KUALA LUMPUR (Jan 24): TH Heavy Engineering Bhd has proposed to novate a contract awarded to it by JX Nippon Oil & Gas Exploration (Malaysia) Ltd to Yinson Energy Sdn Bhd for RM374 million cash.
The previous contract with JX Nippon had entailed TH Heavy leasing a floating production, storage and offloading (FPSO) vessel for JX Nippon's Layang project — a gas production field located in Block SK10, offshore Sarawak. The contract value of the JX Nippon contract was US$372 million (RM1.51 billion) for the initial charter period and US$457 million (RM1.85 billion) for the extended charter period.
TH Heavy said the proceeds of the proposed novation will be mainly used to repay its creditors.
In a filing with Bursa Malaysia today, the offshore fabrication and marine services company, which is 29.81%-owned by Lembaga Tabung Haji, said it will enter into an agreement with Yinson Energy and JX Nippon to govern the terms of novation of the JX Nippon contract. However, the proposed deal will not entail the disposal of the FPSO Layang vessel to Yinson Energy.
At the same time, TH Heavy and Yinson Energy will sign a separate agreement to govern the terms of payment of the novation consideration by Yinson Energy to TH Heavy pursuant to the proposed JX Nippon contract novation.
The three companies will enter into these agreements subject to finalisation of the terms of these agreements by the relevant parties and/or relevant regulatory approvals, TH Heavy added.
TH Heavy, a Practice Note 17 company since April 28, 2017, has faced difficulties raising funds to repay creditors due to the lacklustre financial performance of the group.
"As such, TH Heavy proposes to undertake certain disposals of assets or businesses as an alternative to raise the required funds to repay the scheme creditors under the scheme of arrangement (SoA), which include the proposed JX Nippon contract novation," it said.
The physical completion of the FPSO Layang vessel is currently at 42.92%.
"As the conversion of the FPSO Layang vessel has yet to be fully completed, it is presently not fit for use and not of sea-going condition. Assuming TH Heavy hands over a completed FPSO Layang vessel to JX Nippon pursuant to the JX Nippon contract, the board envisaged the need to incur at least additional capital expenditures of US$107.2 million (RM433.9 million) in order to put the FPSO Layang vessel on stream," said TH Heavy.
Post completion of the proposed contract novation and other components of the proposed regularisation plan of TH Heavy, it said the FPSO Layang vessel will continue to be held as a capital asset of the group.
"TH Heavy will try to procure strategic partner(s) to secure suitable bareboat charter contracts for FPSO Layang vessel for charter in the future or to dispose of the FPSO Layang vessel to a third party, subject to consent and approvals of any relevant parties and/or persons being obtained," it added.
As at Dec 31, 2016, the audited net book value of the FPSO Layang vessel stood at RM713.4 million. As at Sept 30, 2017, the unaudited net book value of the FPSO was RM748.4 million.
TH Heavy also noted that in the event the proposed contract novation does not materialise, the JX Nippon contract is expected to be terminated by JX Nippon, leading to a complete loss in value to the group, as well as exposing it to the liability of paying the delay liquidated damages.
TH Heavy was unable to achieve the original handover date scheduled on June 30, 2016, exposing the group to the maximum delay liquidated damages that can be charged under the JX Nippon contract of US$18.61 million (RM75.31 million).
TH Heavy shares closed up 0.5 sen or 4.76% at 11 sen today, with 10.83 million shares done, for a market capitalisation of RM123.33 million.