Yinson has to manage execution risks as workload grows

  • Business Premium
  • Saturday, 08 Jun 2019

CIMB Equities Research has downgraded Yinson Holdings Bhd from Add to Hold after the share price rallied 23% over the past three months.

Yinson Holdings Bhd will have a lot on its plate as it will have to juggle two large potential floating production, storage and offloading (FPSO) contracts to be secured, along with the acquisition and restructuring of Ezion Holdings Ltd.

According to CGS-CIMB, Yinson will have to convince investors that it is able to manage the increasing execution risks of a sudden scale up in its workload.

“If Yinson does indeed win two major FPSO contract awards as we have assumed, we would much prefer Yinson to focus on the critical phase of project execution and delivery.

“Coincidentally, the Ezion acquisition, which Yinson has been pursuing for more than a year, is still awaiting regulatory approval and may be consummated at just about the same time.

“We trust that Yinson has excellent management, but cannot help but worry that the team will be stretched to their max, and any missteps in FPSO project execution can be very costly,” says CGS-CIMB in a recent report, adding that some investors have expressed discomfort over the sudden expansion in Yinson’s workload.

The research house says that while Yinson is ultimately only interested in Ezion’s liftboat business, it will have to untangle the messy web that currently makes up Ezion, while handling two potential large-FPSO contract wins.

Global oil and gas news portal Upstream recently reported that Yinson is deemed to be at the forefront of two FPSO bids in Brazil and Ghana.

Japan’s Modec has since trimmed its bid scope to supply one FPSO unit for the Marlim project by Petrobras in Brazil, instead of two units previously.

This was due to Modec’s large outstanding orderbook, particularly after securing the Buzios-5 FPSO award from Petrobras.

“Yinson is in the running for both Marlim I and Marlim II contracts, though the group will only accept one award, if successful.

“Without alternative bidders, this means that Modec and Yinson will likely secure one Marlim FPSO contract each, in our view, as long as their price offers are acceptable to Petrobras,” says CGS-CIMB.

Marlim I FPSO shall have a capacity of 80,000 barrels of oil per day (bpd) and seven million cubic metres per day of natural gas (cmd), while Marlim II FPSO shall have a capacity of 70,000 bpd and four million cmd of natural gas, expected to commence production in 2022 and 2023.

Meanwhile, the pursuit of Aker Energy’s Pecan FPSO contract in Ghana is also down to two bidders - Netherlands’ SBM Offshore and Yinson.

According to Upstream, Aker Energy is expected to finalise the bid and decide on the winner at end-June.

It appears that SBM Offshore is eager to penetrate into the West African market, as compared to Yinson, which has established its presence in West Africa as it currently operates the JAK FPSO in Ghana.

The Greater Pecan FPSO will have an oil processing capacity of 110,000 barrels per day and storage capacity of 1.6 million barrels of crude oil.

“If Yinson wins one of the Marlim FPSOs, it will have the balance sheet capacity to take on one more large FPSO project, which could be either the Parque das Baleias FPSO in Brazil, or Aker Energy’s Pecan FPSO.

“However, in order to manage its risks in a new market that is Brazil, Yinson may opt for the Pecan FPSO as a lower-risk option, since it has an established presence in West Africa,” said CGS-CIMB.

As for the acquisition and restructuring of Ezion, CGS-CIMB opines that this will be a time-consuming process, given the involvement of multiple assets, jurisdictions, customers and stakeholders.

This is particularly for the required restructuring of legacy offshore support vessels (OSV) and jack-up (JU) rigs businesses as well as the development of Ezion’s lifeboat business.

Ezion currently has a fleet of 11 liftboats, of which eight are wholly-owned.

Currently, seven liftboats are being employed and in FY18, the liftboat business achieved an average utilisation rate of 53%.

CGS-CIMB says Ezion expects to begin the charters of these four liftboats by end-2019 or early 2020, subject to banks releasing the working capital financing.

Ezion offers competitive rates and charterers are willing to wait for Ezion’s liftboats as there are few other alternatives available.

“Ezion’s liftboat assets are reasonably young and have good potential for deployment in Asia, Middle East, Europe, and West Africa.

“As the construction of oil and gas platform structures picks up and as more offshore windfarm assets are constructed, Ezion can expect to secure more work.

“However, the real delta in earnings will come when daily charter rates (DCRs) increase, but it may take some time for this to materialise,” says CGS-CIMB.

Apart from that, Ezion owns a fleet of 18 JU rigs comprising 14 JU drilling rigs, three accommodation rigs, and one Mobile Offshore Production Unit (MOPU).

To date, 12 of its JU drilling rigs and all of Ezion’s accommodation rigs are unemployed, translating to a high unemployment rate. For FY18, the JU rig business only achieved an average utilisation rate of 29%.

Going forward, Ezion will likely keep only three units while the rest of the rigs will be put up for sale.

“Ezion’s legacy JU rigs business is not something that Yinson will want to retain, with the exception of perhaps a handful of assets. However, the process of disposing them could be time consuming and messy.

“Yinson may explore using Ezion as the vehicle for its OSV business, by injecting Yinson’s four OSVs to merge with Ezion’s OSVs,” says CGS-CIMB.

On April 1, 2019, Yinson announced that it planned to take over up to US$916mil (RM3.81bil) of Ezion’s secured bank borrowings and convert them into new Ezion shares.

Yinson will eventually own at least 70% of Ezion, the banks 16% and the original Ezion shareholders’ stake will be diluted to 14%. Using FY18 financial statements, Yinson’s proposal will likely help Ezion recover from a negative equity position of US$352mil, to a positive equity position of US$555mil.

Yinson’s entry price into Ezion of US$200mil cash means that Yinson is entering Ezion at a price-to-book value multiple of approximately 0.5 times.

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