VELESTO said that the recent suspension of rigs by Saudi Aramco has no impact on the jack-up rig market in Southeast Asia. It projects global rig utilisation to remain elevated at 88% in FY25, even after taking into consideration the rigs diverted from Saudi Aramco. We maintain forecasts, TP of RM0.34 and OUTPERFORM call.

We came away from a VELESTO briefing feeling positively upbeat on the overall rig market outlook. The key takeaways are as follows:

1. VELESTO is not overly concerned about the suspension of the charters for 22 rigs by Saudi Aramco. It believes only up to eight of them will end up in Southeast Asia. However, they will easily be absorbed given the strong demand in the region. Downward pressure on daily charter rates (DCR), if any, will only likely to emerge the earliest in 2025 or 2026.

2. It projects global jack-up rig utilisation of 90% in 2024 amidst tight supply. The rig suspension by Saudi Aramco, at most, will only reduce global jack-up rig utilisation to 88% in 2025, a tad lower vs, 2024 but still way higher than an average of 80% in 2018-2021.

Jack-up rig utilisation is currently maxed out at 100% in Southeast Asia.

3. During 1QFY24, all VELESTO rigs were fully chartered, except for Naga 2, which only started its new charter in Feb 2024 thus did not contribute fully during the quarter. For most of 2QFY24, all rigs will be operational. However, in 2HFY24, Naga 2, Naga 5, and Naga 6 are scheduled for special periodical surveys (SPS). After these surveys, Naga 2 and Naga 6 will begin their charters with Petronas Carigali at increased DCR. It is in discussions for a long-term charter with a Malaysian client for Naga 5, which is expected to commence by the end-FY24 at very favourable DCR. Except for Naga 3 which is set for SPS in 1QFY25, all rigs are expected to be fully operational in FY25.

Forecasts. Maintained.

Valuations. We maintain our TP of RM0.34 pegged to unchanged 15x FY25F PER, at a slight premium to valuations of regional drilling peers (PETROVIETNAM: 14x). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Investment case. We like VELESTO due to: (i) the positive outlook of the local jack-up rig market buoyed by strong demand amidst firm crude oil prices; (ii) its strengthened bargaining power as a result, paving the way for better DCR on contract renewals, and (iii) potential upside surprises to its margins on early signs of easing in labour cost inflation. Maintain OUTPERFORM.

Risks to our call include: (i) a sharp plunge in crude oil prices, (ii) lower-than-expected DCR on rig contract renewals, and (ii) longer-than- expected maintenance duration for rigs.

Source: Kenanga Research - 27 May 2024