PETALING JAYA: Analysts view Velesto Energy Bhd
’s maiden third‑party rig contract as a strategic step towards a more asset‑light business model, though some have turned cautious on the counter amid expectations of weaker earnings and limited share price upside.
Velesto recently secured a contract from Hibiscus Oil and Gas Malaysia Ltd for the provision of a jack‑up rig to undertake drilling works involving eight plug‑and‑abandonment (P&A) wells and one exploration well, with up to seven optional wells.
It is expected to begin by the end of this month, covering the PM3 commercial arrangement area offshore Malaysia, with optional wells located offshore North Sabah.
Hong Leong Investment Bank (HLIB) Research said the contract broadens Velesto’s addressable market by enabling participation in additional drilling campaigns without the need for substantial capital expenditure.
Under the third‑party chartering model, Velesto secures marketing rights from the rig owner before offering the unit to clients.
“Velesto will receive charter revenue from Hibiscus while bearing operating expenditure, and pay a charter fee to the rig owner, with the remaining spread retained as its margin,” it said.
HLIB Research added that Velesto secured marketing rights for more than one third‑party rig, improving its ability to bid for additional charter opportunities.
The research house estimated the contract could lift its financial year ending Dec 31, 2026 (FY26) earnings forecast by about 4%.
This is based on assumptions of a daily charter rate of US$80,000 and an earnings before interest, taxes, depreciation and amortisation margin of 15%.
“However, after removing earnings contributions from the disposed hydraulic workover unit assets, which are expected to be completed by 1H26, we have revised our FY26 and FY27 earnings forecasts up 1.9% and down 0.7%, respectively,” it said.
Kenanga Research estimated the job would take four to six months to complete, with a similar duration if all optional wells are exercised.
Market conditions
The win is positive as it yields income without balance sheet commitments,” Kenanga Research said.
It added that while the spread for the third‑party job was undisclosed, a margin of US$10,000 to US$25,000 per day would translate into an annual profit of RM12mil to RM36mil, depending on market conditions and negotiations.
Despite the progress, analysts have generally maintained a cautious stance following Velesto’s strong share price performance and softer earnings outlook.
Kenanga Research kept its “market perform” call with an unchanged target price of 32 sen.
HLIB Research downgraded the stock to a “hold” from a “buy”, maintaining its 29 sen target price and noting that most near‑term catalysts had already been priced in.
Similarly, BIMB Research cut its rating to “hold” from “buy”, with an unchanged target price of 32 sen.
“Following an over 100% share price return over the past year, we think further upside will be limited by the projected 50% earnings decline in FY26 owing to softer day rates,” it said.
BIMB Research expects FY26 earnings to fall by about 50% to RM86mil due to lower rig utilisation and softer average daily rates.
Ahead of Velesto’s results release today, it projected first-quarter (1Q26) earnings of RM20mil to RM30mil.
This is a 40% to 60% year‑on‑year decline from RM52.6mil, mainly due to weaker utilisation and lower daily rates.
Potential capping
It expects rig utilisation to ease to 45% to 50% in 1Q26 from 67% a year earlier, while average daily rates are projected to soften to US$105,000 to US$110,000 per day from US$127,000.
BIMB Research also warned weakness in the Middle East jack‑up market following the US-Israeli war on Iran could see more rigs diverted to South-East Asia, potentially capping regional daily rates further.
