Velesto has secured USD25m drilling contract for 4+3 wells from SSB/SSPC, starting from Aug/Sept this year. Overall, we are positive on the contract as it improves the rig utilisation in 2H18 and is on track to management’s average target of 75-79% for FY18 (vs 1Q18’s 65%). The DCR is also guided to be in line with current market rate. With no changes in our estimates, maintain BUY recommendation with unchanged TP of RM0.34 pegged to 1.0x FY19 PBV.

NEWSBREAK

Velesto Energy has received a Letter of Award from Sarawak Shell Berhad (SSB) / Sabah Shell Petroleum Company Limited (SSPC) for a contract on the provision of one Jack-Up Drilling Rig, the approval of which was received today. The estimated contract value is USD25m for 4 wells with another 3 wells extension. The job is expected to commence between 1st August and 30 September this year. Velesto has assigned Naga 7 for this job.

HLIB’s VIEW

Full year utilisation at 75%-79%. 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 75-79% for FY18. Note that Velesto’s rig utilisation for 2Q18 is expected to be lower (vs 1Q18’s 65% and 2Q17’s 68%) due to slight delay of the new contracts (Naga 3 and Naga 6).

DCR in line with current market rate. Based on the contract value of USD25m, we are guided that the daily charter rate (DCR) is about USD69k-70k/day which is consistent with the current market rate.

Forecast 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 unchanged TP of RM0.34 based on 1.0x FY19 PBV multiple. 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 - 30 Jul 2018