KUALA LUMPUR (March 25): Shares of Velesto Energy Bhd climbed to their highest in nearly four years after the oil and gas services firm secured a two-year contract extension for the provision of three jack-up rigs to Petronas Carigali Sdn Bhd (PCSB) for RM1.26 billion, which analysts view as positive.

Velesto’s share price rose as much as 5.26% to an intraday high of 30 sen, its highest since May 2020. The counter pared its gains to close at 29 sen — still up half a sen or 1.75% — valuing the group at RM2.43 billion.

Trading volume jumped more than 28-fold to 158.57 million, compared with last Friday’s volume of 5.59 million, making it the most active counter on Bursa Malaysia.

Velesto said it received notice of assignment for three of its jack-up drilling rigs, namely Naga 2, Naga 4 and Naga 6, from PCSB for two years, commencing from Feb 7, 2024 till Feb 6, 2026, inclusive of the continuation from the current drilling campaign, for a total contract value of US$265 million (RM1.26 billion).

Analysts said Velesto is currently experiencing an earnings upcycle entering into the financial year ending Dec 31, 2024 (FY2024), supported by the ongoing global jack-up rigs crunch, which will sustain its fleet utilisation and daily charter rate.

TA Securities said the contracts would not only provide recurring income until 2026, but also increase Velesto's daily charter rate (DCR). The research firm estimated the renewed DCR for the rigs to be between US$130,000 and US$140,000, surpassing the previous estimate of US$100,000-US$110,000 before renewal.

“We estimate that the utilisation rate will be above 90% in 1QFY2024 and 2QFY2024, before dropping to below 85% in 2HFY2024 as Naga 2, Naga 3, Naga 5, and Naga 6 have special periodical surveys scheduled during this period,” it said in a note.

Among eight analysts covering the stock, seven rated it as 'buy', with only one assigning a 'hold' call. The 12-month median target price (TP) stood at 33 sen, according to Bloomberg.

Kenanga Investment Bank has increased its FY2025 earnings forecast for Velesto by 10%, attributing it to a higher average DCR of US$125,000 compared with the previous US$122,500 estimated previously. Consequently, it has revised its TP upward by 10% to 34 sen from the previous 31 sen.

“We like Velesto due to the positive outlook of the local jack-up rig market buoyed by strong demand amidst pick-up in upstream capex; its strengthened bargaining power as a result, paving the way for better DCR on contract renewals, and  potential upside surprises to its margins on early signs of easing in labour cost inflation,” Kenanga added.

Velesto’s share price has risen over 20% year to date and 52% in the past 12 months.