VELESTO was awarded a contract by Carigali Hess for its Naga 8 jack up drilling rig, valued at USD131m. The contract is for 3 firm years, with 3 x 6 months extension options, commencing 2HCY20. Excluding add-ons, we believe daily rate for the contract to be ~USD90k/day – one of the highest in the region, given the long contract duration. We are positive on the award, given the high charter rates and increased earnings visibility hence raised our PBV valuation to 1.2x (from 1x previously). BUY with TP of RM0.40. Note that our TP also accounted for a 7.5% share base dilution from the ESOS.

VELESTO has received a letter of award from Carigali Hess for the provision of 10K Jack Up Drilling Rig for 2020 Drilling Programme. VELESTO will assign the “Naga 8” drilling rig for this contract, with an estimated contract value (firm period only) of USD131m. The contract is expected to commence in 2HCY20 for a firm duration of 3 years, with 3 extension options of 6 months each.

We reckon 20-25% of the contract value could be from added on services (e.g. mobilisation and other reimbursable costs). Excluding the add-ons, we estimate the contract value to imply daily charter rates of roughly ~USD90k/day. We expect the contract to fetch EBITDA margin of ~45% as the awarded charter rate is believed to be one of the highest in the region. As a comparison, average daily charter rate for VELESTO in FY18A was only USD69k/day. The unusually high charter rate is due to: (i) Naga 8 being one of VELESTO’s better performing rigs, and (ii) the long contract duration of 3 firm years (also one of the longest in the region), thus the higherthan-average charter rates could provide some degree of “future proofing” for VELESTO, in anticipation of a gradual uptrend in charter rates in the coming few years.

Overall, we are positive on the contract award, given its highly attractive charter rate coupled with longer-term utilisation visibility for the rig. Currently, Naga 8 is still servicing its contract with Hess until mid-CY20. The rig will then undergo a special periodical survey (SPS) for about 1-2 months, before being redeployed into the Carigali Hess contract in 2HCY20. Meanwhile, we foresee the next contract award to likely go to Naga 4, with the rig due to be out of contract by end-1QCY20 (currently servicing Roc Oil), while the rest of VELESTO’s rigs have already secured contracts for most of CY20.

Source: Rakuten Research - 6 Nov 2019