Investment Highlight

• Limbayong FPSO re-tender. Upstream reported that Petronas has launched a new pre-qualification exercise for the tender for a leased floating production, storage and offloading (FPSO) vessel on 13 October 2021 for its Limbayong field offshore Sabah. This came less than a fortnight after cancelling the previous tender that had drawn bids from 4 domestic contractors – Sabah International Petroleum (SIP), Yinson Holdings, MISC and a consortium between Bumi Armada, MTC and Indiabased Shapoorji Pallonji.
  Recall that the tender specifications have called for a floater capable of producing a capacity 60,000 barrels per day of liquids, including 40,000 bpd of oil and 180 million cubic feet per day of associated gas as well as nameplate storage capacity of 600,000 barrels of oil and water injection facilities up to 75,000 bpd. The tender offered a firm 12-year lease period plus 2 options for three-year extensions and another for 2 years.

• Other key considerations. Upstream indicated that SIP, which does not have any FPSO operations currently, had been in pole position to secure the contract, potentially supported by the Sabah state government for greater participation in its oil and gas projects.
  Petronas’ key concerns include increased financial pledge or dividend to the government’s coffers amid the coronavirus pandemic, tussle for more funds between Sabah’s state administration and the federal government from greenfield E&P projects based in the state and the proximity of Limbayong’s location to China’s “nine-dash line” in the South China Sea.

• No foreign interest so far. While the prior FPSO tender was issued only to Malaysian contractors and lead contractors, this prequalification exercise could be an attempt to include international floater giants such as Modec and SBM Offshore even though foreign contractors have so far shown little interest.

• Charter likely to proceed. In our view, we believe that the FPSO charter will eventually proceed as planned given that a contract to install subsea production systems, subsea umbilicals, risers and flow lines for the Limbayong field has already been secured by TechnipFMC. 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 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.

• Raising 2021–2022 oil price projection by US$5/barrel to US$70–75/barrel as Brent crude oil prices have recovered above US$80/barrel currently after falling to US$65/barrel on 20 August on concerns that the Covid-19 Delta variant could dampen global demand. As US inventories slid 15% from the YTD peak of 502mil barrels on 26 March 2021 to below prepandemic levels at 427mil barrels currently (5% below the 2019 average of 448mil barrels), our raised 2021–2022 price projection is in line with the EIA’s Short-Term Energy Outlook of US$71/barrel for 2021 and US$72/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 maintenance based 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 - 22 Oct 2021