including Velesto. Maintain BUY with an unchanged TP of RM0.33. Our TP is based on 1x FY19 P/B.

Source: BIMB Securities Research - 4 Jul 2018