VELESTO has secured a USD13m drilling contract from PTT Exploration and Production Plc (PTTEP). This is for PTTEP’s 2022- 23 Exploration Drilling Programs. The group has assigned NAGA 3 for this contract (start: Feb CY23) to drill two firm wells. We are largely neutral on this announcement as it has been well flagged and within our assumptions. We maintain our forecasts, TP of RM0.19 and UNDERPERFORM call.

We estimate that VELESTO will derive daily charter rate (DCR) of circa USD100k for this contract. This falls within the company’s earlier guidance that DCRs at Malaysian waters currently range between USD90k-131k.

We understand that DCRs have been raised higher following successful negotiations between VELESTO and Petronas for existing umbrella drilling contracts. Therefore, PTTEP, which has a farm-in agreement with Petronas on this field offshore Sarawak, will award drilling contracts based on the higher rates.

Moving forward, NAGA 3 may potentially be awarded a 2-month extension for this contract. This is before it starts its new contract for Petronas Carigali from end-Aug CY23 until end-Sept CY24.

Based on our estimates, this job will result in earnings accretion amounting to 10% of VELESTO’s FY23F profit. Nevertheless, we have earlier incorporated the following assumptions to our FY23F earnings: (i) 75% utilization for NAGA 3, and (ii) average fleet DCR of USD95k.

Forecasts. Maintained.

We also maintain our TP of RM0.19 based on 15x FY24F PER. This is in line with ascribed valuations for local-centric service providers within our coverage (i.e. DAYANG). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

We prefer to avoid VELESTO as: (i) costs inflation may lead to margin pressure arising from higher manpower and materials costs, (ii) catalysts have already played out (i.e. rebound in rig fleet utilization and DCRs), and (iii) rising interest rates translate to earnings drag from higher financing costs. Maintain UNDERPERFORM.

Risks to our call include: (i) fleet expansion via acquisition of new jack-up rigs, (ii) inflated DCRs as jack-up market tightens further, and (iii) topline boost from a strong USD/MYR.

Source: Kenanga Research - 12 Jul 2023