Investment Highlight

• Potential Limbayong FPSO tender suspension. Upstream reported that Petronas has suspended the bidding exercise for a floating production, storage and offloading (FPSO) vessel for the deep-water Limbayong field off Sabah, unsettling the contracting sector. The report indicated that a disagreement is having a direct impact on the FPSO contest with the Sabah state government pushing for greater participation and local content in projects in its own waters.

• Delay, rebid or alternative tie-in solutions. This could mean a delay to allow Petronas to address procedural issues or a completely new tender invitation to be issued soon given that Petronas has already awarded a subsea equipment contract to TechnipFMC in June this year. An alternative solution could be the nearby Bestari oil discovery, which was earmarked as a tie-in field to Limbayong, hosting the FPSO instead of Limbayong. The final investment decision for Bestari is due soon, and Upstream’s sources suggested that developing Bestari first could deliver a better economic outcome.

• Open only to Malaysian bidders. The tender was open only to Malaysian contractors or Malaysian-led joint ventures. Recall that the Malaysian bidding groups were Yinson Holdings, MISC, Sabah International Petroleum (SIP) and a joint venture between Bumi Armada, MTC and India's Shapoorji Pallonji. Upstream indicated that Sabah International was in a favourable position to land the FPSO contract even though the other contenders were still in the race.
  
  The Limbayong FPSO, under the original tender specifications, required a nameplate storage capacity of 600,000 barrels of oil and production capacity of 60,000 barrels per day (bpd) of liquids, including 40,000 bpd of oil and 180mil cubic feet per day of associated gas together with water injection facilities of up to 75,000 bpd.
  
  The tender involves a lease and operate contract covering a firm 12-year period plus 2 options for three-year extensions and another for 2 years. Contenders to supply the external turret for the FPSO included Bluewater, SOFEC, National Oilwell Varco and London Marine Consultants.
• Overall sector momentum still intact. In our view, the Limbayong delay or potential rebidding exercise does not mean that oil & gas contract rollouts have lost momentum as there are multiple FPSO charters currently in the global pipeline (Exhibit 3) amid a limited selection of financially sound operators in the aftermath of the 2015–2017 oil downturn.
  
  This is underpinned by Yinson recently signing a memorandum of understanding with Brazil-based Enauta Participacoes S.A. for a direct and exclusive negotiation to supply an FPSO with potential conversion costs of up to US$500mil to the Atlanta field in the Santos Basin, offshore Brazil. This is expected to reach a firm contract by January next year.
  
  Besides competing with MISC for the Limbayong FPSO, Yinson is also bidding for the Pecan charter off Ghana with its purchase option for Woodside's Nganhurra FPSO. Additionally, Yinson together with Technip Energies are undertaking prefront-end engineering and design (FEED) services for Total Energies for two large FPSOs to be deployed in Cameia, Block 20/21, Angola and Maka, Block 58, Suriname. Still owning the 300,000mt VLCC Hawk (formerly Apollonia), Yinson has not given up on the FPSO charter of the Parque das Beleias field in Brazil that has been cancelled twice over the past year.
• Recovery in 3Q2021 order flows. The sector’s contract awards in 3Q2021 to Malaysian oil & gas operators rebounded 86% QoQ to RM4.2bil (Exhibit 4), largely from multiple jobs awarded to Sapura Energy. Excluding a lumpy RM1.5bil construction award to Serba Dinamik to build a data centre in Abu Dhabi in August 2020, the 3Q2021 orders rose 41% YoY.

• Maintain 2021–2022 oil price projection at US$65–70/barrel as Brent crude oil prices have recovered above US$80/barrel currently after falling to US$65/barrel on 20 August this year on concerns that the Covid-19 Delta variant could dampen global demand. As US inventories slid 16% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 421mil barrels currently (6% below the 2019 average of 448mil barrels), we maintain our 2021–2022 price projection at US$65–70/barrel vs. the EIA’s Short-Term Energy Outlook of US$69/barrel for 2021 and US$66/barrel for 2022. Notwithstanding the global demand recovery on the back of rising vaccination rollouts, we are cautious on the possibility of Iranian crude re-entering global markets, rebound in US shale production and further relaxation of OPEC production quotas.

• Maintain OVERWEIGHT call. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenancebased operations and Yinson's strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil, plus multiple charter opportunities in Brazil and Africa. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 8 Oct 2021