PETALING JAYA: Softer jack-up day rates, rising competition from international rig operators and potentially tighter domestic upstream spending are expected to weigh on Velesto Energy Bhd
’s earnings prospects, according to Hong Leong Investment Bank (HLIB) Research.
The research house remains cautious on the oil and gas services provider, warning that the regional drilling market faces mounting pressure from an influx of internationally redeployed rigs, while higher dividend commitments by Petroliam Nasional Bhd (PETRONAS) could limit upstream investment.
In its latest company update, HLIB Research said channel checks indicated that Velesto’s renewal day rates (DCRs) could moderate to between US$90,000 and US$100,000 per day, compared with the previous average of about US$110,000.
Consequently, the research house cut its financial year 2026 (FY26) to FY28 earnings forecasts by 21%, 31% and 27%, respectively, and lowered Velesto’s target price to 19 sen per share from 28 sen previously.
It maintained a “hold” recommendation on the stock.
At the current share price of 18.5 sen, the revised target price represents a potential capital upside of 2.7%.
Together with the expected dividend yield of about 10%, this translates into a total expected return of 12.7%.
HLIB Research said global jack-up drilling rates had softened, with Westwood estimating that the global leading-edge DCR averaged approximately US$94,000 per day in the first half of financial year 2026 (1H26), down 6% year-on-year (y-o-y) and 24% from 2024 levels.
The situation is particularly challenging in South-East Asia, where rigs redeployed from other markets are adding to available capacity and intensifying competition for contracts.
Among the examples cited were ADES Holding’s Admarine 502, which secured a drilling contract in Indonesia after being redeployed from Saudi Arabia, and PV Drilling’s PV Drilling IX, which commenced operations in Vietnam after previously operating in the North Sea.
Meanwhile, PETRONAS’ higher dividend commitment could constrain domestic upstream spending despite stronger Brent crude prices.
HLIB Research noted that PETRONAS’ dividend commitment is expected to increase by 18.5% y-o-y to RM32bil in 2027, potentially limiting the funds available for upstream investments.
At the company level, Velesto’s six-rig fleet faces varying degrees of contract visibility. Naga 2 and Naga 8 have secured contract coverage extending beyond FY27, while Naga 4 and Naga 5 remain in negotiations for potential new job awards in mid-2027.
Naga 3, meanwhile, is being moved to Labuan for remarketing after the mutual termination of its proposed disposal to PT Indonesia Drilling Energy.
A short-term contract award is anticipated in the near term.
Furthermore, HLIB Research also lowered its dividend forecast to 2.5 sen from six sen previously, following the removal of an anticipated three-sen special dividend after the Naga 3 disposal was terminated, coupled with weaker free cash flow generation.
“Nevertheless, we believe Velesto’s dividend yield of approximately 10% at current share price levels remains attractive, providing some downside support amid near-term earnings headwinds,” it said.
The research house added that a gradual recovery in domestic jack-up demand could support fleet utilisation, although persistent day-rate pressure and limited upside to domestic drilling activities would continue to cloud the earnings outlook.
An analyst told StarBiz that he expects Velesto’s earnings to rebound in 2H26, supported by its RM1.3bil order book and RM3.7bil tender book.
