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Velesto Energy - Jack-up Market is Booming
Publish date: Tue, 05 Jul 2022, 04:44 PM
Velesto rebounded from its weakest quarter in 1Q21 with utilization rate rising to 39% in 1Q22, boosting its revenue by 76% YoY and paring down its losses by 24%.
We believe Velesto is on the cusp of turnaround as it has secured a long term 2+1+1 year contract with Petronas for all its rigs. Besides that, higher regional DCR relative to local DCR would reduce competition from foreign players for local projects, in our view.
Reiterate our BUY call on Velesto with a TP RM0.28. Velesto risk-to-reward is really attractive given its stock price that is currently lagging crude oil prices.
Asset Utilisation Rate Rebounded Off its Low
Velesto recorded a marked improvement in 1Q22 after revenue jumping by 76% YoY to RM77.4m on the back of higher jack-up rig utilisation rate (UR) of 39% (vs 1Q21: 28%). While this is still less-than-optimal for UR, it helped to reduce its core loss by 24% YoY to RM46m (1Q21: LAT RM61m). Notably, 1Q21 UR of 28% was its weakest since the start of the pandemic in April 2020.
The Worst is Truly Over…
We expect a much stronger 2H22 earnings as the company has secured new work orders for its NAGA 2 and NAGA 6 rigs from Vietnam and Petronas Carigali. We believe this will push its UR to above 70% which will help the company to record quarterly profits from 2H22 onwards. Overall, we see light at the end of tunnel for Velesto after it secured a long-term 2+1+1 years umbrella contract from Petronas for all 6 rigs beginning 1Q22. Note that Velesto is the sole rig provider that has secured this type of contract from Petronas. Thus, any work order from Petronas will directly translate into revenue, though the overall utilisation would still depend on Petronas’ drilling schedule as well as availability of the rigs. Notwithstanding that, full asset utilisation is likely in near future as demand is projected to be strong. Based on Petronas Activity Outlook 2022-2024, Petronas expects demand for jack-ups to stand at 9/9/16 units in FY22F/FY23F/FY24F. On top of that, rising demand from the Middle East has led to tight supply in South East Asia (SEA) - resulting in higher daily charter rate (DCR) in the region as compared to local DCR. We gathered that regional jack-up rig marketed UR stood at 92% vis-à-vis 73% for local rigs in April 2022. There are more idle rigs in the region being reactivated including Sapura Energy’s tender rigs which confirms a tight market condition.
Maintain BUY call with TP of RM0.28
Reiterate our BUY call on Velesto with unchanged TP of RM0.28 pegged at 1x FY22F P/B. We believe Velesto’s turnaround is around the corner premised on (i) rising demand for jack-up rig and therefore, recovery in UR and (ii) normalise COVID-19 cost to improve bottom line as the country enters into endemicity.