This article first appeared in The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017

LATE last week, news broke that pilgrim fund-controlled TH Heavy Engineering Bhd (THHE) was in negotiations with Yinson Holdings Bhd to sell its floating production storage and offloading (FPSO) unit.

Yinson CEO Lim Chern Yuan told a news outfit last Friday that he was in “exploratory talks” with THHE, but that negotiations were at an early stage and that the possible acquisition was part of Yinson’s bigger plan to invest in distressed oil and gas assets.

When queried by the exchange, Yinson said it is still in discussions with JX Nippon Oil & Gas Exploration (Malaysia) Ltd (JX Nippon) and THHE to take over the FPSO vessel charter for JX Nippon by itself.

“This opportunity is one of the few Malaysian proposals the company is currently evaluating. The proposal remains in the discussion stage,” it added.

An oil and gas industry source says, “It could work out to be a good deal for Yinson, they are in a position to squeeze THHE for a good deal. As for THHE, it is between a rock and a hard place, not a good position to negotiate from.”

How THHE’s management navigates the company out of this quandary will be interesting.

For starters, THHE may have to acquire another asset to help it generate revenue, as its only other asset capable of generating revenue is a 56.79-acre fabrication yard in Pulau Indah, Klang, Selangor, that has been blacklisted from Petroliam Nasional Bhd contracts since April last year.

In fact, in October this year, THHE announced that on Oct 9, THHE Fabricators Sdn Bhd — a wholly-owned subsidiary — had received a letter from Petronas, excluding it from being a main contractor for major fabrication works; engineering, procurement, construction and commissioning works; engineering, procurement, construction, installation and commission works; procurement, construction, installation and commissioning works; and procurement, construction and commissioning works.

“Pursuant to the above exclusion, and so long as THHE Fabricators remains excluded, Petronas (including its subsidiaries) and Petroleum Arrangement Contractors shall not award any new contract to THHE Fabricators for the above scopes and THHE Fabricators shall not be allowed to participate in any tender related to the above scopes,” THHE said.

The fabrication yard in Pulau Indah has a net book value of RM138.3 million as at end-2016. It is not clear what the company plans to do with its only remaining asset.

THHE, after much lobbying, has 49% of a joint venture with Destini Bhd to undertake the supply, delivery, testing and commissioning of three offshore patrol vessels valued at RM738.9 million, but how well this contract is doing is not known as the company’s earnings are very weak.

In dire straits?

Things have not exactly been going well at THHE. It managed to obtain an extension of three months from Aug 23 — a second extension — for its creditor’s scheme. This means that it has about a month to come up with a plan or some form of compromise with its creditors.

For the first half of FY2017 ended June, THHE suffered a net loss of RM37.97 million from only RM4.63 million in revenue.

As at end-June, the company had RM22.4 million in cash and cash equivalents. However, it had short-term debt commitments of RM295.1 million and long-term borrowings amounting to RM55.12 million with accumulated losses of RM532.64 million.

Much of its revival hinges on the FPSO.

“Fabrication contracts were too lumpy and the FPSO was acquired to provide a steady stream of income for THHE, but that hasn’t quite panned out as planned,” the oil and gas industry source says.

THHE acquired the FPSO, Deep Producer 1, (formerly the 68,000dwt tanker MV Laurita) in July 2011, at a cost of US$82.5 million, which was about 40% of the US$200 million the previous owners spent building the vessel. However, the FPSO was acquired without a locked-in charter contract and burnt in the region of RM2 million a month.

The FPSO bagged a US$900 million contract from JX Nippon Oil & Gas Exploration only in May of 2014, and it was slated to be deployed at the Layang oil and gas field, located in Block SK10 off Sarawak. However, the conversion cost was some US$230 million, or RM875 million back then.

The FPSO was to have been ready last year, but THHE managed to get an extension for another two years — until 2018 — after which the FPSO was to be leased to JX Nippon until November 2023, with an option to extend the lease up to October 2033, annually.

At calculations and exchange rates back then, the JX Nippon contract was to provide  THHE recurring income of about RM70 million. But with talk of the FPSO being sold, its revenue stream seems less clear.

Worse still, its debts are mounting. The company has a RM240 million sukuk facility, which is secured via a mortgage on the FPSO and the long-term leasehold land and buildings, and is pegged with a coupon rate of 7% per annum.

Some RM170 million of the sukuk facility was to be repaid via bullet repayments in September last year, which was also the maturity date, but THHE managed to obtain a one-year extension for the repayment, that is from September 2016 till September 2017, as the company announced that it was in the midst of finalising a scheme with its creditors, including the sukuk holders.

Pilgrim fund unlikely to pump more money into THHE

THHE’s 29.81% shareholder, pilgrim fund Lembaga Tabung Haji (LTH), was the sole subscriber for THHE’s cash call — Islamic irredeemable convertible preference shares (ICPS) — in 2015.

To recap, THHE had issued 1.19 billion renounceable rights issue of new Islamic ICPS of 25 sen par value at an issue price of 25 sen on the basis of 16 ICPS for every 15 shares held in THHE, with a tenure of five years.

LTH subscribed for 99.75% of the 1.1 billion ICPS offered and raised RM275 million for THHE. This means that LTH will control 64.57% of the company if the preference shares are converted. The preference shares can be converted at any time within the five-year tenure.

Considering LTH is sitting on a huge loss with THHE, it is unlikely more money will be pumped in.

LTH got into this position when it bought into Ramunia Holdings Bhd, the previous incarnation of  THHE, in 2008. To recap, early that year, MISC Bhd proposed to inject its oil and gas unit, Malaysia Machine and Heavy Engineering Sdn Bhd, into fabricator Ramunia in a reverse takeover. The proposal, valued at RM3.2 billion, was called off after MISC announced that there were unsatisfactory due diligence findings.

LTH turned out to be the biggest loser as it got stuck with almost 29.7% of Ramunia’s stock and showed a paper loss of some RM175 million back then, having aggressively accumulated Ramunia shares before the deal fell through and with Ramunia shedding over 70% of its market capitalisation after MISC pulled out.

MISC had postponed the completion of its due diligence three times before calling off the deal, which should have been indication enough that not all was well with Ramunia. LTH emerged as a substantial shareholder in Ramunia in early November 2007, two months before the deal with MISC was announced, and aggressively accumulated shares for a good one year until December 2008.

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