MAYBANK IB Research has upgraded Velesto Energy Bhd to a buy from hold as demand for jack-up drilling rigs (JUs) has been rising.
Velesto recently secured a contract from UAE-based Mubadala Petroleum for the charter of its Naga 4 rig. The contract, valued at US$30 mil, is to drill seven firm wells and is expected to start from 2Q20.
“The charter visibility extension for Naga 4 rig at decent day rates (US$72-75k) is not entirely unexpected, in view of the rising demand for JUs worldwide. Risk-reward has turned positive following our recent downgrade in recommendation, along with a 7% correction in share price,” Maybank IB Research analyst Liaw Thong Jung wrote in a Dec 12 note.
Following Naga 4, Velesto is expected to secure a contract for Naga 7 as its existing charter is set to end by 4Q20, he added.
Further, Velesto should “enjoy near full utilisation” for all its seven JUs in 2020, on condition that four JUs (Naga 2, 3, 5 & 6) secure extensions, “which is likely a foregone conclusion,” said Liaw.
“Upgrade to buy (from hold) with an unchanged 42 sen TP, based on 1x EV/ replacement value. Velesto, with its resilient financials (3x net debt/ebitda), is the best proxy to Petronas’ drilling programmes,” he added.
