Analysts: Shell counterclaim won’t affect MISC’s cash flow

PETALING JAYA: Analysts do not expect the US$583 million (RM2.5 billion) counterclaim filed against MISC Bhd by Sabah Shell Petroleum Co Ltd (SSPC) will have a cash flow impact on the shipping firm.

While the potential impact to MISC’s bottom line is still uncertain pending assessment, Hong Leong Investment Bank (HLIB) Research said it takes comfort from the fact that the contract under Gumusut-Kakap Semi-Floating Production System (L) Ltd (GKL) provides a limitation of liability clause, which limits GKL’s total liability to Sabah Shell to a maximum amount of US$200 million.

Even if the counterclaim is successful, HLIB Research said MISC would only pay back SSPC via reduction in lease rates of the GKL contract in contrast to a lump sum payment.

MISC’s share price fell as much as 2.1% before closing 6 sen or 0.8% lower at RM7.50 yesterday.

Meanwhile, Kenanga Research said the counterclaim of SSPC is a negative surprise as the basic counterclaim is double the amount awarded via arbitration proceedings in February.

Last Friday, MISC announced that SSPC has filed its statement of defence and counterclaim (SDCC), whereby SSPC has refuted MISC wholly owned subsidiary GKL’s claims and is counterclaiming against GKL for alleged defective work, alleged limited functionality of the Gumusut–Kakap Semi-Floating Production System, liquidated damages amounting RM2.5 billion and a refund of the full amount paid to GKL under the adjudication decision rendered in the adjudication proceedings.

Recall that GKL commenced legal proceedings to seek resolution on contractual disputes covering claims for outstanding additional lease rates, payment for completed variation works and other associated costs under the lease agreement dated Nov 9, 2012 between GKL and SSPC for the construction and lease of the Gumusut-Kakap Semi-FPS.

In February, GKL was awarded a total sum of about US$255 million as additional lease rates via the adjudication proceedings.

Kenanga Research made no changes to MISC’s current estimates as the arbitration hearing has been fixed in the first quarter of 2019, but do not discount the possibility of provision pending further material development of the arbitration proceedings which will be made in due course.

The research house is maintaining a “market perform” call on MISC with an unchanged target price of RM8.04. The group is looking for market recovery within the petroleum shipping space at earliest the second half of 2017, backed by sustainable demand and moderation of fleet growth.

LNG charter rates are still under pressure due to overcapacity, which is likely to last until 2018 and charterers are seeking shorter contract term of 7-10 years instead of 15-20 years, said Kenanga Research.