The sinking of Velesto Energy’s NAGA (dragon) 7 jack-up rig offshore Malaysia has prompted investment firm CGS-CIMB to upgrade the drilling company as the closed-door investigation into the accident continues.
Kuala Lumpur-based analyst Raymond Yap described the incident as a possible “blessing in disguise” as the knock-on valuation for the rig may be positive as its insurance claims could exceed the written-off net book value (NBV), which is estimated at MYR400 million ($97 million).
“First, the Naga 7 is fully insured, and the insurance value is pegged to the outstanding debt secured on the rig,” said Yap.
He believes the insurance claims are conservatively worth MYR350 million but could exceed the net book value of the jack-up rig.
“In a perverse way, it may be better to secure a near-term cash payout than to suffer uncertainties over asset underutilization,” he added.
“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 said.
He added that the utilisation rate of Velesto’s fleet from May 21 could rise by 3-5% 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 MYR20 million to salvage the sunken rig, which it may not be able to recoup from insurance claims.
Yap increased Velesto’s price target from MYR 0.17 to MYR 0.195. The company is currently trading at MYR 0.145.
Closed-door Investigation
Although Velesto has said that it is investigating the incident and evaluating recovery options for the unit, it remains unclear who is responsible for the sinking of the jack-up rig that was working for ConocoPhillips off Sarawak. So far, Velesto and ConocoPhillips have failed to answer requests from Energy Voice regarding where responsibility for an inquiry into the accident lies.
Significantly, the industry needs a clear understanding of what happened to avoid similar incidents in future. However, industry observers told Energy Voice that an open public inquiry will be unlikely in Malaysia.
Malaysian national oil company Petronas, which is a partner in the drilling campaign that ConocoPhillips was carrying out when the rig sunk, also acts as the regulator in the Southeast Asian nation.
Energy Voice reported that the accident was the result of a jack-up leg punching through the seabed at the work site of the Salam-3 appraisal well.
ConocoPhillips was considering drilling up to three wells offshore Sarawak this year – the Salam-3 appraisal and the Gagau-1 wildcat on Block WL4-00, and the Mersing-1 exploration well on Block SK 304 with the Naga 7.
The US giant will be keen to continue the drilling campaign and getting a new drilling new should not be an issue. However, the challenge will be sourcing the pipe and equipment – that have long lead times – and were lost when Naga-7 sunk. A new seabed survey will also be required.
Meanwhile, the sunken rig will need to be recovered. It is now expensive scrap metal, but it is a hazard and will also need to be removed to allow for future drilling in the area.