KUALA LUMPUR (Nov 30): CGS-CIMB Research has upgraded Velesto Energy Bhd to a “hold” call, from “reduce” previously, while raising its target price (TP) for the counter to 14 sen, from 10.5 sen previously, assigned due to lower core net loss forecasts.

Analyst Raymond Yap revealed in a note that Velesto President Rohaizud Darus had informed analysts in a briefing last Sunday that some of its ongoing jobs will last longer than what offshore rig intelligence Riglogix had reported.

Given this new information, it is raising its forecasted jack-up (JU) rig utilisation during the fourth quarter ended Dec 31, 2020 (4QFY20) to 52% from 36% previously. Yap mentioned that this would still be the lowest in FY20 when compared to 1QFY20’s 84%, 2QFY20’s 67% and 3QFY20’s 60%, but would not be as steep a quarter-quarter (q-o-q) drop as earlier feared.

“The Naga 6 contract with Petronas Carigali will not end on 8 Nov as reported by Riglogix, but will instead be extended until the end of 2020. Also, while Riglogix reported that the Naga 7 contract with Sarawak Shell ended on 7 Oct, Velesto said that the drilling work actually extended to late-Oct and the rig cannot be demobilised until early-Dec due to the rough seas. Sarawak Shell will continue to pay Velesto the daily charter rate (DCR) up to its actual demobilisation,” Yap noted.

As such, the research house is narrowing its 4QFY20 core net loss forecast to RM9.1 million, from RM15.3 million, while FY20 is expected to have a lower core net loss of RM7.5 million, from RM13.7 million.

For FY21, Yap is forecasting a net loss of RM44.06 million, and RM5.68 million net loss in FY22.

The analyst viewed that Velesto’s FY21 outlook is still highly uncertain as it has only locked in a utilisation rate of 18%, with only the Naga 4 and Naga 8 having contracts in hand. As such, it has maintained its utilisation rate of 60% for FY21.

That being said, the research house was raising utilisation rate assumption to 65% from 60% from FY211 onwards, on the back of reports that OPEC+ may be looking to extend the current 7.7 million barrels per day (mbpd) oil production cuts into end-March or end-June 2021, rather than to taper the cuts to 5.8 mbpd as earlier planned.

He opined that the rollout of Covid-19 vaccines will help to restore demand for transportation fuels. Following Petroliam Nasional Bhd (Petronas)’s capex prudence in 2020, there is a reasonable chance that Petronas may do more drilling work from 2H21 onwards to offset natural depletion rates.

A key upside risk for Velesto is the potential for oil prices to rally above US$50 a barrel, resulting in Petronas accelerating drilling work.

However, a near term downside risk is that Velesto’s 1QFY21 utilisation rate is expected to fall to only 14%, according to Yap, who also viewed that this may result in a large quarterly loss.

“This is because new contracts can only begin work from April onwards after the monsoon season is over. Also, Velesto’s clients may ask for lower DCRs; we have pencilled in US$68,000/day for new FY21F contracts, vs. US$72,000/day during FY20F. The delayed impact of the Mar 2020 oil price crash will be seen in Velesto’s 1QFY21F report card; we expect 1QFY21F to be the trough from which Velesto will recover,” he augured.

Velesto shares were trading unchanged at 9:42 am at 14 sen, resulting in a market capitalisation of RM1.15 billion. It saw 1.45 million shares traded.