Velesto Energy (Velesto) announced that it has secured two drilling contracts from Petronas Carigali (PCSB), mobilising both its NAGA 3 and 5 jack up rigs. We are positive with these batch of contracts as it further solidifies our view of an improving 2H18 rig utilization rates. We maintain our BUY rating and unchanged DCF-derived target price of RM0.35.

Two New Contracts Expected to Contribute in 3Q18

Velesto has secured two short-term drilling contracts for its NAGA 3 and 5 jack up rigs, awarded from PCSB for a combined contract value of US$10.8m. NAGA 3 will be assigned to drill 2 firm wells with the option to renew for another 1+1 well, which is expected to begin between mid July– August 2018. Meanwhile, NAGA 5 will also be drilling 2 firm wells with an additional 2 wells extension option, expected to begin sometime in August 2018. We estimate that 2 firm wells for both rigs will provide 2–3 months work visibility; and a total of 6 months visibility, if extensions are exercised. NAGA 3 was previously with the same client (PCSB), while NAGA 5’s contract with Repsol was not extended, and in turn mobilised for PCSB.

DCR Still Relatively Flat

Based on a 40-days per well calculation, daily charter work (DCR) work out to be US$68,000, in line with the current market rates and our expectation. We make no changes to our earnings forecast as this falls under our full year FY18 DCR and average rigs utilization assumption of 72%.

Reaffirm BUY and RM0.35 Target Price

We reaffirm our BUY rating and DCF-derived 12-month target price of RM0.35. We believe Velesto’s 2H18 jack-up rigs utilisation looks secured, on track to turning around from FY18 onwards. On top of the better utilisation rate, the post-impairment lower depreciation and finance cost with the restructured balance sheet will likely lift the burden off Velesto. Key risks to BUY call are weaker-than-expected DCR and utilisation rates, and RM strengthening.

Source: Affin Hwang Research - 10 Aug 2018