This article first appeared in The Edge Financial Daily on April 2, 2020

KUALA LUMPUR: Yinson Holdings Bhd announced the cancellation of a long-term floating production storage offloading (FPSO) vessel charter job in Ghana valued at over US$2 billion (RM8.7 billion).

The termination of the FPSO Pecan project by client Aker Energy Ghana Ltd came less than two months after a letter of intent (LoI) was awarded to Yinson in February.

Aker Energy suspended the project until further notice in view of the uncertain, volatile and low oil price environment presently, and has yet to set a date for the project to resume.

Analysts are, however, still positive on Yinson, noting its 30% share price decline in March as being oversold, as well as the low breakeven costs estimated for its current and upcoming projects particularly in Nigeria and Brazil.

“As per the LoI, Yinson will still be paid ‘agreed retainer fees’ on a monthly basis for works associated with this job should the signing be delayed beyond the September signing date,” said Maybank IB Research analyst Liaw Thong Jung in a note.

CGS-CIMB analyst Raymond Yap wrote in his research note that Yinson may be luckier in Brazil, where breakeven costs are said to be under US$10/barrel (bbl). This compares with FPSO Pecan which has a projected breakeven cost above US$40/bbl.

Currently, Yinson is bidding for one project in Brazil under Petrobras SA (FPSO Parque das Baleias (PDB)). This is on top of the US$5.4 billion FPSO Marlim-2 time charter in Brazil with Petrobras.

To be sure, FPSO Abigail Joseph, which is expected to begin operation in Nigeria this June, also has low breakeven costs, according to reports.

Yinson’s share price reflects some contract cancellations

On Yinson’s current share price, CGS-CIMB’s Yap explained that the market has not just excluded new project wins, but also priced in the potential impact of low oil prices on ongoing projects as well.

He pointed to three existing contracts that could be impacted by low oil prices: FPSO Helang in Sarawak, and FPSO Bien Dong and FPSO Lam Son in Vietnam.

Removing the three FPSO projects as well as the potential win of FPSO PDB would value Yinson at RM5.14 apiece, Yap said.

“It must be said that renegotiation or termination of the FPSO Bien Dong, FPSO Lam Son or FPSO Helang does not mean that these contracts have zero value,” said Yap.

“In our view, Yinson’s share price is too low relative to its strong management team, robust risk mitigation policies, and valuable contracts on hand,” he said.

Still, looking back at the past one year, this is the second time that Yinson’s contract has been cancelled due to external factors.

In September 2019, its 49%-owned joint venture in Vietnam for a charter contract worth US$1 billion over a 15-year period was terminated due to the Vietnam-China maritime border dispute. For that job, Yinson received full compensation as well.

“It’s a big deal [the FPSO Pecan termination], although the share price has already priced this in,” said an analyst covering the sector.

“The bigger risks are the Brazil jobs (Marlim-2 and PDB),” said the analyst. While FPSO PDB has not been priced in by investors, the same cannot be said for FPSO Marlim-2, which is slated to operate from 2023 onwards.

Certainly Yinson’s contract structure, with clauses in place to safeguard against premature contract termination, and project-financing debt structure, combined with strong partners, puts investors at ease.