KUALA LUMPUR: Oil and gas services company Velesto underperformed CIMB Equities Research’s expectations with a 1H18 core net loss of RM3.8mil, as a result of a 2Q18 loss on weak utilisation versus its small profit forecast.
The research house had on Tuesday cut its FY18F core EPS forecast by 42% on the back of a lower utilisation rate assumption of 70%, from 80% previously.
“We maintain Add as 2H18F should see a strong rise in utilisation and profits, but cut our discounted cashflow-based target price to 32 sen (Ke: 13%) as we trim forward rate forecasts.
“Downside risks include potential for additional delays in reactivating rigs,” it said as it reduced the target price from 33 sen to 32 sen.
CIMB Research said Velesto reported a 2Q18 core net loss of RM22.5mil. While this was lower than 2Q17’s RM49.3mil loss, it more than offset 1Q18’s RM18.7mil core net profit such that Velesto was loss-making during 1H18.
Even if the research house was to strip out RM18mil in realised exchange rate gains from 1Q18’s core earnings (due to debt settlement when the US$ was weak), the 2Q18 performance was still sequentially poorer due to a on-quarter drop in jack-up (JU) rig utilisation from 65% in 1Q18 to only 59% in 2Q18 (although better than 2Q17’s 26% utilisation).
While six of Velesto’s seven JUs worked during 2Q18, only two contributed a full quarter’s revenue.
“The 2Q18 utilisation rate compares unfavourably against our previous full-year FY18 utilisation assumption of 80%, which was itself based on the guidance that Velesto had received from its rig charterers.
“The mobilisation of several rigs was delayed by the charterers, causing Velesto to miss out on precious revenues,” it said.
According to Velesto, five of its seven JUs are now working, with two expected to be mobilised by end-August 2018.
Assuming that the first five rigs will enjoy 90% utilisation for 2H18F, while the next two rigs will see 67% utilisation for the rest of the year, Velesto will achieve 83% JU utilisation for 2H18F.
General charter rates in Southeast Asia stand at only US$55,000 a day, down 33%on-year, according to Clarksons, which is much lower than what Velesto is earning.
International tenders tend to attract rates in the mid-50s, but Velesto is earning higher than the Southeast Asian average because it is a local Malaysian vendor which Petronas decided a long time ago to support strategically.
The corollary of the present support, is that when global rates recover in the future, Velesto’s rates will likely lag.
“Clarksons forecasts Asia-Pacific JU utilisation rates to rise from 59% in 2017 to 70% in 2018-19F, with demand for drilling work rising with expected higher levels of offshore oil and gas production, but balanced by rising JU supply.
“The outstanding JU orderbook of 76 units represents just 14% of the outstanding JU fleet, which is positive for the long term rate dynamics assuming work continues to be available,” said CIMB Research.