KUALA LUMPUR: Analysts maintain a cautious view over Velesto Energy Bhd
's prospects given the expected margin pressure arising from potential cost inflation in the oil and gas services and equipment (OGSE) sector.
According to Kenanga Research, which has an "underperform" recommendation on the stock, the catalysts for the company, such as a rebound in rig fleet utilisation and daily charter rates (DCR), have already played out.
The trading stock of the company has seen a price surge of about 175% over the past year from all-time lows to close at 23.5 sen a share in the last trading session.
Meanwhile, the research firm said the rising interest rates translate to an earnings drag from higher financing costs.
"We maintain our target price of 19 sen based on 15x FY24F price-earnings ratio.
"This is in line with ascribed valuations for local-centric service providers within our coverage (such as Dayang Enterprise Holdings Bhd)," it said in a company update.
In a separate report, Hong Leong Investment Bank (HLIB) Research said Velesto is expected to benefit from the current upward trend in charter rates and future improvements, but it also recommended caution over potential cost hikes in the OGSE sector.
"This concern arises from the combination of cost inflation challenges, intensified by increased demand for oil and gas, and disruptions in the global supply chain, which have impacted the availability of oilfield equipment and spares.
"Our assessments suggest that oil majors will proactively allocate upstream capex as long as oil prices remain above US$65/bbl for a sustained period," it said.
HLIB said Velesto's valuations have been inflated and surpassed its underlying fundamentals, even after considering its prospects for a turnaround and future growth.
It opined the group’s current share price has already incorporated the positives, as reflected in the consensus' optimistic expectations for the group's upcoming quarters.
HLIB has a "sell" call on Velesto and reiterated its target price of 19 sen a share.
Velesto yesterday announced it had secured a contract for the provision of a jack-up drilling rig, the Naga 3, from PTTEP valued at US$13mil, which was a positive development but well within analyst expectations.
Kenanga said it projects Velesto will derive a daily charter rate (DCR) of about US$100,000 for this contract.
"This falls within the company’s earlier guidance that DCRs at Malaysian waters currently range between US$90,000-131,000," it said.
The research firm said DCRs have been raised following successful negotiations between Velesto and PETRONAS for existing umbrella contracts, which will lead to to PTTEP's drilling contracts being awarded based on the higher rates.
Hong Leong Investment Bank (HLIB) Research said it estimates the average rig DCR for the contract to be between US$105,000-110,000.
