YINSON has entered into an agreement for preliminary activities with Azule Energy with regards to the Agogo FPSO project, which is a precursor to the official contract award. According to sources, the contract will have lease tenure of 15+5 years with first oil in late-2025. We maintain our forecasts (already assumed one contract win), TP of RM3.15 and OUTPERFORM call.

Agreement for preliminary activities for Agogo FPSO. YINSON announced that it has entered into an agreement for preliminary activities with Azule Energy, the largest independent producer of oil and gas in Angola. Azule Energy is the new 50-50 independently joint venture between BP plc and Eni SpA.

Tenure of the agreement is 60 days, with an estimated aggregate value of approximately USD218m. In entering into the agreement, both YINSON and Azule have interests in commencing with the preliminary works to safeguard the project schedule in anticipation of the finalisation of the contract for the provision of the FPSO to be deployed for the Agogo Integrated West Hub Development Project, located in the West Hub part of Block 15/06 in Angola, as well as the operation and maintenance services.

Official contract award closer to finalisation. We see this awarded agreement as a clear sign that the official contract award is very close to finalisation and may come within the next few weeks. According to industry sources, the actual contract will have lease tenure of 15 initial firm years plus 5 one-yearly extensions, with expected first oil in late- 2025. We estimate total capex to be ~USD1.5b (assuming 100% stake), with total contract value surpassing the USD5b-mark – thus making it one of YINSON’s biggest contracts within its order book, although we foresee YINSON potentially partnering someone else to take up a minority stake in the project in order to ease equity financing burdens.

USD218m seen as part of upfront pre-payments. Meanwhile, the USD218m value as part of the preliminary activities agreement forms the initial part of upfront pre-payments to YINSON as provided by the clients. We are expecting to see further upfront payments upon the official contract award, with total pre-payments expected to reach up to ~30% of total project capex. This is a reflection of the current global FPSO market in general, as supply is tight given limited number of bidders; financing options provided by clients are becoming increasingly favourable.

Overall, we are positive on the announcement as these are further key developments towards a successful contract award.

Maintain OUTPERFORM, with unchanged forecasts and SoP-TP of RM3.15, as our valuation has already included one new win assumption, based on (i) capex of ~USD1b, (ii) IRR of 13%, and (iii) WACC of 6%. Note that our valuations have also included a 5% ESG premium, based on our in-house 4-star ESG rating (see page 5).

We continue to like YINSON for: (i) its strong market position, with a fleet of nine FPSOs (including three on order) – making them the fourth largest FPSO player in the world and the largest amongst Malaysia based players, (ii) its strong management team, given its untainted track record of project deliveries thus far, and (iii) its conscious decision to diversify into non-fossil energy sectors (e.g. solar, battery technology) to future-proof its earnings sustainability.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) counter-party risk for FPSO contracts, (iii) project execution risks including cost overrun, delays and downtimes.

Source: Kenanga Research - 6 Dec 2022