KUCHING: Analysts are optimistic on Velesto Energy Bhd (Velesto) having secured a contract for its Naga 7 jack-up rig to drill four confirmed wells with an option for three more from Sarawak Shell/Sabah Shell Petroleum Company Ltd, a subsidiary of Royal Dutch Shell, commencing between August 1 and September 30, 2018.
This contract will make use of the available capacity at Naga 7.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) said the announced contract value was estimated at US$25 million or an approximate RM102 million without any details on the contract’s duration.
“However, based on our estimate, we believe this contract could last about nine to 12 months, translating into a daily charter rate (DCR) range of US$69,000 to US$91,000 and in line with our expectations,” it said in its update on this move.
“We maintain our forecasts that Velesto will report a profit in FY18E. We expect utilisation rates in the upcoming second quarter of financial year 2018 (1QFY18) to be relatively similar to 1QFY18, as a result of lower contribution from Naga 7, which was under scheduled maintenance.
“Nevertheless, 2H18 will likely see utilisation rates rise to 80 to 85 per cent, underpinned by contract extensions and expected new contracts. We make no changes to our forecasts, as this falls under part of our full-year utilisation rate of 72 per cent.”
Assuming each well could take 40 days to drill and mobilisation costs of US$5 million, AmInvestment Bank Bhd (AmInvestment Bank) in a separate note estimated that Velesto’s daily charter rate could reach US$70,000 which has remained relatively stable for the past year.
“As this charter is a for a rig with charter which has just expired in June this year, Velesto’s rig utilisation could reach five out of its existing seven rigs, which is likely to struggle to break even in 4QFY18,” it said in a separate note.
“Recall that Velesto’s 1QFY18 net profit of RM5 million would have been a loss of RM2 million to RM3 million, excluding realised forex gains of RM18 million.
“Also note that Velesto has recently secured a US$31 million replenishment charter for its Naga 4 jack-up rig from Roc Oil (Sarawak) Sdn Bhd for its 11-well D35 Phase 2 Infill Drilling Programme, beginning next month.
“However, the group’s 2QFY18 rig utilisation is likely to be similar to 1QFY18’s 65 per cent which will potentially mean that the group will not be able to break even with daily charter rates still soft around US$70,000.”
Velesto’s Naga 2 and 6 are currently warm stacked while the charter of Naga 3 expired in June this year. Meanwhile, AmInvestment Bank said the Naga 5 charter will likewise expire by September this year unless Repsol exercises its option to renew another year.
“With regional daily rig charter rates at US$55,000 to US$65,000, management affirms that Petronas does not foresee any increase in 2018 and 2019. We understand that Naga 2, 3 and 6 may be close to securing short-term charters of around four or five months, while Naga 5 could have a six-month charter until early 2019.”
Currently, Velestro is tendering for 23 short-term charters and seven longterm charters which have a combined value of US$660 million against its current firm order book of US$359 million and optional extension worth US$426 million.
However, AmInvestment Bank forewarned that a major portion of these tenders came from overseas which have lower charter rates compared to Malaysia’s.
“In our view, weak charter rates of short-term duration, comprising a significant portion of its tenders and order book, continue to cloud Velesto’s earnings visibility.”
Nevertheless, AffinHwang Capital reaffirmed its buy rating and a target price of RM0.35 per share, adding, “We believe Velesto’s jack-up rigs utilisation rates are intact and that the group will be profitable moving forward arising from lower depreciation charges and interest cost as well as the absence of a huge impairment.”