FPSO clients are increasingly favouring asset ownership over leasing due to limited contractor availability and financing challenges. Hence, the barrier of entry to the FPSO market has also risen for potential new entrants. The tight FPSO market remains favorable for existing players. We maintain our forecasts, TP of RM3.39 and OUTPERFORM call.

We came away from meeting with Energy Maritime Associates (EMA) organised by YINSON feeling more reassured about the FPSO market outlook. The key takeaways are as follows:

1. A trend is emerging where clients (end-users of FPSO assets) opt to own the FPSOs, securing contractors' services solely for the Engineering, Procurement, and Construction (EPC) phase of the project. In both 2022 and 2023, a total of 11 contracts followed this structure, with clients taking ownership of the assets. This shift may be attributed to a shortage of capacity among FPSO contractors and increased challenges in obtaining debt financing from banks, likely influenced by Environmental, Social, and Governance (ESG) considerations.

2. Traditional banks are increasingly reluctant to provide debt financing to FPSO contractors due to growing (ESG) concerns. This reluctance raises entry barriers for new players aiming to enter the FPSO market, given the substantial capex required for such projects. Established FPSO players with proven track records are exploring alternative financing avenues, such as project bond instruments, private equity funding, and prepayments by clients on their leases and this has led to limited FPSO players bidding for new FPSO jobs unless the IRR is attractive enough.

3. The FPSO market is anticipated to remain tight in 2024, as indicated by EMA's survey, revealing record-high industry confidence. About 93% of clients express confidence in their companies' outlook, a notable increase in 2024 from 77% in 2023. Easing concerns of inflation in 2024 suggest that the prices of spare parts and labour will not experience the same rapid increase seen in 2023. Consequently, FPSO contract awards may also see a YoY increase in 2024, surpassing the six awards recorded in 2023.

Forecasts. Maintained.

Valuations. We also maintain our SoP-based TP of RM3.39 (see Page 2). Note that our TP reflects a 5% premium given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We continue to favour YINSON due to: (i) a strong FPSO order book pipeline with multiple major FPSO jobs under the conversion stage which provides significant earnings growth in coming years, (ii) its strong project execution track record which positions the company to benefit from strong structural demand for FPSO contractors anticipated in the coming years, and (iii) it being one of the first local oil & gas company invest in green technology companies (solar, e-mobility, etc) which in our view would help with the company’s long-term energy transition agenda. Maintain OUTPERFORM.

Risks to our call include: (i) crude oil prices falling below USD70/bb raising required IRR for new floating production projects, (ii) regulatory risks and uncertain returns for RE investments that are mainly focused on emerging markets (i.e. South America, India) and (iii) project execution risks including cost overrun, delays and downtimes for FPSO assets.

Source: Kenanga Research - 23 Jan 2024