Wednesday, September 18

Analysts see improving outlook for Velesto Energy


KUCHING: Velesto Energy Bhd’s (Velesto) outlook for 2019 has been viewed positively by analysts as they expected higher utilisation of the company’s rigs for the next 12 months.

Of note, Velesto had recently secured a charter extension for the provision of jack up (JU) drilling rig services for the Hess Exploration and Production Malaysia (Hess) for the next 18 months commencing the second quarter of 2019 (2Q19).

The contract extension is estimated to be approximately US$38 million.

According to Maybank Investment Bank Bhd (Maybank IB Research), the contract extension equates to a daily charter rate (DCR) of US$70,000 which is decent and comparable to ongoing market rates.

“The 18-month extension for Naga 8 is not unexpected, for Velesto has in the past indicated of such possibility.

“Post the 18 months period, Hess has the option to extend the JU charter for another 23 months, a positive,” the research team said.

It furter highlighted, “While we track that 4 of Velesto’s JU charters (for Naga 2, 3, 5 and 6) have expired in January 2019, this is not a concern for we understand that these JUs have verbally secured re-deployment from 2Q19, pending official announcements.

“With that, we expect Velesto to average a higher utilisation for its rigs of 82 per cent in 2019 compared with circa 71 per cent in 2018 and return to the black, at the core earnings level.

“We posit its profit and loss (P&L) break-even to be at an estimated 77 per cent utilisation. While this is a positive, DCRs are likely to be unchanged, at US$68,000 to US$70,000.”

Aside from that, the research team said it expected more charter announcements in the coming months as Velesto capitalises on Petronas’ drilling programs for 2019.

Meanwhile, it pointed out that Velesto’s plan to pre-pay part of its debts in FY19 could see some cost savings.

“We expect the ongoing rationalisation exercise of its oil field services to conclude by 4Q18,” it added.

“Overall, with an improving outlook over the next 12-months, any short-term weakness in share price is an opportunity to accumulate,” said Maybank IB Research which pegged a ‘buy’ call on the stock.