Naga 8 Secures Contract

Velesto Energy (Velesto) received a Letter of Award for its Naga 8 jack up rig which has secured a long-term charter with Carigali Hess Operating Company valued at US$131m and expected to commence in 2H20. We are positive on this new contract, but Velesto will need to secure further extensions and another new win for Naga 4 to lock in 2H20 utilisation rates. Given the recent run up in share price, we downgrade the stock to a HOLD with an unchanged target price at RM0.37.

Contract Details

Velesto’s Naga 8 jack up rig secured a 3-year firm charter with Carigali Hess worth US$131m, with 3 extension options of 6 months each. The contract is expected to commence in 2H20, upon completing a job with HESS and its SPS exercise. The indicative daily charter rate (DCR) for this contract is US$119,635, which also includes the rig mobilisation cost and other reimbursable cost items.

DCR Higher-than-market Reflects the Mid-term Outlook

Based on our estimates, the actual DCR for this contract is in the range of US$90–100k, which is higher than the current market range at US$65–95k for jack up rigs >350ft water depth. We believe that the high DCR reflects the mid-term positive outlook due to the longer contract tenure. We expect the remaining rigs expiring to be renewed closer to the current market rate of US$70–80k.

Downgrade HOLD as Positive Looks Priced in

We make no changes to our earnings forecasts although the renewed DCR for Naga 8 is higher than our current assumption. With this new contract secured, Velesto now needs to negotiate an extension for 4 of its rigs with Petronas Carigali, and also a new contract for Naga 4 to secure utilisation rate for 2H20. We maintain our DCF-based target price at RM0.37 but downgrade the stock to a Hold rating in view of the recent strong run up in share price. Velesto is set to release its 3Q19 result on 28 November. Upside/downside risks to call hinges on utilisation and daily charter rates.

Source: Affin Hwang Research - 6 Nov 2019