This article first appeared in The Edge Malaysia Weekly on November 6, 2023 - November 12, 2023

HAVING sold a 53.7% stake in UMW Holdings Bhd to Sime Darby Bhd, Permodalan Nasional Bhd (PNB) is now seeking a buyer for its 54% stake in Velesto Energy Bhd, one of the oil and gas (O&G) service providers into which it had injected a whopping sum for recapitalisation during the downturn, according to sources.

A number of them say PNB’s majority stake in Velesto Energy has been on the market for a while, but the extreme movements in oil prices in the past years are curbing dealmakings in the O&G sector.

“PNB has been planning to sell the stake for a while now but how many O&G companies have the money to take on that kind of acquisition?” a source asks.

Shares in Velesto Energy traded at 25.5 sen per share last Friday, giving the company a market capitalisation of RM2.10 billion. This would value PNB’s stake at RM1.13 billion.

Another source points out that few companies are keen to own “bulky” assets in the O&G sector as the memory of the prolonged severe industry downturn in 2014 is still fresh in their minds. In addition, the pattern of crude oil prices is getting more unpredictable and highly volatile.

“While the charter rates of jack-up rigs have improved in the light of elevated global crude oil prices since early 2022, there are still fears of another market downturn that could happen swiftly like it did in 2014,” the source says.

When contacted, PNB, the country’s largest asset management company, declined to comment on the matter.

“With reference to your inquiry regarding Velesto Energy, as a matter of policy, PNB does not comment on speculation,” it says.

Meanwhile, Velesto Energy tells The Edge that it is “not aware of talk of such an exercise”.

The company owns and operates six jack-up rigs, which made the company the sole — and the largest — rig service provider in Malaysia. A jack-up rig is a type of mobile offshore drilling unit used in shallow water to drill exploratory wells and extract oil and natural gas.

In an interview with The Edge back in January, its president Megat Zariman Abdul Rahim said the company would consider selling its jack-up rigs if the offer was right.

“We do get calls from people who want to buy our rigs. We will consider selling if it’s a good offer,” he said, adding that the group was not planning to buy any new assets. New builds can cost from US$200 million (RM946 million) to US$250 million, and take 10 to 15 years to recoup the investment.

In terms of financial performance, Velesto Energy has seen significant improvement this year, driven mainly by higher daily charter rates.

For the first half of the financial year ended June 30, 2023, Velesto Energy booked RM31.63 million in net profit, in contrast to a net loss of RM89.37 million a year ago.

In the six-month period under review, the group said its charter rates had risen by 23% to US$94,000 per day from US$75,000 per day a year ago. On top of that, Velesto’s jack-up rigs achieved a higher utilisation rate of 88%.

The charter rates, however, are still below those in Southeast Asia, which recorded the highest rate of US$150,000 to US$180,000 per day this year, according to a report by US-based Evercore ISI’s latest Offshore Oracle report.

Despite the rise in daily charter rates for oil rigs and higher crude oil prices, the market remains gloomy.

A market observer says Velesto is in a sweet spot to capture the upturn of the O&G industry as it is the only player in the jack-up rig segment. Nevertheless, he concurs with the view that unlike the heyday of the previous oil booms, many local O&G players are reluctant to borrow for asset acquisitions.

“While many O&G companies are seeing improvement in their financial results, they still need the banks’ support for any acquisition or new build. The cash position of local O&G companies may have improved, but there are not many players in the market with the kind of financial muscle to take on large acquisitions,” he adds.

Another observer points out that the termination of Kuala Lumpur Kepong Bhd’s takeover bid for Boustead Plantations Bhd might have sent a message that assets held by government-linked investment companies, or GLICs, have to be kept in bumiputera hands.

Velesto listed during the oil boom in 2013 — when it was known as UMW Oil & Gas Corp Bhd — at RM2.80 per share.

In 2017, it undertook a recapitalisation exercise. As the industry downturn took a heavy toll, it made a cash call. PNB spent RM800 million on the rights issue of ordinary shares on top of the subscription of preference shares.

Later, its major shareholder UMW Holdings Bhd distributed its 57% stake in Velesto — a move to demerge UMW Holdings Bhd, which specialises in auto distribution and heavy equipment, from its O&G unit. The proceeds from the cash call were then utilised to pare down RM1.5 billion of debt.

In 2020, Velesto Energy undertook a share capital reduction to cancel RM2.21 billion of issued shares to eliminate accumulated losses. 

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