In its research coverage on Velesto Energy (VELESTO), Kenanga Research has given an OUTPERFORM call on this counter. VELESTO has been awarded an integrated rig, drilling and completion services contract from Hess, valued at
USD135m. This will be the first jack-up drilling rig contract to be awarded through an “integrated” arrangement in
Malaysia, with Halliburton as the technical partner executing the integrated works. Going forward, the research house expects more contract wins to come given the turnaround in the local drilling market.
VELESTO announced that it has received a letter of award from Hess Exploration and Production Malaysia B.V. for the provision of integrated rig, drilling and completion services for the latter’s 2022 to 2024 North Malay Basin Full Field Development Campaign, with an estimated contract value of USD135m. The Naga 5 jack-up rig will be assigned for this contract, covering 14 wells with an expected commencement date in 4QCY22.
Below are some of key takeaways gleaned by Kenanga Research from the contract win:
- First integrated drilling contract in Malaysia. This contract is the first jack-up drilling rig contract to be awarded through an“integrated” arrangement in Malaysia (as opposed to the conventional lease contract). From what we understand,
Halliburton will be the technical partner executing the integrated works in the contract. - Key assumptions. Being an integrated contract, most of the contract’s value will be for the integrated works, with the jack-up rig charter portion estimated to be one-third of the total value. Based on the job scope, we estimate the contract duration to be ~18 months ending in 1HFY24, with daily charter rates for the rig lease to be roughly USD75-80k – well within current local average market rates. We expect the rig leasing portion of the job to fetch ~45-50% EBITDA margins – also in line with VELESTO’s historical average.
- More contract wins expected to come. With Naga 5 having secured a contract, VELESTO now has 2 out of its 6 rigs on jobs which are >12 months. The rest of the rigs are still currently under negotiations for shorter-term jobs until 2024, which we expect most of them to materialise given the increasing demand for drilling rigs within the local market.
- Forecasts. Kenanga made no changes to its FY22-23F earnings, as the contract win is deemed to be well within its rig utilisation assumption of 60-80%.
- The research house maintains OUTPERFORM, with unchanged TP of RM0.16 – pegged to 15x PER, in line with valuations of DAYANG, a similarly local-centric oil and gas equipment and services provider. There is no adjustment to its target price (TP) based on ESG given a 3-star rating.
- Overall, Kenanga holds the opinion that VELESTO will be a prime beneficiary of the improving regional jack-up rig market, with marketed utilisation expected to reach as high as 100% in Malaysia. As such, it expects the group to turn around from losses as early as 2HFY22, on the back of the recovery in rig utilisations.
- Risks identified include, a significant pull-back in oil prices weighing on oil & gas activities; escalation in operating costs; and project execution risks.
