Velesto has secured 1 drilling rig contract for Naga 7 (3 to 4 months contract) with an estimated contract value of USD8m (RM33m) from ConocoPhilips Sarawak. We view this contract win positively and we believe that Velesto would be able to secure more short-term contracts in 2H21. Upgrade to BUY at a higher TP of RM0.21 (from RM0.18) based on 0.75x (from 0.65x) FY21 BVPS.

NEWSBREAK

Velesto announced that it has secured a Letter of Award from ConocoPhillips Sarawak for Naga 7 with an estimated contract value of USD8m (RM33m). The contract is expected to commence in 2Q21 for a duration of 3 to 4 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, Naga 7’s contract will begin 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.

Outlook. The securement of the aforementioned contract validates our view on our expectations of higher upstream capex spending from Petronas and IOCs in FY21 and we believe that Velesto would be able to secure more short-term contracts in 2H21. Velesto currently has 3 chartered rigs (Naga 2, 7 and 8) in 2H21 and we view that its 2H21 utilisation rate will be higher than 1H21. We expect Velesto’s utilisation rate to come in at c.50% in FY21. We are also positive on its cost saving initiatives implemented over the course of FY20.

Forecast: Unchanged.

Upgrade to BUY, TP: RM.21. Upgrade to BUY with a higher TP of RM.21 (from RM0.18) based on 0.75x (from 0.65x) FY21 BVPS. We believe that the prospects of Velesto is turning positive despite the relatively short duration of its recently secured contracts. We opine that as long as Brent oil price averages above USD60/bbl, more drilling contracts will be awarded.

Source: Hong Leong Investment Bank Research - 27 March 2021