Investment Highlights

• Limbayong FPSO charter in sight. Upstream reported that MISC, Yinson, M3Nergy and MTC are preparing to bid for a floating production, storage and offloading (FPSO) vessel charter for Petronas Carigali’s Limbayong oil and gas field development off Sabah, with technical and commercial offers likely to be submitted next month.

• Local content restrictions on international bidders. International FPSO operators such as Modec and SBM Offshore are not expected to bid even though they have received tenders last year for the project due to strict local content standards with the topside fabrication to be undertaken domestically. The module fabrication and engineering work will have to be carried out in Malaysia with a requirement for up to 90% local manpower.

• Local bidders. Sapura Energy, Malaysia Marine & Heavy Engineering Holdings (MMHE), Kuching-headquartered Brooke Dockyard, Klang-based Muhibbah Marine Engineering and KKB Engineering’s OceanMight, which has a yard in Kuching, are expected to bid for the engineering, procurement, construction, installation and commissioning (EPCIC) contract. However, foreign yards may also be planning to tie up with a local player.

• Mid-sized FPSO. The Limbayong tender opened in November last year on a fast-track procurement with fabrication work to be carried out over 26 months after the award. The FPSO is expected to have a nameplate storage capacity of 600,000 barrels of crude and inject 75,000 bpd of water. Initially, the operator needs the FPSO to handle 60,000 barrels per day of liquids, including 40,000 bpd of oil, as well as about 17 million cubic feet per day of associated gas.

• Looking at 20-year charter. The charter comes in 2 options: (i) a firm period of 12 years, followed by likely extensions of 3, 3 and 2 years, and (ii) a firm period of 5 years with 3 likely extensions of 5 years each.

• Likely winners could be MMHE and MISC. Given the local content requirement, the likely winner for the FPSO charter could be MISC, while its 66.5%-owned fabrication provider, MMHE, could secure the EPCIC job to convert the vessel. For MISC, the earnings impact is likely to be minimal given the group’s huge asset base while the conversion job for MMHE could have a more substantive impact to its depleted order book of RM932mil currently.

• Still expect moderate recovery in Petronas’ upstream capex rollout. As Brent crude oil prices for now are still above Petronas’ 2018 internal crude oil assumption of US$52/barrel for project feasibility studies, we do not expect any substantive changes to its field development activities. With Petronas’ 9M2018 upstream capex declining 7% YoY to RM7bil, we expect a moderate recovery in domestic rollouts as the group has introduced new fiscal term enhancements involving self-adjusted cost recovery and a profit-sharing mechanism based on revenue over cost index for new deepwater production sharing contracts to attract new exploration investments and to open new fields in Malaysia. They are available for new deep-water acreage from 9 open blocks — two off Peninsular Malaysia, four offshore and onshore Sarawak and three off Sabah.

• Contract awards still on upward trajectory. As the oil price dropped recently, we have not seen any impact yet on the upward contract award trajectory with Malaysia’s 2018 contract awards rising 54% YoY to RM11.6bil due to the award of Pan Malaysia umbrella contract renewals, Sapura Energy securing the EPCIC work for the Pegaga CPP and Serba Dinamik’s EPC and O&M jobs. Offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura and MMHE recently being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years.

• We are NEUTRAL on the sector given the volatility in oil price direction over the next 6 months, unresolved US-China trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints. Our top picks are still companies with stable and recurring earnings such as Dialog Group, Serba Dinamik and Yinson. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services. Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson may secure another major FPSO contract next year. We maintain a SELL for Petronas Gas due to the longer term impact from the progressive reduction in its transportation tariffs under the Energy Commission’s new guidelines.

Source: AmInvest Research - 11 Feb 2019