PETALING JAYA: CGS International Research has downgraded Velesto Energy Bhd
from an “add” to a “hold” as it foresees a possible drop in daily charter rates (DCRs) and utilisation rates in the South-East Asia region as a result of the recent suspension of rig contracts by Saudi Aramco.
“South-East Asia could see Middle East rigs returning to the region. We suspect that Aramco is now suspending the jack-up (JU) contracts after it was instructed by the Saudi government on Jan 30, 2024 to refrain from expanding its production capacity from 12 million barrels of oil per day (mbpd) to 13 mbpd,” it said.
The research house pointed out that the South-East Asian JU rig market has seen very high utilisation rates of above 90% since October 2023 versus less than 60% in early-2022.
It added that the average DCRs rose to US$108,000 per day this month compared with US$77,000 per day in April 2022.
This was mainly due to JU rig supply leaving South-East Asia to meet strong demand in the Middle East, while the South-East Asian rig demand had been flattish in the past two years.
As such, the potential return of rigs to this region could see a drop in the DCRs and utilisation rates and impact Velesto from the financial year ending Dec 31, 2025 (FY25) onwards.
“Given how strongly Velesto’s share price has performed, coupled with visible headwinds in the months to come, we downgrade from an ‘add’ to a ‘hold’.
“Upside risks include the potential for Velesto to achieve higher-than-expected utilisation rates in FY24-FY25 if it secures two additional drilling contracts,” CGSI Research said.
It believes Velesto is on track to deliver its best-ever core net profit this year, potentially exceeding even its FY14 high.
“Velesto has already locked up 80% of its capacity days in FY24 and 62% in FY25; we have assumed utilisation of 80% for both years,” CGSI Research added.
In the best-case scenario, the research house said Velesto may be able to increase the utilisation to 85% in FY24 and 90% in FY25 if it manages to secure two additional drilling jobs for the Naga 5 and Naga 3, both have been tentatively assigned jobs from PETRONAS Carigali.
It added that Velesto is also bidding these rigs in Thailand, Indonesia and Vietnam to secure potentially higher DCRs.
That said, the research house does not view the Aramco suspensions as being catastrophic for the JU industry as crude oil prices are currently very strong.
It is expected there will most likely be alternative demand for the displaced JUs, such as in other parts of the Middle East such as Qatar and Kuwait, where their respective national oil firms continue to maintain strong capex budgets.
