• Velesto secured 2 drilling contracts for NAGA 2 and NAGA 5 from Petronas Carigali beginning 2Q21 worth USD20.67m.

• We estimate the average DCR is maintained at US$70k/day.

• We maintain our FY21F/FY22F earnings forecast based on utilization rate of 70%/67%.

• Reiterate BUY with unchanged RM0.265 TP based on 0.8x FY21F P/B. We believe completion of several development projects will underpin the recovery in offshore drilling projects.

Secured jobs for NAGA 2&5

Velesto announced that it secured 2 drilling contracts from Petronas Carigali with a combined firm value of USD20.76m. Naga 2 is assigned to drill 3 wells beginning Jun 2021 while Naga 5 is expected to start drilling 1 well in early April with the option for additional 1+1 wells. We reckon that these rigs will be used for drilling of development well at Petronas Carigali’s Bokor and Bakau NAG field which is currently under hook-up and commissioning (HUC) phase.

Estimate DCR of USD70k/day

Assuming the average period to drill one well is 60 days and the optional wells for NAGA 5 are exercised, we estimate that both rigs will be quite fully occupied until end of FY21. Based on contract value of USD20.76m and drilling days of 240 days for 4 firm wells, this implies daily charter rate (DCR) of USD83k/day. However, we estimate effective DCR is at c.USD70k/day as the estimated contract value includes other additional expenses such as mobilisation fees and procurement of other materials for the clients. This is largely similar to its current and regional daily rate (Table 2).

Maintain our earnings forecast

We believe that this contract award points to recovery in offshore drilling activities, underpinned by higher demand for development wells owing to completion of several development projects. NAGA 4 is currently chartered to Mubadala for Pegaga development project while NAGA 8 will commence its 3-year drilling contract with Carigali Hess for Bergading Deep Ph3 at Malaysia-Thailand Joint Development Area (MTJDA) beginning 2Q21 (Table 1). At this juncture, we maintain our FY21F/FY22F earnings forecast based on utilisation rate of 70%/67% which is above 9M20 utilisation rate of 60%.

Maintain BUY with unchanged TP of RM0.265

Reiterate BUY on Velesto with unchanged TP of RM0.265 which implies 0.8x FY21F P/B which is its 5-year average. This is largely in tandem with Petronas’ annual requirement of 7-10 rigs over 2021- 2023, which is close to historical 5-year average demand of 8.5 units, according to our estimate.

Source: BIMB Securities Research - 22 Mar 2021