Potentail Petrobras job positive for MISC but execution risks are high

PETALING JAYA: Petrobras is close to awarding MISC Bhd with its first floating-production storage and offloading (FPSO) job in Brazil for the Mero-3 but the execution risks are high.

CGS-CIMB Research said MISC would celebrate its first major FPSO contract win after a long hiatus but it was cautious due to the high 40% local content requirement for the project.

The research house said this was coupled with MISC’S relative inexperience in executing large FPSO projects, especially those abroad.

“Although MISC has a 49% stake in FPSO Espirito Santo that has been leased to Shell Brasil since 2009, the project was executed by its 51% joint-venture partner SBM Offshore.

“MISC’S Gumusut-kakap, a Us$2bil capex project and MISC’S only large FPSO project to-date, has been embroiled in legal and technical disputes with lessor Sabah Shell since its inception in 2013,” it said in a research note.

The research firm said it would not pin its hopes too high for the FPSO Mero-3.

CGS-CIMB downgraded its rating on MISC from “add” to “reduce”, with a lower sump of parts (Sop)-based target price of RM7.94 as it cut its second-hand valuation of MISC’S crude tanker fleet.

It had expected the end-2020 value of the tanker fleet to be 15% higher than the end2019 level, but prices have instead corrected 5% to 7% up to last week.

“The ongoing dynamics of the tanker market, with rates likely headed lower, suggests that prices may fall further.

“We have pencilled in another 5% decline to end-2020 from current levels,” the research house said.

It also said tanker earnings may remain weak for the rest of the year as floating storage has a lot more room to decline and also because of the extension of the Opec+ output cuts to the end of July 2020.

“Our Sop-based target price does not include an estimated 11 sen per share value from the potential FPSO Mero-3 award, which only accounts for an additional 1.4% of our current SOP of RM7.94.

“If MISC’S share price pops after the potential Petrobras award, we would advise investors to lighten up on their MISC positions even more,” it said.