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KULIM’S CORE OIL & GAS SEGMENT CONTINUED TO OPERATE IN A VERY DYNAMIC AND VOLATILE ENVIRONMENT

FY 2017 was a challenging one for Kulim’s O&G Division. The volatility in crude oil prices and a weaker local currency took its toll on operating performance. Revenue was posted at RM419.71 million, which is a 32.97% decline compared to RM626.17 million achieved the previous year. From a Profit Before Tax (“PBT”) of RM21.03 million recorded in 2016, the Division has slipped into the red with a Loss Before Tax (“LBT”) of RM130.28 million.

During the year under review, our subsidiary, E.A. Technique (M) Berhad (“EA Tech”) contributed of RM366.97 million to Group revenue, a decrease of 37.98% compared with RM591.66 million recorded in 2016. EA Tech posted a LBT of RM131.90 million, against a PBT of RM21.54 million in 2016.

FY 2017 was a satisfactory year for Danamin (M) Sdn Bhd (“Danamin”), an engineering and quality assurance provider that caters to niche industries. Danamin recorded revenue of RM48.08 million in 2017, a 39.36% increase from RM34.50 million posted the previous year.  PBT increased marginally to RM1.12 million, against PBT of RM1.32 million recorded previously.

In Indonesia, the acquisition of PT Citra Sarana Energi (“PT CSE”) did not create a significant impact on our earnings in 2017. The PT CSE deal in Indonesia is part of our strategic decision to venture into upstream O&G business and move up the O&G value chain into Exploration and Production (“E&P”) activities.

However, for Kulim, this Indonesian venture remains exploratory at the current stage. Although it offered little or no contribution to the Group’s 2017 financial performance, we are confident that its contribution will grow significantly within the next few years as it enters into the production and commercialisation phase.

Given that O&G exploration,production and operations involve a variety of risks, which may expose the Group to substantial liability, Kulim ensures that the organisation practices high standard of safety precautions. Our Risk Management team continually monitors data and has in place a sound risk management strategy.

INDUSTRY DYNAMICS

Despite agreement reached by 22 OPEC and non-OPEC oil producers to cut crude output by 1.2 million barrels per day to reduce global oversupply, oil prices trended lower during the first half of the year. This was because of high inventories, a recovery in United States shale oil production and rising output from OPEC members Libya and Nigeria, neither of which were party to the pact to reduce production. However, as crude inventories were drawn down and the market started to rebalance, crude oil prices rose by 1.6% in the third quarter of 2017 to average USD50.20 per barrel. Crude oil prices ended the year at USD60 per barrel, the highest end-of-year level since 2013. (Source: World Oil Magazine, 3 January 2018)

Within Malaysia, the decision taken by PETRONAS in 2016 to slash Operating Expenses (“OPEX”) and Capital Expenditure (“CAPEX”) over the next four (4) years took its toll on almost all sectors of the domestic O&G industry. The reduction in spending has impacted overall activity and margins in the O&G sector and has delayed the implementation of bigger ticket CAPEX projects. This has indirectly posed a tremendous challenge to our marine vessel operations that support the O&G sector.



UPSTREAM ACTIVITIES - INDONESIA

In November 2008, the Indonesian government awarded a Production Sharing Contract (“PSC”) to two (2) subsidiaries of PT CSE namely PT Rizki Bukit Barisan Energi (“PT RBBE”)(formerly known as PT Radiant Bukit Barisan E&P) and PC SKR International (“PCSKR”) for the South West Bukit Barisan (“SWBB”) PSC. SWBB PSC is located onshore in the West Sumatera Province.

On 10 December 2014, Kulim signed a Conditional Subscription and Shares purchase Agreement (“CSSPA”) to acquire 60% interest in PT CSE for USD133.55 million to gain a foothold in the Indonesian market. Subsequently, on 7 February 2016, taking into account the lower crude oil prices subsequent to the date of signing of the CSSPA, Kulim inked a Supplemental Agreement (“SA CSSPA”) with the vendors, revising the investment cost downward to USD80 million.

The completion date of the CSSPA and SA CSSPA has been further extended to 4 November 2018 due to pending fulfillment of approval of the Indonesian Government and Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi (“SKK MIGAS”) in respect ofthe change of control of the PSC which is anticipated to be obtains by firsthalf 2018.

Based on the POD and requirements by SKK MIGAS, PT RBBE has completed all its obligations to drill four (4) exploration wells. PT RBBE is working closely with the Indonesian authorities to obtain the POD approval which expected in first half 2018.

SUPPORT SERVICES - MALAYSIA

E.A.T ECHNIQUE (M) BERHAD (“EA Tech”)

A public listed company since 11 December 2014, EA Tech is a marine vessel operator. Its principal activities are in marine transportation and offshore storage of O&G, provision of marine port services and marine engineering services. Its activities are supported by a shipyard at Hutan Melintang which has capabilities in shipbuilding, ship repairs and minor fabrication.

FINANCIAL PERFORMANCE

For FY 2017, EA Tech posted are venue of RM366.97 million, a decline of 37.98% from RM591.66 million recorded the preceding year. LBT was posted at RM131.90 million, as compared to a PBT of RM21.54 million in 2016. The loss was attributed mainly to higher costs incurred in the EPCIC project against the contracted sum and also increase in administrative expenses.

The higher cost of the EPCIC Project was mainly due to additional work requests from the client. The final hand-over of the project was initially scheduled for the second quarter of 2017, but to accommodate the additional work requests, the completion date has been pushed back to the first quarter of 2018. EA Tech is presently negotiating with the client to recoup some of the costs incurred in carrying out the variation orders.

Higher administrative expenses was due to discounts on receivables and amortisation of goodwill for the acquisition of Libra Perfex, a company engaged in the hiring and chartering of marine vessels.

CORPORATE DEVELOPMENTS

As disclosed in the last report,EA Tech entered into a Conditional Sale and Purchase Agreement with MTC Engineering Sdn Bhd (“MTCE”) on 22 November 2016 for the purchase of topside engineering equipment costing USD24 million. At an Extraordinary General Meeting (“EGM”) held on 20 March 2017, EA Tech received the unanimous approval of shareholders to proceed with the purchase. The acquisition was duly completed on 1 August 2017 and is in line with the EA Tech’s strategy of pursuing new projects involving the provision of Floating Storage Unit (“FSU”) solutions for Malaysia’s marginal fields.

OPERATIONAL REVIEW

EA Tech operates a total of 43 vessels, comprising 7 tankers, 2 FSUs/ Floating Storage Off Loading (“FSOs”), 3 Offshore Support Vessels (“OSVs”), 28 harbour tug boats and 3 vessels charted from external parties. The average age of the tanker fleet is 9.3 years, with the exception of the Princess Sofea that has been in service for 26 years and is due for replacement. All the vessels undergo regular and periodic maintenance,including dry-docking at EA Tech’s Hutan Melintang shipyard.

In 2016, EA Tech acquired one (1)chemical tanker and one (1) oil tanker, both of which have been refurbished and delivered in the second quarter of 2017. The year under review also saw the conversion of M.T. Nautica Muar into a FSU and it is currently being deployed by Vestigo Petroleum Sdn Bhd (“VPSB”), a wholly-owned subsidiary of PETRONAS, at the Bentara SK315 field offshore Sarawak.

EA Tech’s ship repair and minor fabrication capabilities are vested in its 100%-owned subsidiary, Johor Shipyard and Engineering Sdn Bhd (“JSE”). Operating from its new shipyard at Hutan Melintang in Perak, JSE has the capabilities to construct one (1) vesse lof up to 10,000 Dead Weight Tonnes (“DWT”) or six (6) harbor tugboats at anyone time. Upgrading works, including the construction of a new slipway which are currently still in planning stage, with targeted commissioning rescheduled for 2018.

To reduce an over-dependence onthe O&G sector, EA Tech has been actively pursuing new business opportunities in providing port marine services. During the year under review,three (3) new contracts for the charter hire of vessels were secured, of which two (2) were with Bintulu Port Sdn Bhd (Nautica Tanjung Puteri XXVII and Nautica Tanjung Puteri XXIX) and one (1) with ExxonMobil Exploration & Production Malaysia Inc. (Nautica Tanjung Puteri).

OUTLOOK & PROSPECTS

Looking ahead, EA Tech remains upbeat on its operating performance from its respective business segments. The fundamentals of the company remain strong, underpinned by a substantial orderbook of around RM492.48 million as at 31 December 2017, with an additional RM417.47 million for potential extension. The company has long-term contracts for its marine vessels, which provide a stable and recurring revenue stream.

An immediate challenge for EATech in the coming year is to focus its resources and energy to translate well-defined plans and strategies to turnaround the company. Given its significant strengths in the business, EA Tech is well-positioned to continue delivering shareholder value and to achieve sustainable progress.

DANAMIN (M) SDN BHD (“DANAMIN”)

Danamin provides high quality,cost-effective and technology-driven Engineering, Non-Destructive Testing(“NDT”), Quality Assurance, Asset Integrity Management and Inspection services to the O&G, Marine, Petrochemical, Refinery and Pipeline industries. Backed by a team of over 200 professional employees with the relevant certifications,the company has branches strategically located in the vicinity of its customers’ facilities.

FINANCIAL PERFORMANCE

The principal contributors to Danamin’s revenue are its fabrication and NDT businesses. For the year under review, Danamin generated a revenue of RM48.08 million, a 39.36% increase from RM34.50 million posted in 2016. PBT decreased to RM1.12 million, compared to the previously recorded of RM1.32 million.

OPERATIONAL REVIEW

Danamin’s vision is to be the preferred service provider to industries in the O&G and other specialised sectors. To realise this vision, Danamin complies with internationally recognized standards such as ISO 9001:2008 for NDT, Heat Treatment (“HT”) and Steel Structure Fabrication, ISO 14001:2008 and OHSAS 18001:2007 for NDT & HT as well as classification societies such as Bureau Veritas (“BV”).

Danamin is a relative new-comer to the fabrication business, having commenced operations only in 2013. However,the business is expected to take off with the official launch of Pihak Berkuasa Tempatan (“PBT”) Pengerang in January 2017 to fast-track the development of the Pengerang Integrated Petroleum Complex (“PIPC”) industrial zone and its surrounding areas, which includes PETRONAS’ RAPID Project.

Taking advantage of its proximity to the RAPID project, Danamin has already established rapport with big market players such as Malaysia Marine and Heavy Engineering Holdings Berhad (“MHB”), Lotte Chemical Engineering, Toyo Engineering Corporation, Chec Construction and Petrovietnam Engineering for a slice of the potentially lucrative Pengerang market.

OUTLOOK & PROSPECTS

Moving forward, Danamin has an order book of approximately RM70 million, of which RM45 million were contributed by the fabrication business with another RM25 million from the NDT business.

Danamin is also exploring possibilities to diversify into areas where it can capitalise on its resources and capabilities. Possibilities include entering into a smart partnership with Kulim’s R&D arm, Kulim Smart Technology Sdn Bhd constructing of the prototype Intelligent In-Line Inspection System (“ILIS”), a pipe inspection device that can be used in detecting metal fatigue in vessels and pipelines. At the initial stage, the focus will be on the production of MICRO-ILIS, designed to inspect pipelines with a diameter as small as three (3) inches.