Analysts positive on Velesto’s recovery pace

KOTA KINABALU: Velesto Energy Bhd’s (Velesto) earnings recovery has been viewed positively by analysts as its prospects are expected to be backed by improving drilling rig utilisation.

“We maintain our forecast that Velesto will report a profit in our financial year 2018 (FY18). We expect utilisation rates in the second quarter of FY18 (2QFY18) to be similar to 1QFY18, due to the lower contribution from NAGA 7 as it undergoes scheduled maintenance.

“Nevertheless, the second half of 2018 (2H18) will likely see utilisation rates rise to 80 to 85 per cent, boosted by contract extensions and new contracts secured. This will result in a full-year utilisation rate of 72 per cent, in line with our existing forecasts,” the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang) said in a report.

In addition, the research team pointed out that it remained optimistic on the group’s nearterm outlook as Petroliam Nasional Bhd (Petronas) has only started drilling nine out of its targeted 22 to 24 exploration wells thus far, signalling more drilling contracts to be awarded.

It noted that Velesto was bidding for US$660 million worth of jobs, which consists of 77 per cent shortterm and 23 per cent longer-term contracts.

“Of the total 30 contracts, 15 are from Malaysia, while the rest are from overseas tenders. Daily charter rates (DCR) in Malaysia remain on the higher end, ranging from US$68,000 to US$70,000 per day, as compared to US$55,000 to US$65,000 per day for the oversea contracts,” it added.

Affin Hwang also noted that Velesto (previously known as UMW Oil and Gas) had sued Frontier Oil in April 2015 for an early termination of UMW NAGA 7 for a total of US$19.2 million as well as Frontier’s failure to issue a US$5 million bank guarantee and a US$15 million advance payment.

“Velesto recently announced that the claim was successful and the company was entitled to a total damages claim of US$19.9 million (RM78 million), inclusive of accrued interest during the period.

“We are of the opinion that the amount received will be deployed for future working capital requirements or utilised to repay loans, in an effort to lower its finance costs.