Velesto JU Utilisation In SEA Surged To 81% In May 2023: CGSCIMB

“Our bottom-up tally of Velesto’s current and likely drilling jobs suggest that its jack-up (JU) rig utilisation in financial year 2023 future may hit 80.9%, based on the information we have today,” said CGSCIMB in the recent Company Note.

CGSCIMB lowered their financial year 2023 future utilisation assumption from 83% to 80%, taking into account that Naga 2 will enter the shipyard for repairs and maintenance for 60 days until mid-July 2023.

This repair period was flagged by consultancy Riglogix and was not mentioned in previous Velesto guidance, resulting in a lower utilisation of the Naga 2 than previously anticipated.

“For financial year 2024 future, we think that Velesto may achieve a healthy utilisation rate of at least 60.2%, rising further when new contracts are secured. Our top-down assumption for Velesto’s JU rig utilisation remains at 80% from financial year 2024 future onwards,” said CGSCIMB.

The good news is that the Naga 3 is drilling offshore Sarawak for PTTEP Malaysia from mid-Mar to Sep 2023 at a debt coverage ratio of US$105k per day, according to Riglogix.

This is more than their previous rate assumption of US$90k per day for new contracts secured this year and, if accurate, represents a positive surprise.

Also, Velesto disclosed on 9 May that it had secured Petronas Carigali contracts for the Naga 3, Naga 4 and Naga 6 to drill up to 20 wells, for a total contract value of US$128 million, or US$128k per day over CGSCIMB’s 1,000-day work estimate.

While we are unclear if these implied rates include any one-off fees, we are reasonably confident that the latest financial year 2023 future debt coverage ratios are at least US$100k per day, which we have now reflected into our forecasts. Velesto may be able to offer more clarity at its post-quarter one 2023 future results briefing on the morning of 25 May.

The JU macro environment continues to be strong. In Southeast Asia (SEA), JU utilisation has seen a dramatic surge to 83.1% in May 2023 as annualised rig supply fell 23% year-on-year and annualised rig demand virtually unchanged year-on-year. Middle East (ME) utilisation rose to 86% in May 2023 due to a surge in demand, despite an annualised 27% year-on-year surge in rigs entering the ME region.

Average debt-coverage ratios in SEA rose from 2022’s US$74k per day to US$89k per day in May 2023, and may continue to increase as recent contracts have been signed at higher levels, including for Velesto’s rigs.

Potential re-rating catalysts include our expectation that Velesto will swing back to profits in quarter one 2023 future, and higher-than-expected debt coverage ratio uplift. Downside risks include acceleration in opex inflation beyond what CGSCIMB have imputed, and curtailment of drilling capex should oil prices crash.

“We think that Velesto may achieve a healthy utilisation rate of at least 60.2% in financial year 2024 future, potentially rising further when new contracts are negotiated and secured. Our top-down assumption remains at 80% for all forecast years from financial year 2024 future onwards,” said CGSCIMB.

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