• Velesto’s NAGA 3 and NAGA 5 secured drilling contracts worth US$10.8m from Petronas Carigali for 2 firm wells and additional 2 optional wells each, commencing by end Aug 2018.

• We estimate effective DCR for the contract is at US$67.5k/day which points to a sluggish recovery. Notwithstanding, we believe Velesto is on track for full utilisation rate by 4Q18, bringing the average FY18 rate as per our 75% assumption.

• Maintain BUY with an unchanged RM0.33 TP. We expect Velesto to benefit from the sector’s sustainable recovery.

Secured new contract for NAGA 3 and NAGA 5

Velesto announced that it secured 2 drilling contracts for NAGA 3 and NAGA 5 from Petronas Carigali S/B (PCSB) with combined value of US$10.8m. Both contracts entail the drilling of 2 firm wells and an option for another 2 wells. These contracts are expected to start by end Aug 2018.

Charter rate still around US$70k/day region

Based on the assumption of 40-day drilling period per well, we estimate that the daily charter rate (DCR) is c.US$67.5k/day. This is similar to recent contract awards for NAGA 4 and NAGA 7 which was estimated at US$70k/day.

Management delivers its guidance

This latest contract award came with a shorter drilling tenure of 2-3 months for the firm wells as compared to recent contract award to NAGA 4 and NAGA 7 that lasts for almost one year. Notwithstanding, we are relieved that Velesto delivered on its guidance ie. to replenish its rig orderbook and achieve average utilisation rate of 75% in FY18.

Working to get contract for NAGA 2 and NAGA 6

With this new contract, 5 out of 7 rigs would be on charter by 4Q18. At this juncture, NAGA 2 and NAGA 6 are warm-stacked while efforts are underway to secure contracts for these rigs by 4Q18.

Retain BUY with unchanged TP of RM0.33

The new contract win reaffirms our belief that Velesto would be the preferred jack-up rig operator primarily due to its advantage as a local service provider as well as its fairly modern fleet. We expect recovery in the upstream production would see sustainable utilisation rate and eventually result in higher DCR. Maintain BUY with an unchanged TP of RM0.33. Our TP is based on 1x FY19 P/B.

Source: BIMB Securities Research - 10 Aug 2018