Velesto Energy (VELESTO) believes that current Daily Charter Rates (DCRs) are stabilising at USD130K. On the back of this, the company is now targeting to secure long-term contracts in the range of 2-3 years to lock-in current rates.
“Correspondingly, VELESTO’s current tender book of RM4.2b mainly comprises long-term contracts spread over 6 tenders. However, at this juncture, such long-term contracts are only available in regional markets,” said Kenanga Research (Kenanga) in the recent Company Update Report.
As such, 19% and 21% of VELESTO’s tenders are in Vietnam and Thailand respectively. In contrast, the company’s fleet of 6 rigs are currently all working in Malaysian waters.
In addition, VELESTO is also bidding for DCRs in the range of USD130k for its current negotiations with clients. This includes the Petronas umbrella contract that expires soon in Feb 2024. The jackup market remains tight, whereby current marketed rig utilisation in Southeast Asia (SEA) and Malaysia is stable at 100%.
“Meanwhile, DCRs in Jul-23 remain strong at USD68k-USD152k in SEA and USD88k-USD131k in Malaysia. Nevertheless, according to VELESTO, the higher range of USD152k in SEA was for a short-term contract extension,” said the research house.
VELESTO expects a weaker 3QFY23 on the back of lower fleet utilisation. This is due to the repair and maintenance works for NAGA 2 until late 3QFY23, NAGA 3 being unable to exercise a contract extension due to unstable soil conditions at the previous project site, special periodic survey for NAGA 4 in 3QFY23, and underwater inspection in-lieu of drydocking for NAGA 8 in late 3QFY23.
As such, VELESTO expects lower fleet utilisation in the range of 58%-60% in 3QFY23. On the bright side, the company provided guidance that 3QFY23 earnings will be partially cushioned by higher DCRs. Additionally, the deployment of GAIT 5 hydraulic workover unit towards the latter half of 3QFY23 will also provide a slight uplift to earnings.
VELESTO believes that ongoing operating expenses escalation is stabilising and is currently “under control”. This is underpinned by implementation of its new Enterprise Resource Planning software for inventory management.
Additionally, manpower costs are also stabilising after an earlier round of salary adjustments. Similarly, interest costs are also expected to stabilise after the rise in effective interest rate from 7.15% in Feb-23 to 7.5% currently.
“On the other hand, based on our view, cost headwinds may still linger given tight supply of materials and manpower resources. This is on the back of ongoing multi-year, multi-rig tenders in the Middle East. According to Westwood Riglogix, contract tenures for outstanding tender and pre-tenders in the Persian Gulf have snowballed to 29 years currently,” said the research house.
Kenanga maintains their Target Price of RM0.19 and the Underperform rating. Kenanga is cautious due to the possible earnings de-rating due to drag from lower fleet utilisation in 3QFY23, that stabilising DCRs amidst persistent high costs may compress margins, and higher interest rates may result in increased financing costs.
“Risks to our call include fleet expansion via acquisition of new jack-up rigs, inflated DCRs as jack-up market tightens further, and topline boost from a strong USD/MYR,” said Kenanga.
