Velesto has secured 1 drilling rig contract for Naga 4 (7 to 8 months contract) with an estimated contract value of USD17.7m (RM73m) from Sarawak Shell and Shell Sabah Petroleum. We view this contract win positively and the contract win was within our expectations. Maintain BUY with unchanged TP of RM0.21 based on 0.75x FY21 BVPS.

NEWSBREAK

Velesto announced that it has secured a Letter of Award from Sarawak Shell and Shell Sabah Petroleum for Naga 4 with an estimated contract value of USD17.7m (RM73m). The contract is expected to commence between 15 Aug 2021 and 15 Oct 2021 for a duration of 7 to 8 months.

HLIB’s VIEW

Status of rigs. Naga 4 is expected to be contracted until 1H21 and it will be re-hired between 15 Aug 2021 and 15 Oct 2021 for 7 to 8 months, 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 are expecting 1 more short-term contract to be secured 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 as this is the fourth drilling contract that Velesto has secured in less than 1 month. Velesto currently has 4 chartered rigs (Naga 2, 4, 7 and 8) in 2H21 and we view that its 2H21 utilisation rate will be higher than 1H21.

Forecast: Unchanged.

Maintain BUY, TP: RM0.21. Maintain BUY with unchanged TP of RM0.21 based on 0.75x 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 - 8 Apr 2021