Company Coverage
Velesto Energy (VEB MK): Value Reemerges As Normalised DPS Is Intact; Upgrade To BUY
BUY (Upgraded)
Current price:
Target price:
Upside:
Previous TP :
RM0.25
RM0.29
+16.5%
RM0.31
Analyst
Highlights
The JU rig market continues to enjoy bullish 2H26 outlook despite geopolitical complications. Hence, we think major downside in terms of industry JU DCR is limited (averaging US$94,000 YTD 2026). On VEB, we opine the negatives from the termination of Naga 3 (N3) sale are fully priced in, although they may reintroduce a temporary spike in opex until N3 is redeployed.
Upgrade to BUY, target price adjusted to RM0.29. We rollover our valuations to 2027 horizon and pegging to unchanged 7x EV/EBITDA. Our target implies 18x 2027F PE, and attractive 10% normalised dividend yield. An alternative asset-value based valuation at our target price would imply EV per rig of US$94m, which is at a premium vs other global rig peers and rig sale transactions averaging US$54m to US$100m.
We believe VEB deserves a premium in terms of valuation per rig comparison, due to the stock’s appeal as a dividend payer, and the share price decline of over 20% in our view has priced in all the negatives. VEB excels vs peers in terms of operational uptime (99%), lean balance sheet, and captive market positioning in Southeast Asia provides cash flow certainty.
Analysis
Jackup (JU) rig market outlook remains bullish. We summarised the positive outlook on offshore capex, which is underpinning the structural foundations of a global JU rig recovery, in the RHS appendices. While near term recovery is complicated by the ongoing Middle East conflict, there are signs that Saudi offshore drilling activity is being reactivated, a move that will redeploy idle rigs and normalise global JU activity by 2027. Hence, we believe securing JU rigs will be increasingly prioritised for the sake of energy security. Southeast Asia market demand remains strong, currently driven by Vietnam, Malaysia and Indonesia. Westwood detailed that JU leading daily charter rates (DCR) YTD averaged at US$94,000 (-6% yoy).
Termination of Naga 3 (N3) rig sale might be behind the over 10% share price decline... While Velesto Energy (VEB) successfully disposed of its workover business for RM16.5m, the planned US$63m sale of N3 to an Indonesian entity (announced in Dec 25) was terminated on 7 Jul 26, and the only official reason was that the “transaction failed to meet its deadline”. We believe the share price reacted negatively as this event effectively eliminated a special dividend/share (DPS) scenario of RM0.03 or 12% yield.
…but N3 will not be a major earnings drag. As N3 is now back in VEB’s hands, the idle rig will be incurring daily warm-stacking costs (we estimate at US$25,000). Moving on from the DPS, investors will be greatly anticipating VEB’s next move for N3, which can be earmarked for another buyer (and we think VEB must enhance its buyer assessment and terms the next time), or redeploy N3 into contracts. Although this necessitates dramatic shifts in our forecasts (ie reprojecting utilisation to 72% based on a fleet of six, instead of 82% based on a fleet of five rigs), we assessed that earnings risk from N3 will be contained due to the following:
N3’s upgrade costs are likely fully covered. With the knowledge that N3 was ready for delivery by Mar 26, we deduced that VEB was able to retain and utilise the deposit of US$6.3m (or 10% of rig value) for the upgrade works of N3 in the yard, given that the deposit was a key condition to be met first before sending the rig to a Singapore yard for upgrades to fulfil the “ready for drilling condition”. We understand now that N3 has been relocated to a Johor yard for warm-stacking.
N3 should be able to secure a job by 4Q26 (unlike its pre-sale status). Prior to the sale announcement, N3 was idle throughout 2025 and more than a year. Both Naga 2 (N2) and N3 rigs are among the oldest in VEB’s fleet, but despite having gone through special periodic surveys (SPS), N3 still became uncompetitive when it was idled for a long time. The newly upgraded N3 is now as good as its competition. Therefore, N3 should benefit from the high JU rig demand, including VEB’s plans for an asset-light strategy (as VEB will always prioritise allocation on its rigs first). However, we believe JU demand in 2026 are mostly contracted out. If any, the next available window could be 4Q26 at the earliest.
VEB’s superior parameters enabled Naga 8’s (N8) immediate resecuring of a major contract... N8 officiated a mutual termination of its previous long-term charter with Petronas (Indonesia) in July 26, which might be related to the newly set up Searah JV between Petronas and Eni. However, it was quick to secure its second integrated rig, drilling and completion services (i-RDC) contract, an 18-month job worth US$51m from Chevron for the 2026-2028 North Malay Basin campaign. We believe the rig started mobilisation from Kemamam as early as 2 Aug 26, which is almost a seamless transition after completing its previous short-term job for Jadestone by late-July 26.
…and a returning i-RDC customer. Chevron acquired Hess last year, and Hess was the same client that utilised N8 for the first i-RDC long-term contract in Malaysia (3+3 years) since 2020. At that time, all extension options were exercised, which would have kept the rig busy until Oct 25. Hess later issued an early suspension notice on Feb 25. In hindsight, the new Chevron contract DCR, which was implied at US$94,000, is more lucrative vs the terminated Petronas’ (US$90,000) and comparable to the first i-RDC (US$90-100,000). In addition, after learning the lessons from the first contract, we understand the new i-RDC terms are more favourable for VEB on a project risk-reward basis.
Highlights
The JU rig market continues to enjoy bullish 2H26 outlook despite geopolitical complications. Hence, we think major downside in terms of industry JU DCR is limited (averaging US$94,000 YTD 2026). On VEB, we opine the negatives from the termination of Naga 3 (N3) sale are fully priced in, although they may reintroduce a temporary spike in opex until N3 is redeployed.
Upgrade to BUY, target price adjusted to RM0.29. We rollover our valuations to 2027 horizon and pegging to unchanged 7x EV/EBITDA. Our target implies 18x 2027F PE, and attractive 10% normalised dividend yield. An alternative asset-value based valuation at our target price would imply EV per rig of US$94m, which is at a premium vs other global rig peers and rig sale transactions averaging US$54m to US$100m.
We believe VEB deserves a premium in terms of valuation per rig comparison, due to the stock’s appeal as a dividend payer, and the share price decline of over 20% in our view has priced in all the negatives. VEB excels vs peers in terms of operational uptime (99%), lean balance sheet, and captive market positioning in Southeast Asia provides cash flow certainty.
Analysis
Jackup (JU) rig market outlook remains bullish. We summarised the positive outlook on offshore capex, which is underpinning the structural foundations of a global JU rig recovery, in the RHS appendices. While near term recovery is complicated by the ongoing Middle East conflict, there are signs that Saudi offshore drilling activity is being reactivated, a move that will redeploy idle rigs and normalise global JU activity by 2027. Hence, we believe securing JU rigs will be increasingly prioritised for the sake of energy security. Southeast Asia market demand remains strong, currently driven by Vietnam, Malaysia and Indonesia. Westwood detailed that JU leading daily charter rates (DCR) YTD averaged at US$94,000 (-6% yoy).
Termination of Naga 3 (N3) rig sale might be behind the over 10% share price decline... While Velesto Energy (VEB) successfully disposed of its workover business for RM16.5m, the planned US$63m sale of N3 to an Indonesian entity (announced in Dec 25) was terminated on 7 Jul 26, and the only official reason was that the “transaction failed to meet its deadline”. We believe the share price reacted negatively as this event effectively eliminated a special dividend/share (DPS) scenario of RM0.03 or 12% yield.
…but N3 will not be a major earnings drag. As N3 is now back in VEB’s hands, the idle rig will be incurring daily warm-stacking costs (we estimate at US$25,000). Moving on from the DPS, investors will be greatly anticipating VEB’s next move for N3, which can be earmarked for another buyer (and we think VEB must enhance its buyer assessment and terms the next time), or redeploy N3 into contracts. Although this necessitates dramatic shifts in our forecasts (ie reprojecting utilisation to 72% based on a fleet of six, instead of 82% based on a fleet of five rigs), we assessed that earnings risk from N3 will be contained due to the following:
N3’s upgrade costs are likely fully covered. With the knowledge that N3 was ready for delivery by Mar 26, we deduced that VEB was able to retain and utilise the deposit of US$6.3m (or 10% of rig value) for the upgrade works of N3 in the yard, given that the deposit was a key condition to be met first before sending the rig to a Singapore yard for upgrades to fulfil the “ready for drilling condition”. We understand now that N3 has been relocated to a Johor yard for warm-stacking.
N3 should be able to secure a job by 4Q26 (unlike its pre-sale status). Prior to the sale announcement, N3 was idle throughout 2025 and more than a year. Both Naga 2 (N2) and N3 rigs are among the oldest in VEB’s fleet, but despite having gone through special periodic surveys (SPS), N3 still became uncompetitive when it was idled for a long time. The newly upgraded N3 is now as good as its competition. Therefore, N3 should benefit from the high JU rig demand, including VEB’s plans for an asset-light strategy (as VEB will always prioritise allocation on its rigs first). However, we believe JU demand in 2026 are mostly contracted out. If any, the next available window could be 4Q26 at the earliest.
VEB’s superior parameters enabled Naga 8’s (N8) immediate resecuring of a major contract... N8 officiated a mutual termination of its previous long-term charter with Petronas (Indonesia) in July 26, which might be related to the newly set up Searah JV between Petronas and Eni. However, it was quick to secure its second integrated rig, drilling and completion services (i-RDC) contract, an 18-month job worth US$51m from Chevron for the 2026-2028 North Malay Basin campaign. We believe the rig started mobilisation from Kemamam as early as 2 Aug 26, which is almost a seamless transition after completing its previous short-term job for Jadestone by late-July 26.
…and a returning i-RDC customer. Chevron acquired Hess last year, and Hess was the same client that utilised N8 for the first i-RDC long-term contract in Malaysia (3+3 years) since 2020. At that time, all extension options were exercised, which would have kept the rig busy until Oct 25. Hess later issued an early suspension notice on Feb 25. In hindsight, the new Chevron contract DCR, which was implied at US$94,000, is more lucrative vs the terminated Petronas’ (US$90,000) and comparable to the first i-RDC (US$90-100,000). In addition, after learning the lessons from the first contract, we understand the new i-RDC terms are more favourable for VEB on a project risk-reward basis.
BUY (Upgraded)
Current price:
Target price:
Upside:
Previous TP :
RM0.25
RM0.29
+16.5%
RM0.31
Analyst
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