PETALING JAYA: There are mixed reactions from analysts on Velesto Energy Bhd on the company bagging an extension of its Naga 8 jack-up rig for 18 months at an estimated US$74mil.
It said its contract with Carigali Hess Operating Company (CHOC) has been extended from April 19, 2024 until Oct 18, 2025.
CHOC – a joint-venture oil and gas company between PCJDA Ltd and Hess Oil Company of Thailand Ltd based in Kuala Lumpur – is involved in gas production in Block A-18 of the joint development area administered by the Malaysian-Thailand Joint Authority.
Hong Leong Investment Bank (HLIB) Research said even though it is positive on the job win, it was expected and it has imputed the utilisation and daily charter rate (DCR) assumptions into its forecast.
“We estimate the DCR for the contract extension to range from US$125,000 to US$130,000.
“We also view the renewal of this legacy contract positively, given the significantly higher rates as compared to the estimated prevailing DCR of US$80,000, reflecting the tight availability of jack-up drilling rigs as offshore activities are on the rise,” it said.
HLIB Research said given that Velesto had previously secured a three-year contract plus a six-month option from CHOC, it was no surprise that Velesto had taken a win again.
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The research firm also said that based on its checks, Velesto will prioritise long-term contracts from now on to capitalise on the current tight market and elevated DCR, which is deemed a win-win for both parties.
In line with this, the research firm said it has a “hold” call on Velesto with an unchanged target price (TP) of RM0.25.
However, Kenanga Research said it will maintain its TP of RM0.19, which is still a slight premium in valuation compared to regional drilling peers due to Velesto’s supportive client, PETRONAS Carigali Sdn Bhd.
Kenanga Research also said it was positive on the development but it was expected.
However, it said it will maintain its “underperform” call on the counter as risks to its call include a fleet expansion via acquisition of new jack-up rigs, a further surge in DCR as the jack-up market tightens, as well as a reduction in operating expenditure.
“We remain cautious on Velesto due to a possible earnings derating due to drag from lower fleet utilisation in the third quarter of 2023, persistent high costs may compress its margins, and higher financing costs on elevated interest rates,” Kenanga Research said.
Meanwhile, TA Research noted that it will maintain its “buy” call with an unchanged TP of RM0.33, as the contract extension was still within its utilisation rate assumption and average DCR assumption for financial year 2024 (FY24) and FY25.
The research house said this was Velesto’s first firm contract for a jack-up drilling rig that extends into 2025, which will provide the group earnings visibility up to the third quarter of 2025.
“At an estimated DCR of US$135,000 per day, the contract extension is lucrative considering that DCR in Malaysia hovered between US$90,000 and US$131,000 per day in July 2023.
“This is also much higher than the US$94,000 per day average that Velesto registered in the second quarter of this year,” it said.
TA Research added that it believes this DCR should be on the higher end among Velesto’s rigs as Naga 8 is the newest one.