We recently visited Velesto Energy’s Naga 2 and 5 jack-up rigs at MMHE’s yard in Pasir Gudang, Johor, which were undergoing leg repair and special periodic survey (SPS) works. Naga 6 had already completed its SPS in March 2019 and has been mobilised to Sarawak for a PTTEP job. We reiterate our BUY rating with a higher target price of RM0.40 as we roll forward our valuation.

Naga 2, 3, 5, 6 Secured Petronas’ Contracts

Naga 2 and 3 announced a 1-year contract, with 2 annual renewal year options with Petronas Carigali which will commence from May-19. Naga 5

is in the midst of completing its SPS work begun in March-19, and will be subsequently mobilised for a 1 year contract with similar 2 annual renewal year option with Petronas Carigali at the D18 field starting in May-19. Naga 6, which completed its SPS, has commenced a contract with PTTEP for 70 days, starting in March and ending by mid May-19. It will then undergo a recertification in June-19 before starting the similar 1+1+1 year contract with Petronas Carigali. Meanwhile, Naga 4 will continue to be contracted to ROC Oil Sarawak until August-19; Naga 7 is reported to have started a 4- month job with Murphy Oil since April-19 before it will resume its contract with Shell from October-19 onwards; and Naga 8’s contract with Hess will expire by December-19.

Rates Improving, But Malaysia Still a Better Market for Jobs

Based on IHS Markit data, average daily charter rates (DCR) have recovered from a low of US$50,000 in 4Q18 to US$62,000-63,000 in February 2019 due to improving supply-demand dynamics. This is also reflected in the recent contract wins for Petronas where DCRs range from US$69,700 to as high as US$75,700. Overall, this is in line with our assumptions whereby we have factored in a slight improvement in FY19 to US$71,500 and a further 3.9% improvement across FY20-21.

Reaffirm BUY and Raise TP to RM0.40

We make no changes to our earnings forecasts but roll forward our valuation to FY20E, implying a new DCF-based target price of RM0.40 (from RM0.30). We remain positive on Velesto on the back of recovering drilling rig prospects as Petronas’ jack-up rig demand is expected to increase to 16-18 rigs in 2019 (2018: 7-10 rigs). In addition, we believe Velesto, as Malaysia’s largest jack-up operator and with a younger fleet, has an edge over its competitors in terms of securing new contracts, at the very least with Petronas.

Source: Affin Hwang Research - 23 Apr 2019