Velesto Energy has received a Letter of Award from Carigali Hess, for the Provision of a Jack Up Drilling Rig for their 2020 drilling programme. Velesto has assigned Naga 8 for the job. The contract value for the firm period of 3 years amounts to USD131m with an extension of c.18 months. Work is expected to commence by 2H20. Post earnings revision and the new benchmark in day rates, we are upgrading our call to a BUY (from Hold) with a higher TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean P/B (from 0.9x FY19 P/B). Velesto remains an excellent proxy to recovering of oil prices and an uptick in upstream exploration and production activities.

NEWSBREAK

Velesto Energy has received a Letter of Award from Carigali Hess Operating Company, for the provision of a jack up drilling rig for its 2020 drilling Programme. Velesto will assign Naga 8 for the job. The contract value for the firm period of 3 years and amounts to USD131m with an extension of c.18 months. Work is expected to commence by 2H20.

HLIB’s VIEW

Earnings visibility. We are positive on the contract secured as it cements Velesto’s rig utilisation and earnings visibility for FY20 onwards. Note that Velesto has achieved 70% rig utilisation in 1H19 and is targeting to hit 80% this year. We expect FY20 should better than FY19’s utilisation rates due to less incidences of SPS activity in FY20 (which takes c. 6 weeks per rig). This award essentially sets in motion the first of the major rig renewal contracts for Velesto. Note that Naga 4 & Naga 7 will come up for renewal throughout 2020. NAGA 8 is a premium independent-leg cantilever jack-up rig that has a drilling depth capability of 30,000 feet and has a rated operating water depth of 400 feet.

A new benchmark. It is understood that rig rates regionally are in the USD80k USD100k/day range; this award roughly equates to c. USD120k/day although we understand that mobilisation costs and reimbursable cost items are imputed into the total package. Nonetheless, the award essentially serves as the benchmark for rig rates to uprate when they come up for renewal. We remain upbeat on the prospective renewed terms for rigs coming off contracts moving forward.

Forecast. Post contract award we are adjusting our FY20-21 earnings upward by 29%-45% as we impute a higher day rate assumption into our model.

Upgrade to BUY, TP: RM0.46. Post earnings revision and the new benchmark in day rates, we are upgrading our call to a BUY (from Hold) with a higher TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean P/B (from 0.9x FY19 P/B); we deem this justified as we are of the opinion that the jack up rig market is on the cusp of an upswing. Velesto remains an excellent proxy to recovering of oil prices and an uptick in upstream exploration and production activities.

Source: Hong Leong Investment Bank Research - 6 Nov 2019