Velesto Energy has received a Letter of Award from Mudabala, for the Provision of a Jack Up Drilling Rig for their “Pegaga Development Drilling Program”. Velesto has assigned Naga 4 for the job. The contract value amounts to USD30m for a duration of c.12 months. Work is expected to commence by 2Q20. Forecast unchanged as the award is reflected in our forecast. Maintain our BUY call and TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean 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 cycle. Velesto remains an excellent proxy to an uptick in upstream exploration and production activities.

NEWSBREAK

Velesto Energy has received a Letter of Award from Mudabala Petroeleum, for the provision of a jack up drilling rig and services for the “Pegaga Development Drilling Campaign”. Velesto will assign Naga 4 for the job. The contract value amounts to USD30m. We understand that the drilling program is for duration of c.12 months, with drilling slated for commencement in 2Q20. Currently Naga 4 is undertaking work for ROC Oil.

HLIB’s VIEW

Naga’s keep winning. 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 77% rig utilisation in 9M19 and is on target to hit 80% this year (vs. 73% in FY18). This award is the second major rig renewal contracts for Velesto. This award roughly equates to c. USD82k/day although we understand that mobilisation costs and reimbursable cost items are imputed into the total package (note that rig rates regionally are in the USD80k-USD100k/day range). Nonetheless, the award validates our thesis that rig rates will continue to uprate when they come up for renewal. We remain upbeat on the prospective renewed terms for rigs coming off contracts moving forward.

Outlook. NAGA 2,3,5,6,7 will come up for renewal throughout 2020 and we continue to foresee domestic rig rates will continue to converge when they come up for renewal. 2019 had a lot of SPS activity; once every 5th year mandatory dry docking. In FY20, there won’t be any SPS except N8; this will result in optimal downtime and a higher utilisation rate.

Forecast. Unchanged our forecasts already reflects this award.

Maintain BUY, TP: RM0.46. Maintain our BUY call and TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean 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 cycle. Velesto remains an excellent proxy to an uptick in upstream exploration and production activities.

Source: Hong Leong Investment Bank Research - 12 Dec 2019