DEVELOPMENT

• This is an update from the MoU between Malaysia Marine and Heavy Engineering Sdn Bhd (MMHE) and Uzma Engineering Sdn Bhd (UESB), dated July CY23.
• MMHE and UESB had entered into a Sub-Contract Agreement (SCA) for the provision of Refurbishment, Life Extension and Conversion of a Mobile Offshore Drilling Unit (MODU), into a Mobile Water Injection Facility (WIF), valued at approximately RM43m.
• The SCA involves MMHE providing all deliverables related to fabrication engineering, demolition, repair life extension and conversion of the MODU, including all related general services. The completion of the work is expected within 1QCY25 and will be deployed into offshore Sabah to support enhanced oil recovery (EOR) operations.

OUR VIEW

• Improved tech for more efficient EOR. The MODU will be equipped with Uzma's Mobile Water Injection Facilities (UzmaWIF), a state-of-the-art solution for efficient and sustainable water management in oil and gas operations. This system is designed to optimise reservoir pressure, EOR rates, and reduce environmental impact. The conversion into a Mobile WIF will be MMHE's first floater conversion project for UESB. Water injection had long been used for EOR operations, for the benefits that include: (i) recovering an additional 20-40% of original oil in place (ooip), (ii) cost-effective with readily available technology, and (iii) improving sweep efficiency and ensuring a more uniform displacement of oil. However, water management and environmental concerns had been a prominent challenge in this method. That said, we do opine that with UESB's advanced innovation in water injection tech, along with MMHE's expertise in heavy engineering of offshore facilities, the risks of the conversion are kept at a minimal.
• High-cost vs feasibility. The conversion from a drilling unit to a water injection infrastructure can be a complex and costly operation. The rough cost for the conversion varies based on: (i) the extent of the demolition, refurbishment and installation processes, (ii) aging conditions of older units that may require additional upgrades, and (iii) logistics and regulatory challenge. Based on industry examples, such conversions can range within USD50m- 100m (approx. RM209m-420m). This estimated cost is relatively moderate in the context of upstream O&G, which only accounted for about 10% of a typical offshore project. Additionally, the feasibility and sustainability of water injections for EOR could mitigate the cost of the conversion.
• Other external risks remain. The success of the SCA might be affected by various risk factors including: (i) execution risks involving raw materials and labour, (ii) weather conditions that may be unfavourable for refurbishment operations, (iii) operational and commercial impacts that may result from political and economic uncertainties locally and globally, and (iv) unforeseen the impact of global pandemics or other endemic diseases which could disrupt workflow. We noted that MMHE has considered the risks and developed mitigation plans to deter these risks.
• All in all, we maintain positive on this collaboration with UESB. We anticipate that this is also a sign that the upstream division locally continues to be sanguine, despite the lower Brent crude oil since late Aug-24. Barring any unforeseen circumstances, we do not expect the SCA to have a material effect on its earnings, hence we make no changes to its FY25-26 forecast. We also maintain our BUY call for MMHE, with an unchanged target price of RM0.65.

Source: MIDF Research - 2 Oct 2024