Velesto has secured an extension contract worth USD38m from HESS for 18 months in which the company has assigned Naga 8 for the job. Overall, we are positive on the extension as it improves the rig utilisation in 2019 (vs 9M18: 67%). The implied DCR of USD70k/day is also in line with current market rate. With no changes in our estimates, maintain HOLD recommendation on the stock with unchanged TP of RM0.25 pegged to 0.75x FY19 P/B.

NEWSBREAK

Velesto Energy has received a drilling rig extension contract from Hess Exploration and Production Malaysia B.V. (Hess) for North Malay Basin, the approval of which was received yesterday. The extension has duration of 18 months with an option to extend for another 5 months. Velesto has assigned Naga 8 for this job and contract value is estimated at USD38m. The contract extension has already commenced since 2Q18.

HLIB’s VIEW

Targeting 80% rig utilisation this year. We are overall positive on the extension contract secured as it would improve Velesto’s rig utilisation in 2019. Note that Velesto has achieved 67% rig utilisation in 9M18 and is targeting to hit 80% utilisation this year.

DCR in line with current market rate. We understand that the daily charter rate (DCR) is similar to the firm contract that was contracted in November 2016. Based on the contract value of USD38m, the implied DCR is about USD70k/day which is consistent with the current market rate.

Stronger 4Q18. Velesto is releasing its 4Q18 results end of this month. We expect Velesto to register better results QoQ (3Q18 core net loss of RM13.6m) on the back of higher utilisation (3Q18: 75%). However, 1Q19 rig utilisation is going to be weaker as Naga 3, Naga 5 and Naga 6 will be off hire this quarter amidst monsoon season.

Forecast. Maintained as it is within our FY19 charter rate assumption of USD70k/day and average rig utilisation of 75%.

Maintain HOLD, TP: RM0.25. Maintain HOLD recommendation with unchanged TP of RM0.25 based on 0.75x FY19 P/B multiple. Despite exploratory drilling is expected to pick up this year, we believe Velesto’s upside could be capped by the idle time between jobs. Meanwhile, we do not expect DCR to pick up in the near term as Velesto is already receiving higher rates than other players in the region. We turn more cautious on Velesto’s outlook in view of volatile oil prices, which may slow down the recovery of the upstream segment. In the worst case scenario, whereby oil prices continue to retrace for more than 6 months, we reckon that the exploration drilling segment in which Velesto is operating in would be the first sub-segment to be affected given that it is largely dependent on oil majors’ capex spending.

Source: Hong Leong Investment Bank Research - 13 Feb 2019