The contract is to drill 2 firm wells whereby the group will assign its Naga 7 drilling rig for the works

By MARK RAO / Pic By Velesto.com

VELESTO Energy Bhd’s latest drilling contract is expected to help the company achieve its 80% utilisation target while providing earnings visibility for the year.

The upstream oil and gas drilling service provider secured a US$8 million (RM33.5 million) contract from Petronas Carigali Sdn Bhd via its indirect wholly owned unit, Velesto Drilling Sdn Bhd.

Expected to commence in the third quarter of this year (3Q19), the contract is to drill two firm wells whereby the group will assign its Naga 7 drilling rig for the works.

Kenanga Investment Bank Bhd analyst Koh Huat Soon said the duration of the work is expected at 90 to 120 working days with daily charter rates believed to be near US$70,000 per day (excluding other value-added services).

This will enable Velesto Energy’s to make earnings before interest, taxes, depreciation and amortisation (EBITDA) margins of around 45%.

“Overall, we are positive on the contract announcement, highlighting Velesto Energy’s position as a prime beneficiary of increased jack-up drilling rigs demand in the country, as well as providing further utilisation and earnings visibility,” the analyst wrote in a report yesterday.

“With the contract for Naga 7 now secured, we believe no further contracts are necessary for the rest of 2019, as all its rigs should already have contracts at hand until at least end of the year.”

The award does not alter the research firm’s forecast for the company’s fiscal year ending Dec 31, 2019 (FY19) and FY20 as it is within its 80% to 85% utilisation assumption, while the expected charter rates are broadly within its US$72,000 per day imputed assumption.

As such, the research firm maintained an ‘Outperform’ call on Velesto Energy with an unchanged target price (TP) of 35 sen pegged to a one times FY20 estimated price-to-book value.

“We continue to like Velesto Energy given the certainty of its turnaround story, clear earnings visibility for the next one to two years, while we also see limited downside risks from current share price levels,” Koh said.

Downside risks include poorer than expected rigs utilisation, weaker than expected charter rates and lower than expected margins, the analyst added.

There are reportedly 20 drilling rigs available in Malaysia now, of which seven is owned by Velesto Energy.

Naga 7, which will be used for the recent Petronas Carigali contract secured by the company, is a three-legged 375 ft independent leg jack-up cantilever rig.

Hong Leong Investment Bank Bhd said the company is on track to achieve its targeted 80% utilisation rate for FY19 following the contract award.

“We are overall positive on the contract secured as it would improve Velesto Energy’s rig utilisation in the second half of 2019 (2H19),” its analyst Sheikh Abdullah wrote in a report yesterday.

Note that Velesto Energy has achieved 70% rig utilisation in 1H19.

The research firm maintained a ‘Hold’ coverage for the company with an unchanged TP of 31 sen based on a 0.9 times FY19 price-to-book multiple.

“Velesto Energy remains a good proxy to recovering of oil prices. However, at this juncture, the share price has priced in the better outlook in 2019.”

For its 2Q ended June 30 this year, Velesto Energy posted a RM11.91 million net profit against a loss of RM24.08 million for the corresponding period last year.

This was owing to the higher turn-over for the quarter at RM157.05 million, up 40.4% year-on-year (YoY) largely supported by the drilling services business which benefitted from higher rig utilisation and average charter rates.

For the 1H19, the company remained in a net loss position of RM10.31 million despite revenue rising 21.6% YoY to RM284.08 million.

In an earlier report this week, TA Securities Holdings Bhd expects the company’s earnings to turnaround in FY19 on improved drilling fleet utilisation (estimated at 79% this year against 73% in FY18) and the uptick in daily charter rates.

“Furthermore, earnings visibility has improved, given longer contract tenures for newly secured drilling contracts,” its analyst Kylie Chan wrote.

The research firm raised its TP for the company to 38 sen from 34 sen previously, due to higher forecast EBITDA generation for FY20.

Velesto Energy closed unchanged at 30.5 sen yesterday, valuing the company at RM2.5 billion.