We view Yinson’s disposal of a 50% stake in Petroleo Nautipa (PN) to be in line with  its  conservative strategy to avoid reservoir risk, and  could free  up  funds  for  more  floating  asset  opportunities.  We  shed  6%/8% from our  FY15F/16F  earnings  estimates upon PN’s disposal. Our SOPbased FV  is  nudged  lower  to  MYR2.60  (from MYR2.70).  Downgrade  to SELL,  as  catalysts  are  priced  in  and  Yinson  is  currently  trading  at  a premium vs its local peer. 

Conclusion of the deal.  On 24 July, Yinson  announced its decision  to sell its 50% stake  in  PN to BW Offshore (BWO NO, NR)  for  USD59.3m (MYR188m)  cash. The disposal (1.7x P/BV and 10x P/E) is expected to be  completed  by  3QCY14  with  a  MYR78.7m  gain  on  disposal.  PN  is producing in the Etame offshore field in Gabon, for an 8-year firm period (2012-2020) with extension options up till 2022.

Low  returns  for  Yinson.  According  to  management  at  last  Friday’s briefing, the deal’s projected internal rate of return (IRR) is: i)  -3% based on the 8-year firm contract,  or  ii) low-single digit  of  <3%  including  2-yearextensions.  We  believe  the  disposal  is  in  line  with  management’s strategy to minimise reservoir risk. The production profile of the field may decline  to  3k  barrels  per  day  (bpd)  by  2022,  a  level  that  may  be uneconomical. Current production is  understood to be  19k bpd vs PN’s production capacity of 30k bpd of oil. 

The  decision  reiterates  Yinson’s  conservatism  as  we  believe management  has  opted  not  to  pursue  redeployment  opportunities surrounding the Etame field, which  is part of a concession that includes the Avouma, Ebouri and South Tchibala fields. PN may tie  up to nearby fields –  it was granted an additional eight  (firm) years from its original 10 year firm contract  since 2002.  We believe  the buyer has a different risk appetite  and  accepts a  higher reservoir risk for a  better  chance of  PN’s redeployment. Assuming this scenario, the deal’s IRR could be >3%.

Downgrade  to  SELL  (from  Neutral),  MYR2.60  FV  (from  MYR2.70).We  lower  our  FY15F/16F  earnings  estimates  by  6%/8%  due  to  the absence  of  PN’s  contribution  of  a  MYR15m-20m  associate  profit.  The stock (at a 25x FY16F P/E) is trading at a premium to its local peer, Bumi Armada  (BAB  MK,  BUY,  FV:  MYR4.54,  at  a  17x  P/E).  We  believe  the market  has  factored  in  >1  new  job  wins  which  could  materialise  in 2HCY14.  While  Yinson has  room  for  additional  floating  asset jobs  (net gearing  at  0.5x),  it  is  competing  against  more  aggressive  peers  with bigger balance sheets and track records. 

Source: RHB