Secured Contract for NAGA 4

Velesto Energy has received a letter of award from ROC Oil (Sarawak) for the provision of the jack-up drilling rig NAGA 4. We make no changes to our earnings forecasts as this is within our rig utilisation assumption. We maintain our BUY call with an unchanged 12-month DCF-based target price of RM0.35.

Contract Details

Velesto Energy announced that it has secured a contract to assign the NAGA 4 drilling rig to ROC Oil (Sarawak) for 11 firm wells, which is under the D35 Phase 2 infill drilling programme. This contract is worth US$31m (which translates to RM125.4m) and expected to commence in August 2018. Based on our assumptions of 1 firm well per month, the contract would expire by end-July 2019, and command a daily charter rate (DCR) of US$93k.

Update on Drilling Rig Fleet

The NAGA 4 contract with ConocoPhillips will be expiring by end-July 2018. It will be subsequently redeployed to ROC Oil to start on this new contract. Meanwhile, NAGA 3 and 7 contracts with Petronas Carigali are expected to have expired by June 2018. NAGA 5 firm contract with Repsol is likely to be completed by September 2018, with an renewal option for a further period of one year. NAGA 8 is on a long-term contract with HESS for 3 years, which will only be expiring by October 2019, with a renewal option for another 23 months. We expect 2Q18 to have remained profitable with a drilling rig utilisation of around 75%, in line with our full-year forecast.

Maintain BUY

We make no changes to our forecasts as we have already assumed an average drilling utilisation rate of 71% in FY18, and 73% in FY19. We maintain our BUY call and DCF-based target price of RM0.35.

Key downside risks to our BUY call would be lower-than-expected utilisation rates and daily charter rates.

Source: Affin Hwang Research - 4 Jul 2018