Velesto has secured a USD31m drilling contract for 11 wells from ROC, starting from Aug this year. Overall, we are positive on the contract as it improves the rig utilisation in 2H18 and is on track to management’s target of average 80% for FY18 (vs 1Q18’s 65%). The implied DCR of USD70k/day is also in line with current market rate. Estimates are maintained as it is within our assumptions. Maintain BUY recommendation with lower TP of RM0.34 (from RM0.39), based on unchanged 1.0x P/B multiple to account for higher share base post conversion of RCPS by PNB and rolling forward of our valuation base year to FY19.

NEWSBREAK

Velesto Energy has received a Letter of Award from Roc Oil (Sarawak) Sdn Bhd (ROC) for a contract on the provision of one Jack-Up Drilling Rig for its D35 Phase 2 Infill Drilling Programme, the approval of which was received today. The estimated contract value is USD31.0m for 11 firm wells and is expected to commence from August this year. Velesto has assigned Naga 4 for this job.

HLIB’s VIEW

Improves 2H18 utilisation. We are overall positive on the contract secured as it would improve Velesto’s rig utilisation in 2H18, which is on track to achieve management’s targeted average rig utilisation of average 80% for FY18 (vs 65% in 1Q18). Note that Naga 4 was working for ConocoPhillips for a short 3-month job from May to July this year.

Implied DCR in line with current market rate. Based on the contract value of USD31.0m for the 11 firm wells and assumption of 40 days duration per well, the implied daily charter rate (DCR) is about USD70k/day which is consistent with the current market rate.

Forecast. Our forecast is maintained as it is within our FY18 charter rate assumption of USD70k/day and average rig utilisation of 75%.

Maintain BUY, TP: RM0.34. Maintain BUY recommendation with lower TP of RM0.34 (from RM0.39) based on unchanged 1.0x FY19 PBV multiple after we (i) increase our share base by 18% for the conversion of RCPS into ordinary shares by PNB and (ii) roll forward our valuation base year to FY19. We like Velesto for being the largest domestic jack-up rig owner to benefit from the demand uptick in jack-up rig amid stabilisation of oil prices.

Source: Hong Leong Investment Bank Research - 4 Jul 2018