New Drilling Contract Secured

Velesto Energy (Velesto) announced it has secured a drilling contract from Sarawak Shell Berhad (SSB) / Sabah Shell Petroleum Company Limited (SSPC). This contract will be making use of the available capacity at NAGA 7. Our rig utilisation rate assumptions remain unchanged despite the new contract, and hence no changes to earnings forecast. We maintain our BUY rating and DCF-derived Target Price of RM0.35.

New US$25m Drilling Contract Secured, Expected to Begin in 3Q18

Velesto has secured a drilling contract for its NAGA 7 jack-up rig, which is awarded by SSB/SSPC, a subsidiary of Royal Dutch Shell. The announced contract value is estimated at US$25m (RM102m), and expected to begin between early Aug18 to end-Sept18. The announcement did not disclose the contract duration. However, based on our estimate, we believe this contract could last about 9-12 months, translating into a daily charter rate (DCR) range of US$69,000 to US$91,000 and in-line with our expectations.

Additional Utilization Capacity at NAGA 7 Factored-in

We maintain our forecasts that Velesto will report a profit in FY18E. We expect utilisation rates in the upcoming 2QFY18 to be relatively similar to 1QFY18, as a result of lower contribution from NAGA 7, which was under scheduled maintenance. Nevertheless, 2H18 will likely see utilisation rates rise to 80-85%, underpinned by contract extensions and expected new contracts. We make no changes to our forecasts, as this falls under part of our full-year utilisation rate of 72%.

Reaffirm BUY and Target Price of RM0.35

We reaffirm our BUY rating and our DCF-derived 12-month Target Price of RM0.35. We believe Velesto’s jack-up rigs utilisation rates are intact and that the group will be profitable moving forward arising from lower depreciation charges and interest cost as well as the absence of a huge impairment (post a balance-sheet rationalization exercise). Nonetheless, DCR will continue to be muted as compared to 2017.

Key Downside Risks

The key risks to our BUY call are weaker-than-expected DCR and utilisation rates;RM-strengthening.

Source: Affin Hwang Research - 30 Jul 2018