PETALING JAYA: UOB Kay Hian (UOBKH) Research states that Velesto Energy Bhd
(VEB) is unlikely to leverage fully on any upside to the daily charter rates (DCR) for jack-up (JU) rigs, given its locked-in DCR with Petroliam Nasional Bhd (PETRONAS) but shields it from the current discount in the South-East Asia region’s DCR as compared to other parts of the world.
Hence, the research house maintained a “hold” call on Velesto and a target price of 29 sen a share on the back of the balance in risk-to-reward.
OUBKH Research stated the global JU active rig count has gone down to a year-to-date low of 391 rigs after Saudi Aramco cut its five-year capital expenditure (capex) by US$40bil as well as a suspended close to 22 JU contracts to halt the expansion of Saudi Arabia’s long term oil production capacity of 13 million barrels of oil equivalent per day.
This has led to the rig operators to seek opportunities elsewhere and impacted South-East Asia JU rates to be capped, thereby completing the “mini-cycle” in the rig DCR which started in 2022, back when Middle East players were on an acquisition spree and soaked up JU rig supply.
UOBKH Research noted that PETRONAS has yet to contract the six and 13 JU rigs for the 2025 and 2026 horizon, after all 13 JU rights had been awarded for 2024.
The operating environment in Malaysia also remains a major concern, the research house said. This includes SapuraOMV selling its assets to TotalEnergies and PETRONAS to hand over its role as gas aggregator to Petroleum Sarawak Bhd (Petros) in Sarawak’s gas upstream and downstream industries by 2025.
“Channel checks indicate that there may be rationalisation in PETRONAS’ upstream capex related to Sarawak projects and wells.
In an ideal situation in our view, Petros should automatically assume or “farm-in” to PETRONAS’ role in the Sarawak upstream production sharing contracts”, UOBKH Research noted.
That said, the research outfit believes the two issues will present a negligible risk to Velesto’s financial year 2024 earnings.
Any fall in DCR will only impact Velesto’s earnings from 2025 as its Naga 8 JU rig remains contracted for Carigali Hess until end of 2025 while the Naga 2, Naga 4 and Naga 6 rigs are on a two-year extension contract for PETRONAS until 1Q26.
Its Naga 3 and Naga 5 rigs deployment will expire by end-24However, UOBKH Research noted the Naga 5 rig may be most at risk on local contract replenishment in this scenario. N5 will be available for work from the fourth quarter of next year after its special periodic survey.
“As we understand negotiations for a local contract are still ongoing, and given the importance of prioritising Sarawakian contractors in the state, we are not ruling out a tougher competition for Sarawak jobs,” the research house stated.
“Our channel checks indicate that N3 may likely be employed in Indonesia in 2025 (though it may be in the form of a joint venture structure), as part of Velesto’s strategic move for diversification,” it added.
On a brighter note, it noted Velesto’s strong contract clauses and balance sheet is strong enough to withstand any cash flow strain delays by a few months, in case of any hiccups and rig payments being delayed.
“We understand that termination clauses and other alternative day rates, which could be due to waiting-on-weather, repairs, standby, force majeure, mobilisation, among others, are favourable to the rig players. Under such scenarios, we estimate Velesto can remain profitable,” it stated.
