UOB Kay Hian Research downgrades Velesto to Hold, TP 42c

UOB Kay Hian Research said industry reports revealed that Naga 4 rig had secured a long-term contract which Velesto has yet to announce. This contract is for a seven-well charter from Mubadala for the Pegaga field (SK320).

KUALA LUMPUR: UOB Kay Hian Malaysia Research has downgraded Velesto Energy to Hold as rising rates has been priced in but maintained the target price of 42 sen with an entry price of 38 sen.

It said on Tuesday that fresh after announcing Naga 8’s lucrative multi-year contract, it learnt that Naga 4 has secured a one-year contract, which will likely exceed its utilisation assumption for 2020.

“Aside from Naga 8, the new rates for the other contracts reflect a gradual rise in tandem with the market’s. We believe Velesto has fully re-rated on high sustained utilisation, and rising rates has somewhat been priced in,” it said.

Naga 8 rig secured a multi-year (three years plus 18 months) contract from Carigali-Hess at US$120,000 daily rate (estimate net daily rate of US$95,000 after mobilisation and reimbursable costs).

However, UOB Kay Hian Research said industry reports revealed that Naga 4 rig had secured a long-term contract which Velesto has yet to announce. This contract is for a seven-well charter from Mubadala for the Pegaga field (SK320).

“We had earlier highlighted that among the many new rig requirements, Mubadala was looking for a rig to drill from 2Q20. Naga 4 will complete its Roc Oil contract at March-April 2020 before drilling for Mubadala for a year until 1Q21.

“With this and assuming all Petronas contracts will exercise extension, Veselto’s 2020 utilisation will be almost full at more than 93% (vs our 89% assumption), leaving behind a small gap from Naga 7 which will complete its Shell contract by 4Q20,” it said.

To recap, Naga 8’s US$95,000 rate is at the top end of the regional asking jack-up (JU) rates of US$65,000-US$95,000 compiled by IHS, although still above the US$62,000 to US$75,000 contracted regional rates.

Naga 8 is unique because this is the only multi-year contract awarded, and the high rates justify the rising JU market demand that is expected to persist.

“We estimate any new contracts (at one year tenure) to be likely at US$75,000-85,000, that is unlikely to be as high as US$95,000 but still above Velesto’s 2Q19 average rate of US$71,000.

“Malaysia is driving regional utilisation to about 80%. Based on our compilation, the JU rig count across both Malaysia and the Malaysia-Thai Joint Development Area (JDA) has increased from 9 in Feb 19 to 16 in October 2019,” it said.

The Petronas Activity Outlook (PAO) had in the past increased its local JU demand per annum from six to 10, to as high as 16 to 19.

“We deem the current JU rig count in 2H19 now met the high PAO requirements.

“We believe Malaysia is a key country that drives the rising Southeast Asia JU demand. Regional utilisation is on the rise at 60%-70% currently (estimated by IHS) or 80% (estimated over marketed supply, by WestWood).

“Elsewhere, Vietnam has been awarding new JU rig contracts, while Pertamina (Indonesia) appears to be struggling to fulfil its new rig requirements partly due to the rising asking rates in the rig market,” it said.