Last Friday evening, Velesto announced that it has secured a two-year umbrella contract (with a 1+1 extension option) for the provision of jack-up drilling rig services from Petronas Carigali. Under this contract, Velesto will provide its services based on the group’s rig availability on a call-out basis. We note that the umbrella contract did not entail any hard commitment from Petronas in terms of specific job details (i.e. contract size, job tenure, daily charter rates) throughout the entire contract period. We deem this development to be slightly positive as ground indications are leading to a pick-up in Petronas upstream capex in 2022 amidst the current high crude oil prices. Maintain BUY with an unchanged TP of RM0.18 based on 0.7x FY22 P/B.

NEWSBREAK

Last Friday evening, Velesto announced that it has secured a two-year umbrella contract (with a 1+1 extension option) for the provision of jack-up drilling rig services from Petronas Carigali. We note that the contract commences effective in 1Q22.

HLIB’s VIEW

Key highlights. We note a few key salient points, as below: (1) Under this contract, Velesto will provide its jack-up drilling rig services based on the group’s rig availability and schedule on a call -out basis. This means that Velesto can still bid for other drilling jobs during this tenure and will not be entirely dependent on Petronas for the next 2+1+1 years. (2) We highlight that this umbrella contract did not entail any hard commitment from Petronas in terms of specific job details (i.e. contract size, job tenure, daily charter rates) throughout the entire contract period. (3) Overall, we are slightly positive over this development as ground indications are leading to a pick-up in Petronas upstream capex in 2022 amidst the current high crude oil price environment.

Outlook. We are forecasting Velesto to turn profitable in FY22-23 as we expect to see a pick-up in drilling rig tenders this year amidst the high current crude oil price which will lead to increased activity in the O&G space. We believe that Velesto would not use the Naga 7 insurance proceeds to acquire a new rig as it will continue to optimise its assets and continue improving its balance sheet. We also highlight notable balance sheet improvements – i.e. net debt and net gearing stood at RM289m and 0.13x as at end-December 2021 (vs. a net debt and net gearing of RM793m and 0.35x a year ago).

Forecast. We make no changes to our FY22-23F earnings estimates. While blended utilisation levels in 1Q22 is expected to remain lukewarm due to the annual timeline of clients’ capex planning cycle, we expect Velesto to perform better in FY22 on a full year basis (as compared to FY20-21).

Maintain BUY, TP of RM0.18. Maintain BUY with an unchanged TP of RM0.18 based on 0.7x FY22 P/B.

Source: Hong Leong Investment Bank Research - 14 Mar 2022