DEVELOPMENT

• MISC Bhd (MISC) has entered into share sale and purchase agreements (SPA) with SBM Holding Imc. S.A. (SBM), with completion expected in Jan CY25.
• The SPA includes the proposal for the acquisition of 49% equity interest in FPSO Kikeh by MISC OBU One One (L) Pte. Ltd. To MISC, which involves Malaysian Deepwater Floating Terminal (Kikeh) Limited (MDFT) and Malaysian Deepwater Production Contractors Sdn. Bhd. (MDPC).
• The SPA also includes the divestment of 49% equity interest in FPSO Espirito Santo of MISC Offshore Holdings (Brazil) Sdn. Bhd. to SBM, which involves Brazilian Deepwater Production B.V. (BDPBV), Brazilian Deepwater Production Contractors Ltd. (BDPC), Brazilian Deepwater Production Ltd. (BDPL) and Brazilian Deepwater Floating Terminals Ltd (BDFT).

OUR VIEW

• In line with MISC's streamlining initiatives. This SPA is expected to give MISC full custody of FPSO Kikeh, including full operational control of its production in offshore Sabah, while FPSO Espirito Santo will be given to SBM including its operations in the Campos Basin, offshore Brazil. We believe this transaction is fair, as both deepwater FPSOs had neared its 50-year service mark, giving them a similar depreciated value. To note, FPSO Kikeh is the first and largest deepwater FPSO in Malaysia and Asia, can produce 120,000boepd and has a storage capacity of 2m barrels of oil. PTTEP Sabah Oil, a subsidiary of PTTEP, awarded a 6-year contract extension for the FPSO Kikeh, operating in the deep waters of Block K, offshore Sabah, Malaysia, with the charter ending in Jan CY28.
• Challenges of an old vessel. Given that FPSO Kikeh had reached its 50 years of service this year (CY24) - the average maximum years of service for an FPSO - we anticipate several risks to its future operations, including: (i) lower structural integrity, (ii) higher safety hazard, (iii) increased environmental risks, and (iv) lower operational efficiency. Regular maintenance and retrofits will be needed to minimise these risks in the near future, and we believe, with MISC's expertise in the marine repair, we believe FPSO Kikeh's operational life can be extended by 10- 20 years more. Additionally, deepwater FPSOs are built sturdier and more resilient, as deepwater E&P activities are often done under harsh weather and oceanic conditions; subsequently giving it an advantage in its lifespan.
• Deepwater Sabah provides better opportunities. All in all, we maintain positive on this transaction, despite the age of the FPSO obtained. Moreover, we believe that this decision is sound, as taking control of an FPSO closer to home helps to increase time and cost efficiency in maintenance and logistics, as well as to ensure regulatory compliance within the nation and region. Additionally, the deepwater region in Sabah still has the potential to be explored and produced, as only 45% of the area with hydrocarbon potential have been studied. In comparison to Campos Basin, where FPSO Espirito Santo is anchored in, the weather in deepwater offshore Sabah is less harsh and the geology is less complex, consequently making offshore Sabah a better option.
• We make no changes to our forecast projection for MISC at this juncture, and maintain our BUY call, with a target price of RM9.75.

Source: MIDF Research - 9 Sep 2024