UOB Kay Hian
Date of Report: 30 April 2025

Velesto Energy: Riding the Wave of Regional Expansion and Automation Amid Jackup Rig Market Shifts

Overview: The Premier Malaysian Jackup Rig Provider Eyes Regional Growth

Velesto Energy Berhad, formerly known as UMW Oil & Gas, stands as Malaysia’s leading jackup (JU) rig service provider. Despite a turbulent first quarter for global JU rigs, Velesto is poised for growth, leveraging market stabilization, strategic upgrades, and a push for regional expansion. With a BUY rating and a target price of RM0.22 (offering a potential upside of 46.6%), Velesto presents an attractive opportunity for investors seeking exposure in the energy sector.

Stock Snapshot: Valuation, Performance, and Ownership

• Share Price: RM0.15
• Target Price: RM0.22
• Market Cap: RM1,232 million (US\$280 million)
• Shares Issued: 8,215.6 million
• 52-week Range: RM0.13 – RM0.30
• Major Shareholders:
  • Skim Amanah Saham Bumiputera: 37.9%
  • Yayasan Pelaburan Bumiputera: 11.1%
• FY25 NAV/Share: RM0.25
• FY25 Net Cash/Share: RM0.00
• Dividend Yield: 8% (current price)

Market Trends: Navigating a Global Correction Cycle

The first quarter of 2025 marked a correction for the global JU rig market, mainly due to:

• Saudi Aramco suspending over 34 out of 92 Saudi JU rigs for up to 12 months as it paused its maximum sustainable capacity expansion.
• Pemex (Mexico’s NOC) temporarily suspending rigs as part of end-2024 cost-cutting efforts.
• Competitive utilization rates dipping below 80%, though excess Saudi capacity has been largely absorbed by Southeast Asia.

NOCs Dominate Demand

National oil companies (NOCs) account for about 64% of JU rig demand globally, with Saudi Aramco as the largest single operator. This concentration offers rig players long-term contract visibility but exposes them to unique risks, such as payment issues (notably with Pemex) and abrupt policy shifts (such as those from Saudi Arabia and changes in Petronas’ outlook).

Regional Market Outlook

For 2025, regional JU day rates have stabilized, and utilization remains robust above 80%. The Vietnamese market, in particular, is active, with at least seven tenders expected in the near term. Velesto’s CEO, Megat Zariman Abdul Rahim, noted that Velesto’s utilization will be a blend of Malaysian and broader Southeast Asian opportunities, as the company actively adapts to shifting market needs.

Financial Performance and Outlook: Key Metrics and Forecasts

Key Financials (RM million)

Operational Upgrades: Automation and Robotic Integration

Velesto continues to modernize its fleet, with four of its six JU rigs—Naga 4, Naga 5, Naga 6, and Naga 8—equipped with enhanced drilling functions. Key milestones include:

• Naga 5 and Naga 6: Upgraded with offline capabilities since August 2022, enabling multiple simultaneous activities during drilling, reducing well days and emissions.
• Naga 6: Scheduled for a robotic arm installation in 2025, a step made possible through a November 2024 collaboration with Petronas and National Oilwell Varco (NOV).

Fleet Developments and Contract Updates

• Naga 8: Expected to be demobilized by end-April 2025 after completing its contract at the Bulan-C platform. It will then undergo a Special Periodic Survey (SPS), costing US\$10-20 million. The contract was originally due to finish in 4Q25, but was suspended early without compensation.
• Naga 5: Rumored to be close to securing a multi-year contract, potentially with PTTEP for an 18-month offshore Sarawak program. The sustainability of day rates was questioned by the CEO, but recent regional wins suggest a higher day rate of around US\$155,000 may be achievable, hinting at high 2026 demand.

Key Financial and Operational Assumptions

ESG (Environmental, Social, Governance) Highlights

Environmental

• Achieved a 15% reduction in carbon intensity of operational emissions.
• Developing further emission reduction guidelines.
• Safety: Loss Time Injury Frequency (LTIF) was 0.50 in 2022 (down from 0.54 in 2021).

Social

• 16% of total staff are female.
• 29% of workforce are non-Malaysians.
• COVID-19 policies implemented, including compliance measures and hiring a health advisor.

Governance

• 5 out of 9 board members are independent.

Valuation, Recommendation, and Risks

Valuation:
The target price of RM0.22 is based on a 5x EV/EBITDA valuation, despite this implying a higher 2025F PE (23x). The current price is seen as a favorable risk-reward entry, underpinned by the repayment of all long-term loans and a high dividend yield.
Recommendation:
Maintain BUY. Investors are advised to trade within a defined window, as risk events (such as contract suspensions or payment issues) remain possible, but the fundamentals and sector trends are supportive.
Risks:

• Contract suspensions or early terminations.
• Payment risks from major NOCs such as Pemex.
• Sudden shifts in oil company activity outlooks, influenced by both market and geopolitical factors.

Conclusion: Strategic Expansion and Automation to Drive Velesto’s Growth

Velesto Energy is strategically positioning itself for regional expansion and operational efficiency through automation and digital upgrades. While global JU rig markets are in a correction cycle, Velesto’s adaptability, strong financial foundation, and focus on high-specification rigs underpin its growth outlook. With stabilized utilization rates, new contract opportunities, and an ESG-driven approach, Velesto remains a compelling investment for those seeking exposure to the Southeast Asian energy sector.

Appendix: Key Financial Tables

Profit & Loss (RM million)

Balance Sheet (RM million)

Cash Flow (RM million)

With stabilized operations, a robust upgrade cycle, and a strategic regional focus, Velesto Energy is well-placed to capitalize on the evolving Southeast Asian energy landscape.