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Velesto Energy (VEB MK) is Malaysia’s largest owner and operator of jack-up rigs for offshore drilling for oil & gas. The company owns six jack-up rigs and four so-called “hydraulic workover units” used to maintain, repair and improve wells.
I didn’t know the company until Twitter account and Asian Century Stocks subscriber @InflationX mentioned it to me. Part of the reason is that the company used to be known as UMW Oil & Gas but changed its name to Velesto Energy after its demerger from then-parent UMW in 2017.
Jack-up rigs are used for drilling in shallow waters, whereas semi-submersibles and drillships are used for deepwater environments. Jack-up rigs are perfect for offshore Malaysia, where water depths are shallow and weather conditions benign.
Oil & gas rigs are commodities. They’re produced to certain specifications and can be transported from one location to another. Since they are commodities, their prices tend to move with supply & demand across the cycle.
Since 2014, we’ve had a down-cycle in charter rates for offshore oil rigs. The downturn was sparked by an explosion in a new supply of crude oil from US shale basins, causing prices to plummet and reducing offshore capex. It didn’t help that a record number of orders were placed for new oil rigs, causing a temporary oversupply. In Malaysia, for example, dayrates for jack-up rigs fell from around US$150,000 in 2014 to US$75,0000 today.
Other problems for Velesto Energy included a dilutive share issue in 2017, a weaker oil price following the outbreak of COVID-19, the sinking of Velesto’s jack-up rig Naga 7 in 2021 and temporary downtime in 2022 due to the upgrading of two of Velesto’s rigs.
Today, the situation seems to be improving rapidly:
- Brent oil for 2025 delivery now trades at around US$80 per barrel - well above the break-even rates for most shallow water discoveries globally.
- Velesto’s key client Petronas's latest activity outlook predicts that it will require 16 jack-up rigs in offshore Malaysia by 2024, up from just nine today. Since Velesto has had a 40-60% market share in Malaysia, it will most likely be a primary beneficiary of this shift.
- The upgrading of jack-up rigs Naga 5 and 6 was completed in August 2022 and will help the company’s utilisation rate recover.
- Spot dayrates for jack-up rigs remain weak. But the latest tenders of jack-up rigs for 2024 start dates were priced closer to US$90,000 (Seadrill West Telesto and Maersk Resolute). It’s challenging to compare jack-up rigs of different specs, but dayrates are certainly trending higher.
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