BUCKING the downward trend in the oil and gas industry, offshore services provider Yinson Holdings Bhd has clinched a US$3.25 billion contract for its floating production, storage and offloading (FPSO) facility from ENI Ghana Exploration and Production Ltd, adding to a burgeoning order book that will keep it busy for the next 20 years.

Despite being in a jittery industry that has seen spillover effects from the over 50% drop in crude oil prices in the past six months, Yinson (fundamental: 1.5; valuation: 1.5) has emerged as a contrarian performer, clinching a multibillion-dollar contract that will see its FPSO chartered at the Offshore Cape Three Points (OCTP) block off the shores of Ghana.

Yinson group executive chairman Lim Han Weng tells The Edge that in contrast to the slide in crude oil prices to US$48 per barrel last week, the group’s numbers have actually improved.

“Because our contracts are in US dollars and the contracts are fixed, the cost of our day-to-day operations has gone down. We pay salaries in local currencies, which are now weaker than the US dollar, and spare parts’ prices have also gone down. So our cost has gone down and our profit has actually improved,” says Lim.

He adds that although the ringgit is a liquid currency, the Ghanaian cedi is not widely traded, thus the contract is in US dollars. “We have to factor in the loss in foreign exchange.

“Our business model is built for a downturn. During the bad times, we have an order book that can sustain the business. It is operating in a rather defensive currency now. It’s a very long-term business model,” Lim says when asked if he is worried about the slump in oil prices.

“However, three years down the road, if oil prices don’t recover, then there is going to be less projects and that’s when we will see problems in the FPSO industry … When oil prices go up, it will also take some time before new projects kick off.”

Acknowledging the weak sentiment in the oil and gas industry, he says the award of the latest contract is timely for the group.

“With this project, cash flow is secured, order book is secured and we’ve got work to do for the next 2½ years.”

With the new FPSO contract, Yinson’s order book has ballooned to about US$5.8 billion.

To recap, last Wednesday, the company announced that it was awarded a contract for the chartering, operation and maintenance of its FPSO by ENI Ghana at the OCTP block located in the Tano Basin, 60km off the shores of Ghana.

The contract was awarded through a consortium of Yinson Production (West Africa) Pte Ltd (YPWA) and Yinson Production West Africa Ltd (YPWAL). YPWA is a wholly-owned unit of Yinson while YPWAL is a Ghanaian 49:51 joint venture of Yinson Production Pte Ltd and Oil and Marine Agencies Ghana Ltd.

This contract, Yinson’s first West African job, is for a charter period of 15 years with an option to extend for another five years. The charter period translates into a value of US$2.53 billion. If the extension option is exercised, the value will increase to US$3.25 billion.

The FPSO for the job is currently undergoing steel replacements and will be converted to fit the needs of the field at a cost of US$1 billion. It will commence operation in Ghana in September 2017 and will start contributing to the group from financial year ending Jan 31, 2018.

Lim says Yinson will see a positive cash flow from the contract after six to seven years. “The surplus cash flow, we can either use it to reduce interest rates or we can take on other projects.

“Every year, we get dividends from our projects, which we reinvest every year for a new project. But then what happens if there are more competitors one day and there are too few projects? Rather than having to underbid to win projects, we might as well issue dividends.

“We hope that the project [at the OCTP block] will more than double our earnings, given that it’s our biggest contract size to date,” Lim remarks.

Yinson’s net profit rose fivefold to RM86.79 million for the third quarter ended Oct 31, 2014, from RM15.5 million a year earlier. Meanwhile, revenue of RM255.21 million was 7.8% higher than a year ago.

For the cumulative nine months to Oct 31, 2014, the group posted a net profit of RM147.77 million from RM41.16 million a year earlier. Revenue was also higher at RM829.8 million from RM692.42 million previously.

Liaw Thong Jung of Maybank IB Research is of the view that the Ghanaian project is positive from both an operating and financial perspective.

“This is a bankable contract with good counterparty risk. The OCTP field is commercially viable with reserves recoverable beyond 15 years,” he says in a note dated Jan 29.

Maybank IB Research estimates that the Ghana FPSO contract will contribute RM110 million to RM170 million in annual net profit from FY2018 to FY2022.

“Valuation wise, this job adds RM2.45 billion net present value, based on a 12% project internal rate of return,” says Liaw.

He adds that this job can generate total free cash flows of US$608 million from the 11th to 15th year. Assuming the extension is exercised, Yinson can generate further free cash flow of US$522 million over the 16th to 20th year.

The research house raised its target price on Yinson to RM4.35 after changing its valuation methodology to sum of parts from a price-earnings valuation previously.

Yinson’s share price closed at a record high of RM3.47 last year on Sept 15. However, it has since retreated 18.16% to close at RM2.84 last Thursday. Based on that closing price, the company has a market capitalisation of RM2.93 billion.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.

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