Velesto forecast to deliver robust earnings growth

PETALING JAYA: Velesto Energy Bhd is expected to deliver strong earnings growth for the fourth quarter ended Dec 31, 2023 (4Q23) and 1Q24, thanks to higher jack-up drilling rig utilisation rates.

According to CGS-CIMB Research, the oil and gas services provider would likely post its strongest quarterly performance in four years with an estimated core net profit of RM23mil in 4Q23.

This estimate was based on the projected utilisation rate of 92% for Velesto in 4Q23, with daily charter rates (DCRs) averaging US$95,000, up from US$78,000 in 4Q22.

“Velesto’s strong performance will likely continue into 1Q24, as we estimate its utilisation to reach 98%,” CGS-CIMB Research said.

Velesto recently guided a utilisation rate of 80% to 85% for 2024, against an estimated 83% for 2023.

“We have pencilled in a top-down assumption of 80% utilisation for now; anything above that will be a bonus,” CGS-CIMB Research said.

“Although Velesto has so far only secured utilisation of up to 63% for 2024, we are confident that Velesto will be able to achieve its 80% to 85% guidance because domestic clients have already booked the Naga 2 and Naga 4 for additional drilling work in Malaysia, with the announcement of the precise job details to be made only after the new two-year umbrella contract is firmed up,” it added.

CGS-CIMB Research noted that Velesto was currently negotiating additional work for the Naga 5 in Malaysia or in South-East Asia.

“We are forecasting average DCRs of US$112,000 in 2024 and US$131,000 in 2025, up from US$90,000 in 2023.

“These rate increases are possible because we believe Velesto has most likely renegotiated its two-year umbrella contract with PETRONAS Carigali Sdn Bhd effective Feb 7, 2024,” it said.

CGS-CIMB Research reiterated an “add” call on Velesto, with a higher target price of 29 sen as compared to 27.5 sen previously.

It noted that the medium-term prospects for the global jack-up drilling rig market remained robust, amid higher activities in the Middle East.

Citing data from consultancy Riglogix, it said there was strong demand globally for jack-up drilling rig services, with worldwide utilisation at 85% in January 2024, and average DCR rising 26% from the 2022 average to US$91,000 last month.

“The strength in jack-up demand has been driven by the frenetic drilling activity in the Middle East, Indian subcontinent and the Far East.

“This drew jack-up rigs away from South-East Asia, which pushed up the jack-up rig utilisation rate to 91% in January 2024, and raised the average DCR in South-East Asia to US$103,000, higher than even the Middle East’s average DCR,” it said.

The highest DCRs in South-East Asia had been signed by Borr Drilling, at US$150,000 to US$170,000, CGS-CIMB Research noted.