KUALA LUMPUR (March 25): Velesto Energy Bhd (KL:VELESTO) has announced a RM1.2 billion share capital reduction aimed at enhancing its capital structure and preparing for potential future distributions to shareholders.

This marks the oil and gas drilling rig operator's second such exercise in five years, after the RM2.21 billion capital reduction in February 2020.

In a bourse filing announcing the new capital reduction, Velesto said that as at the end of February, the group had an issued share capital of RM1.84 billion, consisting of 8.22 billion shares and 101.82 million units of options that are eligible for its employees’ share option scheme. These options are exercisable into an equivalent number of new shares at an exercise price of 23 sen per share.

Velesto had reported accumulated losses of RM139.95 million at the group level as at the end of Dec 31, 2024, while achieving retained earnings of RM129.63 million at the company level following its recent return to profitability.

After the proposed capital reduction exercise, Velesto’s retained earnings are expected to be RM1.06 billion and RM1.33 billion at the group and company levels respectively.

In a separate statement, Velesto’s president Megat Zariman Abdul Rahim said the exercise represents a significant step towards creating long-term value for shareholders.

He said that since the previous capital reduction exercise in 2020, the group has made remarkable strides in financial recovery, achieving profitability for the year ended Dec 31, 2023 (FY2023) and FY2024.

“We believe it is ultimately about building strength and setting a solid foundation for the next phase and future distribution to shareholders. It optimises our balance sheet, puts us in a stronger capital position, and even opens the door to return free cashflow to our shareholders,” he added.

Supported by higher average daily charter rates and improved utilisation, Velesto, which operates six jack-up drilling rigs and two hydraulic workover units, has reported eight consecutive quarters of earnings.

The group’s quarterly net profit for 4QFY2024 dropped 17.29% year-on-year to RM55.16 million from RM66.68 million, in line with a 23.08% fall in revenue to RM276.06 million from RM358.89 million, mainly due to lower utilisation and completion of its integrated rig drilling completion (i-RDC) project.

For FY2024 as a whole, net profit more than doubled to RM207.71 million from RM99.53 million in FY2023, as revenue rose 12.08% to RM1.36 billion from RM1.21 billion, amid higher utilisation and better charter rates for the group's jack-up rigs, in addition to the extension of the i-RDC project.

As of January, Velesto had an order book of RM709 million, providing financial visibility until early 2026, the group said, adding that it is cautiously optimistic about the outlook for FY2025.

The improved financial position has enabled Velesto to start paying dividends. It announced its maiden dividend of 0.25 sen per share in 4QFY2023, followed by another 0.25 sen payout in 2QFY2024. The dividend was subsequently increased to one sen per share in 4QFY2024.

Velesto listed during the oil boom in 2013 — it was then known as UMW Oil & Gas Corp Bhd — at RM2.80 per share. A favourite among investors, its shares traded as high as RM4.58 in 2014 with its market capitalisation reaching RM9.9 billion.

However, the sudden crude oil rout the following year caught the O&G industry darling by surprise as it had geared up for new drilling rigs, with its eighth rig delivered during the industry downturn in 2015.

From 2017, it undertook a series of balance sheet restructuring, beginning with a rights issue that was supported by its now-51% shareholder Permodalan Nasional Bhd (PNB). In between, its major shareholder UMW Holdings Bhd exited the rig operator by distributing its 55.7% stake in specie to its own shareholders.

Following Velesto’s completion of a RM1.82 billion rights issue, in which PNB put in over RM800 million, the group pared down RM1.5 billion of debt.

Under the 2020 share capital reduction exercise, the group cancelled RM2.21 billion of issued shares to eliminate accumulated losses.

In 2021, the group pared down debt further with a RM471.8 million in insurance claims from the Naga 7 rig, which sank in May that year.

Coupled with earnings from ongoing operations, the capital exercises helped Velesto reduce its total borrowings to RM177.94 million at end FY2024, from RM3.77 billion in FY2016.

Velesto managed to transition to a net cash position of RM69.58 million as at the end of 2024, a significant improvement from its previous net borrowing of RM3.21 billion, leading to a net gearing of 135% in 2016.

At the company level, it reversed accumulated losses of RM1.04 billion in FY2016 to a retained earnings position of RM129.63 million by the end of 2024.

Velesto anticipates completing its latest share capital reduction exercise by the third quarter of 2025.

Shares of Velesto have been on a downward trend over the past year, declining by 43%. The stock last closed at 16.5 sen, giving the group a market capitalisation of RM1.36 billion.