• Upstream, a global oil and gas news magazine, reported that Velesto’s NAGA 3 has secured short term contracts with 2 joint operating companies in Vietnam for drilling campaigns in 2H22.

• Recall that prior to the market downturn, foreign markets made up c.25-50% of the company’s revenue with Vietnam contributing to more than half of that over the FY13-15 period.

• We reaffirm our view that Velesto is getting closer to turnaround its financials underpinned by this maiden foreign contract and recent long-term umbrella contract with Petronas.

• No changes are made to our earnings forecast pending further details from management. Maintain BUY with unchanged TP of RM0.28 pegged at 1x P/B to FY22F.

Secured short term contract in Vietnam

Upstream, a global oil and gas news magazine, reported that Velesto’s NAGA 3 has secured short term contracts with 2 joint operating companies (JOC) in Vietnam namely Hoang Long and Hoan Vu which operate Te Giac Trang oilfield in Block 16-1 and Ca Ngu Vang oilfield in Block 9-2 respectively. The contracts entail drilling of 3 development wells with an option of additional 1 well in 2H2022.

Maiden drilling contract from abroad since market downturn

We are positive with this contract as it marks its return to international drilling market which its last presence in 2015. Recall that prior to market downturn, foreign market made up c.25-50% of the company’s revenue (Chart 1) with Vietnam as one of key market contributing to more than half of its foreign-based revenue over FY13-15 (Chart 2). While this contract win is well within management guidance, we believe this points to the increase in jack-up rig demand which signify the continuous recovery in drilling market. We also believe that counter-party risk for this contract is low as the JOCs are backed by national oil company (NOC) such as PTTEP and PVEP.

No change to earnings forecast

We make no changes to our earnings forecast pending further details from management. To recap, our FY22F earnings is based on utilisation rate assumption of 70%. Based on its existing firm orderbook, we estimate that it has secured utilisation rate of c.40% in FY22 (FY21: 48%) which excludes this contract win and recent long-term contract with Petronas.

Maintain BUY with unchanged TP RM0.28

Maintain BUY on Velesto with unchanged TP of RM0.28 pegged at 1x P/B to FY22F. We believe Velesto’s turnaround is around the corner premised on rising demand for jack-up rig translating into recovery in utilisation rate.

Source: BIMB Securities Research - 23 May 2022