Positive on Velesto Energy’s new awards from Roc Oil Sarawak

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The contract is for the Naga 2 jack-up rig to drill three firm wells, with an estimated contract value of US$14 million and an estimated commencement date of between January 25 to February 25 this year.

KUCHING (Feb 3): Optimism is seen for Velesto Energy Bhd (Velesto Energy) after the receipt of a letter of award from Roc Oil (Sarawak) Sdn Bhd for the provision of jack-up rig drilling rig services.

The contract is for the Naga 2 jack-up rig to drill three firm wells, with an estimated contract value of US$14 million and an estimated commencement date of between January 25 to February 25 this year.

“Based on the job scope, Kenanga Investment Bank Bhd (Kenanga Research) reckoned that the duration of the contract should be about four months.

“Assuming 30 per cent of the contract value are add-ons, this implies a daily charter rate of US$80,000. This is higher than Velesto Energy’s historical day rates over the past few years of US$70,000 to US$75,000 and is reflective of the current up trending rates in the market amidst the demand resurgence.

“We expect the contract to fetch an EBITDA margin of about 45 per cent – in-line with historical average. The Naga 2 rig is currently also servicing Roc Oil, and hence, this contract award can also be somewhat seen as an extension contract from an existing client.”

Kenanga Research was more positive on the contract win, as this is reflective of a resurgence of rig demand and activity level in the domestic market.

“Being Malaysia’s largest jack-up drilling rig provider, Velesto Energy is poised to benefit from this resurgence in demand,” it said.

“As such, with this being the first contract win for the year, we believe more wins will come to quickly fill up Velesto Energy’s rig schedule for the rest of the year.”

Meanwhile, researchers with Hong Leong Investment Bank Bhd (HLIB Research) was also positive on the job win as it will keep Velesto’s Naga 2 rig occupied until mid-June 2023 which will help boost the group’s overall blended rig utilisation rate while riding on the increasing daily charter rates (DCRs).

“With this job win, we highlight that all of Velesto’s rigs are now utilised,” it said. “We estimate the DCR for the job to range from US$95,000 to US$100,000.

“We remain optimistic and believe that Velesto be profitable in 4Q22, in which results are slated for release on February 27. We should also expect the group to be profitable in FY23 as all of its rigs are chartered until at least the end of the year.”

HLIB Research made no changes to Velesto’s FY22 estimates. However, post tweaks, channel checks and discussion with the group, it raised its FY23-FY24 earnings forecasts by seven and five times respectively to account for significantly higher DCRs and blended utilisation rates.”

Kenanga Research also made no changes to its current forecasts for Velesto Energy as the new win is deemed to fall well within its assumptions.

“Our FY22/FY23 earnings are based on a rig utilisation assumption of 60 and 80 pct and average daily charter rates assumption of US$75,000 and US$85,000.

“While we like Velesto as a prime beneficiary of the resurgence of the local drilling market, its current valuations are already rich. Since our outperform call in Sep-2022, the stock has performed tremendously – having more than doubled. As such, we see this as an opportunity for investors to realise some profits.”