Velesto likely to gain from better demand for jack-up drilling rigs

TheEdge Fri, Sep 06, 2019 10:54am - 4 years View Original


Velesto Energy Bhd
(Sept 5, 30.5 sen)
Maintain outperform with an unchanged target price (TP) of 35 sen:
Velesto Energy Bhd announced that it had received a letter of award from Petronas Carigali Sdn Bhd for the provision of jack-up drilling rig Naga 7. The contract is to drill two firm wells with an estimated contract value of US$8 million (RM33.6 million), and is expected to commence in the third quarter of 2019.

While no contract period was included in the announcement, we reckon the duration to be three to four months (90 to 120 working days). As such, we believe the contract should be based on a daily charter rate of about US$70,000, excluding other value-added services, and should be able to fetch earnings before interest, taxes, depreciation and amortisation margin of around 45%. There is no change to our earnings estimates for financial year 2019 (FY19E) to FY20E post-contract award, as we deem the figures to be within our utilisation assumption of 80% to 85%, with the charter rate also broadly within our imputed assumption of US$72,000 a day.

Overall, we are positive on the contract announcement, highlighting Velesto’s position as a prime beneficiary of increased demand for jack-up drilling rigs in the country, as well as providing further utilisation and earnings visibility. With the Naga 7 contract secured, we believe no further contracts are necessary for the rest of 2019, as all the company’s rigs should already have contracts at hand at least until the end of the year

Our TP is pegged at a one-time FY20E price-to-book value, roughly in line with its two-year mean valuation. Post-results, we made no changes to our FY19E to FY20E numbers.

We continue to like Velesto given the certainty of its turnaround story, clear earnings visibility for the next one to two years, while we also see limited downside risks from current share price levels. Additionally, the company reportedly has also demonstrated satisfactory environmental, social and governance practices, being one of the new names within the oil and gas industry to be included in the FTSE4Good Bursa Malaysia Index. That said, we believe a range-bound trading strategy of 30-35 sen would suit the stock.

Risks to our call include poorer-than-expected rig utilisation, weaker-than-expected charter rates, and lower-than-expected margins. — Kenanga Research, Sept 5

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