KUALA LUMPUR (July 21): Long-term Ketapang charter termination could be a blessing in disguise for Velesto Energy Bhd (KL:VELESTO) as the rig industry recovers, according to Kenanga Research.
"We think this [termination] is largely neutral for the group as we remain confident that the rig could secure another job in the coming months to fill up the gap.
"That aside, the rig industry outlook in our view is in its early phases of recovery and a termination of longer-term job could be a blessing in disguise for the group, as it provides the group more optionality if rig market rates improve from FY2027 (the financial year ending Dec 31, 2027) onwards," the research house said in a note on Tuesday.
The house upgraded the stock from 'market perform' to 'outperform' while maintaining its target price at 32 sen, implying a 28% or seven sen upside to its current price of 25 sen.
"We believe that the recent weakness in share price has overcorrected for weaker dividend outlook (particularly after Naga 3 sale cancellation) and believe the rig market could improve further from FY2027 if upstream demand returns," said Kenanga.
On July 20, Velesto announced the termination of the Ketapang charter contract without cause.
The drilling contract was originally chartered for a period of four years. The loss of the rig’s income, Naga 8, could potentially own up to RM11.5 million if another charter is not secured.
Kenanga believes the termination to be neutral to the group as the group is already marketing Naga 8 to potential clients. The house maintained its income forecasts.
The termination also allows the group better optionality from FY2027 onwards, benefitting from rising daily charter rates (DCR) if it’s not locked in charters for long durations. The rig industry is also in its early phases of recovery, which could create better opportunities for the group with the same resources.
However, Kenanga warned that factors such as global recession that bring oil prices lower, weaker than expected jack-up rig demand in the Middle East and higher occurrences of breakdown in ageing rig fleet could hinder progress.