Velesto has secured 2 drilling rig contracts for Naga 2 (4 to 6 months contract) and Naga 5 (2 months contract) with an estimated total contract value of USD20.8m (RM85.3m). We believe that Velesto will be able to secure more short term drilling contracts in 2H21 and the Company will be able to have a higher utilisation rate in 2H21 vs 1H21 as we believe that Petronas would have a higher propensity to spend on capex in 2H21. Maintain HOLD at a higher TP of RM0.18 (from RM0.14) based on 0.5x (from 0.4x) FY21 BVPS.

NEWSBREAK

Velesto announced that it has secured 2 Letter of Awards from Petronas for Naga 2 and Naga 5 with an estimated contract value of USD20.8m (RM85.3m). The contract for Naga 2 is expected to commence from 15 May 2021 to 15 June 2021 and the contract for Naga 5 is expected to commence from 1 April 2021 to 14 April 2021. The duration for Naga 2’s contract is expected to be from 4 to 6 months while Naga 5’s contract is expected to last for 2 months.

HLIB’s VIEW

Status of rigs. Naga 4 is expected to be contracted until 1H21, Naga 2 will be contracted for 4 to 6 months in 2Q21, Naga 5 will be contracted for 2 months in 2Q21 and Naga 8’s long-term contract is only expected to begin in 2Q21. We deem the current utilization rates of rigs to be in-line with our expectations of c.50% in FY21 as we expect Velesto to secure more short-term contracts in 2H21.

Daily Charter Rates. DCR for the aforementioned contracts amounts to c.USD70-72k excluding decommissioning and technical related costs.

Outlook. We expect to see a pick-up in Petronas’ propensity to spend in 2H21 and we believe that Velesto would be able to secure more short-term contracts in 2H21. We believe that its 2H21 utilisation rate will be higher than 1H21 despite only having 2 chartered rigs (Naga 2 and 8) in 2H21 as we opine that we should see some elevation in capex from Petronas in 2H21. We expect Velesto’s utilisation rate to come in at c.50% in FY21. Furthermore, its cost savings initiative is expected to mitigate any short-falls in utilisation rates.

Forecast: Unchanged

Maintain HOLD, TP: RM0.18. Maintain HOLD recommendation with a higher TP of RM0.18 based on 0.5x (from 0.4x) FY21 BVPS. While we believe that Petronas would start to elevate its capex spending in 2H21, we haven’t seen a material pick-up in contract awards for Velesto yet as the duration of the aforementioned contracts secured are only for 4 to 6 months (Naga 2) and 2 months (Naga 8). We believe that more drilling contract awards are required for us to warrant a re-rating on our call for Velesto.

Source: Hong Leong Investment Bank Research - 29 Mar 2021