Asian companies have taken a battering in the offshore industry downturn. Singapore's Ezion and Ezra have gone into liquidation, Malaysian OSV builder and owner Nam Cheong is currently in default on its loan repayments, construction player Swiber Holdings is still under judicial management five years since it plunged into crisis, Singaporean banks have hung a "for sale" sign outside troubled OSV owner Emas Offshore (here), and the Pang family has sold Pacific Radiance to an American investment firm, ENAV (here).
That's just a quick summary. Also, Singapore's two main shipyards Keppel O&M and Sembcorp Marine are trying to merge after years of losses in their offshore fabrication businesses, write-downs on rigs that owners abandoned, and a series of delays in payment and delivery from key customer Borr Drilling (here). Oh, and Malaysian player Bumi Armada is in the process of selling its entire fleet of OSVs and construction units to focus on its "core" floating production business, as it battles to pay down over US$1.5 billion of debt.
But whilst other South East Asian players are struggling, one company seems to be consistently bucking the trend. No, not dive support vessel owner Ultra Deep Solutions, which is currently caught up in an internet mud-slinging battle with Triumph Subsea! No, not our favourite Aussie phoenix that rose from the ashes and tax default of Otto Marine, Go Offshore.
Instead, we refer, of course, to Yinson Holdings, the Malaysian company that seems to go from strength to strength in the FPSO sector. Since 2011, Yinson's stock price is up 900 per cent. One US dollar invested in 2011 is now worth nine dollars, a return very similar to that of Google/Alphabet over the same period.
Yinson now has a market value of nearly US$1.4 billion. Over the same period, Bumi Armada, a much more well-established FPSO company also based in Malaysia, and working in an almost identical market segment, has seen its shares fall by over 70 per cent. Bumi Armada now has a market capitalisation of around US$700 million.
As we advised with James Fisher and Sons (here), when something looks too good to be true, it probably is.
The rags to rich story of Yinson is seemingly a captivating tale of hard work and entrepreneurship. The company's history (here) begins, "In 1983, Yinson was founded by Lim Han Weng as a humble transport and logistics company in Johor Bahru, Malaysia. Thanks to an unwavering commitment to excellent customer service and on-time delivery, the little company grew exponentially. In 20 years, Yinson became one of Malaysia's biggest transport companies, operating a fleet of 365 trucks and supplying a further 565 trucks to our customers…."
Then in 2010, the company bought five tugs, and in 2011, it was awarded its first FPSO contract in consortium with PetroVietnam Technical Services Corporation (PTSC, a subsidiary of state-owned PetroVietnam). The joint venture company was awarded a contract for the charter of a floating, storage, and offloading vessel (FSO), named FSO PTSC Bien Dong 01.
One might wonder why PTSC considered a company like Yinson, which had never owned an FSO or a tanker before, to be a suitable partner for a large, long-term offshore contract, but we'll leave that question for another day. This success with PTSC, in the words of Yinson's website, "paved the way for Yinson to win a contract for the charter of a floating, production, storage, and offloading vessel (FPSO), named FPSO PTSC Lam Son, again in conjunction with PTSC. The day rate for the unit was reported as US$201,000 for ten years firm (here).
Quite a pay day for Yinson, although it only holds 49 per cent of each Vietnamese unit, with PTSC holding the balance.
Bumi Armada has also been successful in Vietnam with a consortium in conjunction with Vietsovpetro, a PetroVietnam joint venture, for the long-term contract for the Te Giac Trang field FPSO for the Hoang Long Joint Operating Company, in which PetroVietnam is also a partner.
We hope Yinson and its external auditors PwC have conducted a thorough compliance review of the PTSC and Lam Son contracts, as PetroVietnam and its subsidiaries have a rocky record for corruption.
Indeed, in 2018, a bumper crop of 22 senior PetroVietnam directors and managers were tried for malfeasance, including former chairman of the board Dinh La Thang, who was sentenced to 18 years in prison in Hanoi (here).
Fortunately, Yinson paid PwC just less than US$1 million for its audit and non-audit services in 2012, so one would hope that compliance was an area of strength (here). The company does feature a whistleblowing hotline prominently on its webpage – call +60 1 11 662 2738 to contact Yinson's Governance, Risk Management and Compliance Department, or email: whistleblow@yinson.com
In 2014, Yinson spent US$170 million to buy the Norwegian FPSO company, Fred Olsen Production, acquiring its fleet of three FPSOs, and one jackup mobile offshore production unit (MOPU), as well as the company's management and track record.
In the most recent quarter before the take-over, Fred Olsen Production reported a profit of just US$2.8 million. This demonstrated the razor-thin margins that have characterised the FPSO business, which was the main driver for Fred Olsen exiting the sector. The acquisition sent the Yinson stock price to a fresh high.
And Yinson continued to double down, even as Bumi Armada hit problems in late 2014 when CEO Hassan Basma resigned unexpectedly just before Christmas, and its stock price came under pressure (here). Yinson has even copied Bumi Armada's strategy of investing is OSVs, and owns two AHTS and two OSVs in conjunction with PTSC in Vietnam (here).
By mid-2016, Yinson divested its fleet of lorries and onshore logistics to focus entirely on the FPSO business. In the years after the Fred Olsen acquisition, Yinson won three new FPSO projects – for FPSO John Agyekum Kufuor for ENI in Ghana; the FPSO for the Helang field in Malaysia operated by JX Nippon, and the FPSO Abigail-Joseph, for First E&P in Nigeria. The latter was a redeployment of one of the FPSOs Yinson acquired with the Fred Olsen acquisition, the unit formerly named Knock Allan, which had previously operated for nearly 10 years in the Olowi Field in Gabon for Canadian Natural Resources before the field ran dry. The vessel was chartered by First E&P in Nigeria on a firm seven-year contract.
One of the Fred Olsen units, Adoon, has been on charter in Nigeria since 2006.
Notably, the win with ENI in Ghana followed in the footsteps of Bumi Armada, which had previously been successful with ENI in Angola, winning the contract for FPSO Armada Olombendo in 2014, which produced first oil in 2017.
Like Vietnam, both Angola and Nigeria have proved countries where other FPSO players have suffered extreme reputational damage from corruption allegations. We recall that SBM Offshore paid US$827 million in fines for US$240 million of bribes paid in Equatorial Guinea, Angola, and Brazil, as we covered here. We covered further Angolan corruption here.
Nigeria, where Yinson owns and operates two FPSOs, is also notorious for corruption. Again, the company will have done well if it can navigate the complex regulatory and operational environment of the Gulf of Guinea, where piracy, nationalism, and state neglect create many challenges.
Yinson is now on an incredible roll in Brazil, with three massive FPSO projects under development. Remember that Yinson has never worked in Brazil before, but has now won three major projects there.
Its first win was the award of the contract for the conversion of the FPSO Anna Nery for Petrobras in 2019. The unit is scheduled for first oil in 2023. As we have covered extensively, Brazil's oil and gas sector as a whole, and Petrobras in particular, has been wracked by historic allegations of corruption, which predated Yinson's award of its first contract with Petrobras in 2019. Let's hope everything has been cleaned up now by the raft of prosecutions and imprisonments under the Lava Jato investigation (here).
At the start of February, Yinson announced it had signed firm contracts with Petrobras for the charter and operation of another FPSO in Brazil, to be named FPSO Maria Quiteria. Maria Quiteria will be deployed on the deepwater Parque das Baleias project in the Campos basin.
The sums involved are huge. Yinson said the estimated aggregate value of the charter and operations and maintenance contracts is around US$5.2 billion over a contract period of 22.5 years from the date of the final acceptance of the unit by Petrobras in 2024.
Additionally, Yinson has won the contract for the upgrading of the FPSO, which was formerly known as OGX-2 . After OGX went spectacularly bust in 2013, the Brazilian independent Enauta acquired the unit for US$80 million and renamed it Atlanta to produce on the Atlanta field in the Santos basin of Brazil. The contract value is estimated at US$500 million.
"Brazil is a vital market to us," Yinson Group chief executive Lim Chern Yuan said in the press release here, "and Yinson is thrilled that Petrobras, one of the most recognisable leaders in the energy sector, has entrusted us once more with the delivery of FPSO Maria Quiteria. We would like to thank Petrobras for placing their confidence in us and we look forward to continue building Brazil's energy industry together."
These contract wins have catapulted Yinson to ever greater market value and acclaim. It is now selling itself as an "infrastructure and renewables" business rather than just an FPSO player. It has 140 MW of solar capacity in production and 190 MW under development, the company says. This is equivalent to less than thirty modern offshore wind turbines, so don't hold your breath.
Investors love a green story and Yinson has provided them with some incredible statements.
"At the heart of this project is Yinson and Petrobras' joint aspiration towards tackling world climate issues," Yinson's head of offshore production, Flemming Grønnegaard, said as part of the press release for the Maria Quiteria FPSO contract award. "We look forward to implementing low-emission designs that were a key consideration of FPSO Maria Quitéria's design scope and begin realising Yinson's zero emission FPSO concept, which is an important component in Yinson's Climate Goals Roadmap."
So, producing hundreds of millions of barrels of oil is a joint aspiration to tackling climate change? Do they think we were born yesterday?
However, Yinson's core FPSO business is not without its risks, and it is a business where success and contracts have historically come to those companies most willing to take on more risk (that if we ignore the historic corruption associated with the massive contract awards in the FPSO sector, which Yinson so far and thankfully seems to have played no part).
These risks essentially fall into four categories.
Firstly, hundreds of millions of dollars have to be spent on the conversion of the FPSO units for the field-specific projects. This cash is paid out up front to shipyards and equipment suppliers. In 2021 Yinson took out a bridging loan of US$400 million for its first Petrobras project. Any cost overruns and delays have to be born by the FPSO owner, typically before a dollar of revenue is paid by the client. This has happened over and over in the history of the industry.
The wise and experienced FPSO specialist Peter Lovie sets out the problems in an article here.
Investors in all the major FPSO companies have been bitten by cost overruns in the past. I see no reason why Yinson should be immune to the problem in the future, especially on its Brazilian projects, where Petrobras is a notoriously hard paymaster.
The FPSO business is incredibly capital-intensive and the award of three huge projects in Brazil is likely to require Yinson to borrow more and more capital, which is only slowly paid back. Already Yinson has liabilities and debts of around US$2 billion.
Each big contract win means that Yinson will be required to raise more and more capital to pour into the FPSO conversions. Yinson has already completed a US$800 million refinancing exercise for FPSO John Agyekum Kufuor, with the loan successfully drawn down in April 2020 with a twelve-year tenure. Yinson has already sold down a 26 per cent stake in the Ghanaian FPSO to a Japanese consortium comprising Sumitomo Corporation, Kawasaki Kisen Kaisha (K Line), JGC Holdings Corporation, and the Development Bank of Japan.
Managing an FPSO is incredibly complicated, and invariably, things go wrong. At the extreme end we saw the explosion and destruction of the Nigerian FPSO Trinity Spirit earlier this month. The incident serves as a sad reminder of the need for strong risk management and procedures.
Earlier this month Modec, the number two FPSO player, announced that it expected its 2021 full-year result to be a loss of US$363 million. The reason was a combination of risk factors one and two:
It is worth reading the full text of Modec's profit warning and reminding ourselves that Petrobras is a hard paymaster, Brazil is a difficult operating environment, and when FPSOs have problems, they are big and expensive problems. This is something that the Malaysian stock exchange investors and Yinson's management seems insouciant about.
Modec wrote (here):
"In the FPSO Cidade de Santos MV20, which had been suspended since the beginning of 2021, the resumption of operations scheduled in 2021 was delayed to January 2022. Taking such situation into consideration, long-term profits review related to operational services was conducted, and it was found that the inevitable cost of fulfilling the obligations under the contract outweighs the economic benefits expected to be received under the contract. As a result, we expect to recognize provision of approximately ¥4 billion (US$34.8 million) for expected loss in future to fulfill the contract.
"For the same reason, an impairment loss at an equity-method affiliate of the Company, and an expected credit loss allowance for loans to [that affiliate] totaling approximately ¥6 billion (US$52.2 million), is expected to be recorded in the current fiscal year.
"In addition, in the FSO Cidade de Macaé MV15, the start of special maintenance campaign using the flotel, which was originally scheduled to be carried out in 2021, was postponed to 2022, and it turned out that the condition got worse than expected. As a result, it is expected that more repair costs will be incurred after 2022 than originally expected. Therefore, as with the FPSO Cidade de Santos MV20 above, after reviewing long-term profits related to operational services, provision for expected loss in future of approximately ¥6 billion to fulfill the contract will be recognized in the current fiscal year.
"In addition, the FPSO Guanabara MV31, which is currently under construction, is expected to have a further delay in the construction period, and some concerns were aroused about the onboard equipment. As a result, we expect to record the additional cost of approximately ¥10 billion (US$87 million) in the current fiscal year. For the above reasons, we have decided to revise the forecasts for ordinary profit and profit attributable to owners of the parent downward…"
Modec has infinitely more experience working in Brazil and the US$363 million loss for 2021, largely caused by its Brazilian projects, is a salutary warning to Yinson about the magnitude of problems that can arise in a high-cost environment like Brazil with a highly demanding client like Petrobras.
The third risk is the fact that every FPSO is unique and usually needs expensive renovation to work on a different oil field. As a result, the final value of an FPSO is hard to assess. Maybe if a repositioning opportunity exists it can maintain its value.
If an FPSO comes offhire, however, it can sit expensively offhire waiting for the right next opportunity, or may need to be scrapped.
We don't know what assessments of residual value Yinson has made about its units, but BW Offshore, the industry's number three player, provided a reminder that FPSO company balance sheets can often spring nasty surprises when FPSOs come offhire and the owners suddenly discover that they are worth less than expected.
BW issued a press release on February 9 (here) warning investors that it faced a large write-down:
"BW Offshore has decided to record an impairment to the book value of the FPSOs BW Athena, Espoir Ivoirien, Sendje Berge, Petróleo Nautipa and Umuroa amounting to US$66.6 million in the fourth quarter of 2021. The impairment reflects reduced expectation of longer term extensions to current contracts for the listed vessels that are still in operation, as well as limited potential for future redeployment for the same units and for the abovementioned FPSOs that are in lay-up.
"In addition, the company will record an impairment of US$23.8 million related to the previously announced sale of Joko Tole and associated loss from the transaction."
The final risk is the simple risk that the client goes bust or cannot meet its payment obligations to the FPSO owner. This typically happens when oil prices dive, not a problem today, or when the client's oil field produces less oil and gas than expected and the contract is terminated.
With Petrobras and ENI, and with Addax and the PetroVietnam affiliates in Vietnam, this is less of a problem. But for First E&P in Nigeria, there could be more exposure to field production issues.
Yinson may be a special and wonderful company led by geniuses, which is why it is able to avoid all the structural industry problems that have bedevilled all the other players in the FPSO industry over its long history.
I don't think so. After a 900 per cent rise in the stock price since 2011, I would be cautious. The company already has around US$2 billion of debt, and its new Brazilian contract wins expose it to further, higher levels of capital expenditure, and to higher levels of operational risk both up until first oil and client acceptance of the units in 2023 and 2024, and afterwards.
BW Offshore and Modec have highlighted that cost blow-outs and operational problems are regular occurrences in the FPSO industry.
Today, Yinson looks different to its troubled Asian peers in offshore. In five years' time, I wonder whether it will look so different.
When something looks too good to be true, it probably is.
Two weeks ago, we looked at how embattled Malaysian construction contractor Sapura Energy had served notice to its client that it was walking away from a contract to transport and install the foundations of a wind farm in Taiwan (here). Sapura is another case study of a Malaysian offshore contract that over-extended and is on life support. Stepping away from losses and delays in Taiwan was a necessity for Sapura's new CEO, as he struggles to service US$2 billion of debt.
Now vessel offshore owner POSH has joined the exodus, announcing that it is also exiting Taiwan and selling its stake in a wind farm support joint venture to Singaporean player Marco Polo Marine. The press release is here.
POSH has had a torrid couple of years.
Its POSH Terasea joint venture with bankrupt Ezion, which operated five large anchor handling tugs, was liquidated in 2019 after it defaulted on US$27 million loan (here). POSH ended up taking a hit of around US$40 million on its balance sheet as a result, and ended up buying some of the joint venture's vessels from the banks. In 2019 the Kuok Group announced it was taking POSH private (as we covered here), buying out the minority shareholders and delisting the company from the Singapore stock exchange just before the collapse in the oil price in 2020. This followed hard on the heels of the company pulling its vessels out of Africa, and successfully suing its Saudi Arabian business partner Makamin for US$11 million in 2019, as well as changing its CEO Lee Keng Lin, who moved to a business development role for the Kuok Group this year.
It's a well-known fact that Sean Lee, the CEO and part-owner of Marco Polo Marine, is a big fan of Taiwan, from where his pop-star wife Vivian Hsu hails. His company considered listing depositary receipts on the Taiwan stock exchange in 2012. Having survived the downturn, Mr Lee has set Marco Polo Marine on a path of diversification.
Last month, he announced that the company's shipyard in Batam, Indonesia was being certified Singapore-listed. Marco Polo Marine is venturing into environmentally friendly and class-certified scrapping (so-called "green ship recycling") at its shipyard in Batam, Indonesia.
Wind support fits his wider, greener vision and plays to the desires of lenders and investors. Like Yinson, he can read the mood.
But what is POSH's motivation? The wind farm sector in Taiwan is booming and activity there is at an all-time high. Local owner Dong Fang Offshore recently bought the large subsea and cable lay vessel Polar Onyx from G. C. Rieber (here). Everyone, from CWind in the crewboat sector (here) to Swire Pacific Offshore in PSVs, has been busy flagging vessels to the Taiwanese registry to work there.
So, does the sale represent the savvy Kuok Group cashing out at the top of the Taiwanese wind market? Since the price is not mentioned, it is hard to tell. Or is this an attempt to tidy up the group's structure ahead of a possible sale of POSH by the parent Kuok Group? There have been many rumours about Singapore-based OSV companies being sold to American interests in the last year, but so far only Pacific Radiance has actually done a deal (here).
What's clear is that POSH went into Taiwan with all guns blazing less than four years ago (here) and is now retreating, claiming it is more interested in the currently nearly non-existent floating wind market, rather than the booming fixed turbine market. This seems very odd.
We have so many questions, but as we saw with Shell and Prelude, the carbon capture and storage saga at Gorgon, and the allegation of corruption against BP and Socar in Azerbaijan over the Shah Deniz 2 project last week (here), the truth in offshore often takes a long time to emerge.
When it does, we'll let you know.
Background Reading
Bumi Armada's most recent investor presentation for the period ended on September 20, 2021 is here.
Yinson's 2021 annual report is here.
More information on Vivian Hsu's acting, modelling and music career can be found here. It's not often an offshore ship-owner marries a bona fide superstar!
Our previous piece on the theme of something looking too good to be true was our analysis of Topaz Energy and Marine in 2019, which you can read here.