Maybank IB said the rigs market segment would inevitably suffer from the current oil crisis, which has led to an austere cut in offshore capex.
PETALING JAYA: Velesto Energy Bhd is expected to be loss-making in the next two years as it faces disruption to its operations following cuts in capital expenditure by oil companies in a cyclical downturn.
Velesto is the largest jack-up drilling rig operator by fleet size locally.
Maybank IB said the rigs market segment would inevitably suffer from the current oil crisis, which has led to an austere cut in offshore capex.
“Drilling activities will be disrupted as a result of this. Drilling operators are at the mercy of the clients, for they will be pressured to renegotiate existing contracts and to lower rates, while utilisation will likely be disrupted by delays or cancellations, ” it said in a report yesterday.
For those reasons, the research firm said it has cut Velesto’s FY20 to FY22 earnings based on lower average daily charter rate (-6-23% to US$70,000 and rig utilisation (-13 to 25-percentage-point to 66%-72%).
“That said, we now expect Velesto to be in the red over the next two years (FY20-21) before returning to the black in FY22, ” Maybank IB said. For the financial year ended Dec 31,2019, the company made a net profit of RM33.21mil versus a net loss of RM19.52mil a year ago.
That said, Velesto, according to the research firm, has turned more resistant financially to withstand this crisis versus the last cycle in 2014.
It noted that the oil and gas service provider has re-based its drilling costs, reduced its operating expenditure such as headcount and salaries, plus recapitalised its balance sheet.
“Its FY20 net debt-to-EBITDA and net gearing level of 3.2x and 0.3x now is much lower versus its FY15-16’s 10.2x-40.7x and 0.9x-1.4x respectively.
“Under this condition, the risk of a cash call is remote, in our view, ” it said.
Following the recent sell-off that saw the stock losing three-quarters of its value, Maybank IB sees upsides to Velesto’s share price. It noted that the share price fall has priced in much of the operating negatives, turning Velesto attractive.
The research firm has maintained a “buy” call on the stock with a target price of 20 sen.
https://www.thestar.com.my/business/business-news/2020/04/30/velesto-seen-loss-making-in-next-two-years
