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This article first appeared in The Edge Malaysia Weekly on October 8, 2018 - October 14, 2018

OCT 26 is the deadline for TH Heavy Engineering Bhd (THHE) to submit its regularisation plan to Bursa Malaysia, which is crucial for it to exit Practice Note 17 (PN17) status, a category for financially distressed companies.

But sceptics doubt that THHE, which operates a fabrication yard in Pulau Indah, will be able to meet the deadline, which the stock exchange has already extended once.

This was in May, a month after the ailing oil and gas company was categorised a PN17 company. It was given five more months to submit its regularisation plan to the relevant authorities for approval.

Nonetheless, there is now talk of THHE, in which Lembaga Tabung Haji holds a 29.08% stake, seeking more time from Bursa. But whether the regulator will show the company any leniency is anybody’s guess.

“We [in the oil and gas industry] have not heard of anything, any plan, or white knight coming in [for THHE]. And the people who previously stepped in to rescue the company have their own set of problems now,” says an industry player.

Questions to THHE CEO Suhaimi Badrul Jamil went unanswered.

 

Lifeline cut

Before May this year, there was market talk that certain contracts linked to the RM4 billion Trans-Sabah Gas Pipeline (TSGP) could be injected into THHE, which would have given the company a shot in the arm.

But it is a drastically different scenario after GE14. The Pakatan Harapan government has decided not to go ahead with TSGP, which involves the laying of a 662km pipeline from the Kimanis Gas Terminal to Sandakan and Tawau.

The project was among the “red files” discovered by the PH government. The crux of the matter is that although 88%, or RM3.5 billion, of TSGP’s total cost has already been paid, the only work done so far is the clearing of 12% of the land.

Before THHE slipped into PN17 status, Tabung Haji’s former chairman, Datuk Abdul Azeez Abdul Rahim, who was also the member of parliament for Baling at the time, was said to have helped the oil and gas company bag a RM738.9 million contract for the supply, delivery, testing and commissioning of three offshore patrol vessels (OPVs) for the Malaysian Maritime Enforcement Agency, in partnership with Destini Bhd.

THHE holds a 49% stake in the joint-venture company, THHE Destini Sdn Bhd, while Destini controls the rest.

Market talk had it that Azeez was looking to secure more work for THHE. But he is probably out of action now as he and two of his family members were remanded by the Malaysian Anti-Corruption Commission (MACC) late last month, thus dashing hopes of THHE finding its financial footing anytime soon.

 

Two income-generating assets

Bluntly put, the oil and gas company’s two assets have not generated as much earnings as it would have hoped.

Its 56.79-acre fabrication yard in Pulau Indah, Selangor, is its core asset. However, the yard has been blacklisted by Petroliam Nasional Bhd (Petronas) since April 2016, after the non-performance of the procurement, construction and commissioning of KNPG-B Topside PH II, Kinabalu Non-Associated Gas Development Project.

The company’s other core asset is a floating production storage and offloading (FPSO) vessel, currently on a novation contract with Yinson Bhd for the provision of engineering, procurement, construction, installation and commissioning and leasing for Layang FPSO that was awarded by JX Nippon Oil & Gas Exploration (M) Ltd for RM374 million cash.

THHE utilised the RM374 million it received in early June this year to settle debt obligations.

Named Deep Producer 1, THHE’s FPSO was bought for US$82.5 million — about 40% of the US$200 million the previous owner had spent on building the vessel — in July 2011 when high crude prices were fuelling a global oil boom.

While the purchase seemed like a good deal, the FPSO was bought without a locked-in charter contract. This was a risky move as THHE burnt RM2 million a month while awaiting a chartered contract.

Finally, three years later, it secured a US$900 million chartered contract from JX Nippon Oil & Gas Exploration to deploy the FPSO to the Layang oil and gas field, off Sarawak’s shores. Based on calculations and the exchange rate at the time, the contract was expected to provide THHE with a recurring income of about RM70 million a year.

However, it incurred a conversion cost of US$230 million or RM875 million.

 

Tabung Haji’s call

There is a good chance that the equity interest of Tabung Haji in THHE could be bumped up. To recap, Tabung Haji, the single largest shareholder of the oil and gas company, was the sole subscriber for its rights issue of Islamic irredeemable convertible preference shares (ICPS) in 2015.

The pilgrims fund pumped in RM275 million of fresh capital for 99.76% of almost 1.1 billion of the ICPS in the cash call. The tenure of the ICPS is five years.

Tabung Haji will control more than 64% of the company should it convert the preference shares. This means the ball will be in the pilgrims fund’s court if THHE decided on a recapitalisation .

THHE has been bleeding red ink since its financial year ended Dec 31, 2014 (FY2014). It had accumulated losses of RM697.07 million as at June 30 this year.

For the six months ended June 30, the company incurred a net loss of RM104.23 million on revenue of RM329,000. Its operating cash flow was in a deficit of RM101.05 million.

Its borrowings were not a concern — RM81.3 million for the short term and RM69.92 million for the long term — but its payables were, having ballooned to RM455.42 million. This large amount is due for payment soon, adding more stress to THHE’s financial condition. Its cash balance stood at RM68.8 million as at June 30.

While THHE has no other substantial shareholder than Tabung Haji, the names on the list are nevertheless interesting: Pelaburan Mara Bhd (formerly Amanah Saham Mara Bhd) with 4.61%; Mohamad Faroz Mohamad Jakel, a well-known businessman with interests in textiles and property, with 3.38%; Datuk Seri Hadian Hashim, the substantial shareholder of special purpose acquisition company, Sona Petroleum Bhd, with 0.54%; and Yayasan Pok dan Kassim, which is linked to former Perlis menteri besar Datuk Shahidan Kassim, with 0.36%.

This is not the first time THHE has been in PN17 status. It was also financially distressed between March 2010 and October 2012. Indeed, a year after it exited PN17 status, THHE’s market capitalisation soared to a record of RM898.3 million compared with the RM67.3 million seen last Thursday.

Will the recent recovery in crude oil prices make THHE’s regularisation easier? Perhaps Tabung Haji and the CEO know better.

 

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