• Velesto’s NAGA 7 submerged following a “punch-through” accident. Fortunately, no casualties have been reported. The company and the authority are taking steps to salvage the rig from damaging the environment.
• We expect minimal impact to Velesto’s financial and ESG score as we think this accident was not due to breach of any SOPs. However, we wish to highlight that risk of shariah non compliance is higher in the event that (i) the company makes claim from conventional insurance and (ii) the proceeds exceed the allowable limit of non-permissible income of 5% to revenue.
• Maintain BUY on Velesto with unchanged TP of RM0.265 which implies 1x FY21F P/B. We believe higher rig utilization will drive the turnaround in the company’s financial moving forward, notwithstanding the potential loss of NAGA 7 rig.

NAGA 7 punched through the seabed

Velesto’s NAGA 7 submerged after one of its legs broke through the seabed during the jack down of the legs to the seafloor. This occurred after the rig arrived at the site to drill Salam-3 exploration well offshore Sarawak. To recap, it is currently chartered to ConocoPhillips Sarawak for the drilling of 3 exploration and appraisal wells in Block WL4-00.

No casualties reported

All 101 crew personnel on-board are safe and majority have been evacuated to the shore. The company and the authority are currently taking steps to salvage the rig in order to minimise the impact to the environment.

Our thoughts

While the company is investigating the incident and assessing its impact, we expect minimal financial impact to the company as the rig is covered by insurance. We also expect minimal impact to its ESG score as we believe it has always performed its drilling work in a safe manner. In addition, we understand that this accident could be due to soil failure which should have been identified during the site survey work (i.e. required work to identify best location for the rig prior to drilling). The Upstream magazine reported that ConocoPhillips had earlier performed soil boring studies and site survey at the location. Nonetheless, we see higher shariah non-compliance risk as the expected insurance claim proceeds could potentially violate the 5% allowable limit of non-permissible income. At this juncture, we keep our earnings unchanged pending more clarity from the management.

Source: BIMB Securities Research - 5 May 2021