Highlight Yinson’s game changer

Highlight Yinson’s game changer
Business & Markets 2013
Written by Syarina Hyzah Zakaria of theedgemalaysia.com
Friday, 21 June 2013 16:46

Johor-based YINSON HOLDINGS BHD []’s journey towards becoming the world’s sixth largest player in the floating production, storage and offloading (FPSO) segment of the oil and gas industry had begun as an accident of sorts.

Last year, when Norway-based Fred Olsen Production ASA (FOP) could not supply Lam Son — which was set up by Vietnam’s PetroVietnam and Petroliam Nasional Bhd — with an FPSO vessel because of some financing issues, in stepped Yinson.

This saw the start of its relationship with FOP, and today, Yinson is poised to take over the Oslo entity, which will make it the sixth largest FPSO owner in the world.

Globally, there are fewer than 300 FPSOs, an asset that is becoming integral to oil companies to reduce their cost of production.

These vessels command long-term charters that provide steady cash flow to oil and gas service providers.

The faces of Yinson managing director Lim Han Weng and his son and executive director Chern Yuan light up when they talk about their chance encounter with FOP.

Little did they know that the project handover in 2012 would eventually result in the company taking over FOP in a RM551 million exercise.

Just a month ago, the acquisition would have been a tall order for Yinson because as at May 14, its market capitalisation stood at only RM613 million. But it placed out a block of shares to Datuk Mokhzani Mahathir’s Kencana Capital Sdn Bhd at RM2.82 apiece, a development that was disclosed to Bursa Malaysia on May 31.

That gave the stock a major push in the recent oil and gas rally on Bursa. As its price doubled, its market cap rose to RM1.04 billion.

Chern Yuan, talking about how Yinson took over the Lam Son project in Vietnam, says,“There was talk of FOP wanting to dispose of the business for a long time, but I was not sure how serious they were until I met them.

“We talked during the handover and it seemed like they were no longer interested in the business. We saw a good opportunity and it made sense for us in terms of synergy.”

However, he adds, CEO Anette Olsen — a fifth-generation Olsen — took her time in negotiating terms with the company, although it was a friendly deal.

“The relationship started from there ... We discussed and they went to market to look for M&A, but we were always the front runner. And we got it at a price that is fair to both companies. The value that we can create out of it is enormous,” Lim points out.

He says the merger is a perfect fit for Yinson as there is no overlap between the capabilities, customers and geographical bases of the two companies.

FOP also has some experience in the new oil and gas frontiers, such as South America and Africa, which Yinson will be able to leverage.

Their combined client portfolio includes Talisman Energy, Vaalco Energy Inc, Gazprom OAO, Sinopec Ltd, Addax Petroleum, Canadian Natural Resources, PetroVietnam, Petronas and Royal Dutch Shell plc.

With the acquisition of FOP, not only has the company diversified its clientele and reach into the US, Norway and Africa in addition to its current base in Malaysia and Vietnam, but it has also gained a wealth of expertise.

Having worked with the FOP team during the handover, Chern Yuan doubts that there will be a problem in merging the companies. Moreover, FOP has a stellar track record, having built 10 FPSOs — although only three are currently owned and operated by the company — and a mobile offshore production unit in the past.

In fact, notes Chern Yuan, the availability of FOP’s FPSOs has been close to 100% annually, which reflects an operations management team that is efficient and good at what it does. This also means that the vessels have no downtime, apart from scheduled maintenance, and are always available for charter.

Yinson’s order book currently stands at close to RM8 billion. When combined with FOP’s long-term contracts, the fleet of vessels will be kept busy until 2033.

“Yinson has lacked a strong operations management team and because of that, people have always doubted our capability. When we took over the floating, storage and offloading project, there was a lot of scepticism, but we delivered it on time and within budget. That built a trust in us,” remarks Lim.

“In the past, for Yinson to grow, we had all this hardware, but no software. We were able to get contracts and assets, but we didn’t really have a team to manage them. That was what we lacked.

“With this new structure, we inherit a company with the software and track record. There are huge economies of scale and synergies to benefit from.”

Global aspirations

“It’s a big game changer and an exciting time for us,” observes Lim.

The father-and-son team aspires to make Yinson a global brand with the merger as much can be done with FOP’s track record and management skills.

The company has announced that it plans to delist FOP from the Oslo Stock Exchange if it gets acceptance of more than 90%.

To see the deal through, Yinson has secured the support of First Olsen Ltd, which controls 61.54% of FOP.

“I don’t see how we can’t compete against any other player in the world. The idea is to build our brand name with FOP’s rich history and expertise. With a bigger and stronger team of people, we’ll be more competitive than ever before,” Chern Yuan points out.

“We went from having only one asset to one client and now we are the sixth largest FPSO company in the world.”

Furthermore, the Lim and Olsen families are similar in the way they run their business — a focus on the long term, strong earnings visibility and big order books.

Says Chern Yuan, “Our investors must understand our income stream, which must suit them. If the price of oil goes up to US$200 per barrel, we won’t have sudden jumps or big dips in our earnings.

“FOP is like us. They like stability and long-term contracts and they are conservative in business. I think their philosophy is like ours.”

FOP is a subsidiary of Fred Olsen & Co, a private holding company that established a powerful and multinational shipping and shipbuilding business in Norway.

Fred Olsen & Co made its fortune in the tank business, operating a fleet of 40 in the early 1900s.

In 1973, it sold its business but re-entered the industry in the mid-1980s.

Under the group, FOP now boasts a market cap of NOK977.7 million (about RM531.19 million) while associate company Fred Olsen Energy has a market cap of NOK16.01 billion.

The Kencana link

The entry of Kencana Capital into Yinson has raised its profile and reduced the Lims’ stake in the company to 42.99% from 55.63%.

The placement of up to 15% of new shares to Kencana Capital is expected to net RM106.6 million, which will be used to partly fund the acquisition of FOP.

The rest of the acquisition will be funded by Yinson’s proposed private placement of shares, bank borrowings and internally generated funds.

According to Chern Yuan, Yinson did not want to go to the market because it needed to make sure everything was in place. But as it was slightly short of cash for the FOP deal, it approached Kencana Capital.

“We were looking at the deal and decided to take it to them. We took their advice as they also saw value in the deal, and proceeded with it,” says Chern Yuan, adding that Kencana Capital will only subscribe for the shares if the FOP deal comes through.

The subscription is part of the agreement, and the transaction is the reason Kencana Capital is investing in Yinson.

“This is a separate investment from SapuraKENCANA PETROLEUM BHD [] and there is no conflict of interest. Kencana Capital was careful that there was none,” Chern Yuan explains.

Moreover, Yinson’s FPSO production segment is vastly different from SapuraKencana’s engineering, procurement, CONSTRUCTION [] and commissioning business.

Kencana Capital will not be taking an executive position or board seat in Yinson, but it might provide guidance and educate the company on certain matters, according to Chern Yuan.

Mokhzani declined to comment on the matter.

Yinson’s rise as a marine support service outfit began several years ago when it secured a RM1.01 billion, 20-year charter contract for an FSO facility via a 49:51 joint venture with a unit of PetroVietnam.

Subsequently, the company bought a 40% stake in a new deepwater bulk port — PTSC Phy My Port — in South Vietnam, which is owned by PetroVietnam’s PetroVietnam Technical Services Corp, for RM26.38 million.

Originally designed as a jetty, the port was upgraded to handle up to 2.5 million tonnes of cargo a year. Yinson and PTSC began their partnership in 2007.

Yinson discovered the port in 2007 when it started supplying steel scrap and building materials to Vietnam in a bid to widen the geographical reach of its trading business.

Despite trading actively in other Asean markets, supplying coal from Indonesia to Malaysian power producers, Yinson first ventured into Vietnam.

It may dislike the fact that its rice bowl is in Vietnam, but it is clear that this is a land of opportunity for the company.



This article first appeared in The Edge Malaysia Weekly, on June 17, 2013.