Velesto warns of weak drilling market


VELESTO Energy Bhd foresees headwinds in the year as many oil and gas companies globally have initiated cost-cutting measures that will result in reduced activities in the drilling sector.

In its exchange filing yesterday, the company added that the Covid-19 pandemic has triggered supply and demand mismatches and caused market disruptions that will likely see new well drilling activities and associated jobs fall in the near term.

“Many oil companies globally have started to reduce both capital and operational expenses to conserve funds and to prepare for the challenges in the near future. This has resulted in reduced activities including in the drilling sector,” Velesto noted in its filing yesterday following the release of its first-quarter results ended March 31, 2020 (1Q20).

Velesto posted RM16.32 million net profit for the 1Q20 compared to a net loss of RM22.22 million in the same period last year due to more work for its rigs.

Revenue for the quarter was up 38.76% year-on-year (YoY) to RM176.27 million.

The company guided to lower earnings prospects as oil producers who rely on higher oil prices are expected to cut back in awarding drilling contracts in a low-oil price environment.

“Lesser drilling activities are expected in the near term as oil companies review their drilling programmes. Only five of the group’s seven jack-up drilling rigs are working but all are still under contract.

“However, there is no guarantee the options under the contracts will be exercised upon expiry of the primary terms,” Velesto warned.

Velesto added that the group is continuously tendering for new contracts to partially mitigate potential softening of the market which may affect contract renewals.

For the hydraulic workover units, Velesto said none of the group’s units is working at present.

“The demands for workover and plug and abandonment activities are also expected to soften due to the present market environment.

“The group’s oilfield services operation in China is also impacted by the softening market but to a lesser degree. The group will continuously monitor and evaluate the viability of this subsidiary,” it said.

It attributed the improvement in 1Q earnings mainly to improved performance in the drilling services segment.

“On average, the jack-up rig utilisation in 1Q was 86% compared to 66% in the corresponding quarter. The drilling services segment registered a significant improvement to a pretax profit of RM26.4 million against the loss before tax of RM9.5 million reported in the corresponding quarter,” it said.

Velesto said the oilfield services segment experienced a 21.6% decline in revenue attributable to lower revenue recorded from their oilfield operation by a subsidiary in China in the current quarter.

Velesto’s shares closed 3.03% or half a sen higher yesterday at 17 sen, valuing the company at RM1.4 billion.