Kenanga Research & Investment

Yinson Holdings - Completion of FPSO Adoon Contract

Publish date: Fri, 13 Jan 2023, 09:06 AM

YINSON’s FPSO Adoon contract has been successfully completed, after having operated for 16 years, with Addax exercising the option to purchase the FPSO at the end of the contract period. Overall, we are neutral, given that this has been well anticipated. This would allow YINSON to better reallocate its resources to newer upcoming projects (e.g. Agogo FPSO) that will likely be awarded in the coming months. Maintain OUTPERFORM, albeit with a slightly lowered SoP-TP of RM3.05.

End of FPSO Adoon contract. YINSON announced that it has successfully completed its contract for FPSO Adoon, which has been operating at Block OML 123 offshore Nigeria. The contract has already been operating for 16 years, with an original period of 8 years until 2014 coupled with extensions of 8 more years up until 2022. The contract was then further extended by the client Addax Petroleum Development (Nigeria) Limited through consecutive monthly extensions until January 2023. Following so, Addax exercised its contractual option to purchase the FPSO at the end of the contract period, and the sale was completed on 11 January 2023.

Neutral on the contract expiration. Overall, we are neutral over the completion of the contract, given that it was well anticipated. The sale of the FPSO will allow YINSON to recycle its capital and better allocate its resources onto newer upcoming projects (mentioned below), with the FPSO remaining on the field under the operation of the new owners.

Anticipation of new contracts. We believe an official charter contract award for the Agogo FPSO is likely to be finalised in the coming weeks. According to industry sources, the contract is expected to be 15 firm years plus 5 yearly extensions, with first oil expected in late-2025. We estimate the 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 in its order book. Overall, given how tight the current global FPSO market is at the moment, we believe any new tenders or contract wins would yield attractive returns and financing options.

Forecasts. We lowered our FY24F earnings by 4% to account for the cessation of FPSO Adoon.

Maintain OUTPERFORM, albeit with a slightly lowered SoP-TP of RM3.05 (from RM3.15 previously), after making adjustments following the cessation of FPSO Adoon. 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.

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, and (iii) project execution risks including cost overrun, delays and downtimes.

Source: Kenanga Research - 13 Jan 2023

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