NAGA 8 secured new contract
Velesto announced that NAGA 8 secured a drilling contract from Carigali Hess Operating Company (Carigali Hess) with firm value of US$131m (Table 1). The contract is for a 3-year firm period followed by 6+6+6 months extension option beginning in 2H20 at the Block A- 18 of the Malaysia-Thailand Joint Development Area (MTJDA). NAGA 8 is currently serving Hess Malaysia for an 18-month drilling programme ending Aug 2020 at the North Malay Basin. We expect the new charter to begin sometime in 4Q20 as the rig would undergo a periodical SPS survey for 2 months before beginning a new contract.
Higher DCR for NAGA 8
Based on the 3-year firm contract, we estimate the average daily charter rate (DCR) to be worth c.US$120k/day (Table 1). This is c.70% higher than the average DCR of US$72k/day for contracts secured in 1H19. This contract is by far the highest DCR Velesto garnered in recent times, reflecting the robust demand for jack-up rigs. Recall that Petronas noted in the 2019-2021 Activity Outlook that jack-up rig demand is expected to rise to 16-18 rigs (2018: 10-12 rigs).
Raise earnings forecast
We raise our FY20-22F earnings forecast by 37-11% as we believe higher jack-up demand, particularly in SEA region, would lead to sustained high DCR. According to IHS, a global oil and gas information provider, the jackup demand is expected to rise by 7% in 2020 to 405 from 379 in 2019.
Maintain BUY with higher TP of RM0.43
Upgrade Velesto to TRADING BUY with higher TP of RM0.43 (from RM0.36) as we peg higher P/B of 1.2x to FY20F (from 1.0x FY20F P/B). We believe this is fair as the recovery in DCR could turnaround earnings and provide a re-rating catalyst for the stock.
Source: BIMB Securities Research - 6 Nov 2019
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