KUALA LUMPUR (May 5): The sinking of Velesto Energy Bhd’s Naga 7 rig offshore Sarawak yesterday has prompted CGS-CIMB to upgrade the company to "add" while raising its target price to 19.5 sen from 17 sen prior.
Calling it a possible “blessing in disguise”, analyst Raymond Yap said the valuation impact of the sunk rig may be positive as its insurance claims may exceed the written-off net book value (NBV) which is estimated at RM400 million.
“First, the Naga 7 is fully insured and the insurance value is pegged to the outstanding debt secured on the rig,” he said.
He believes that the insurance claims are conservatively worth RM350 million, but could exceed the NBV of the rig.
Yap pointed out that meanwhile, the NBV is determined through a discounted cash flow of its “value-in-use”, taking into consideration the rig market’s reduced utilisation estimates and reduced debt coverage ratio (DCR) expectations after the oil crash last year.
“In a perverse way, it may be better to secure a near-term cash payout than to suffer uncertainties over asset underutilisation.
“Second, given Petronas’s desire to support local asset owners with drilling jobs, Velesto may potentially experience an increase in its overall utilisation rates after the removal of the Naga 7, with the work for Naga 7 reallocated to Velesto’s other rigs. Third, the write-off of the Naga 7 may reduce Velesto’s depreciation expense,” he observed.
He added that the utilisation rate of Velesto’s fleet from May 21 could increase by circa three to five percentage points to 60% to 63% for FY21, and 75% to 80% for FY22, after the removal of Naga 7.
However, he cautioned that Velesto would have to incur costs of around RM20 million to salvage the sunken rig, which it may not be able to recoup from insurance claims.
At the time of writing, Velesto was the ninth most active stock on Bursa Malaysia, shedding half a sen or 3.13% to 15.5 sen, with 67.95 million shares done. It had a valuation of RM1.31 billion.
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