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FYE 2019 was a challenging for Kulim’s O&G Division, as it posted a PBT of RM49.90 million compared to RM87.14 million in FYE 2018. The Division recorded decrease in revenue of RM307.52 million, representing a 34.56% lower compared to RM469.92 million achieved in the previous year.

During the year under review, our subsidiary, EA Tech contributed of RM271.87 million to the Group revenue, a decrease of 35% compared to RM419 million recorded in 2018. EA Tech posted a PBT of RM 32.68 million, against PBT of RM90.36 million in 2018.

Another subsidiary of the Group, Danamin, an engineering and quality assurance provider which caters to niche industries, recorded a revenue of RM35.64 million in 2019, a decrease of 30.01% from RM50.92 million posted in the previous year. The Company also registered a LBT of RM17.04 million against RM3.18 million previously.

In Indonesia, the acquisition of PT CSE did not create a significant impact on our earnings in 2019. 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.

This Indonesian venture is currently moving towards production stage and is targeted to go on-stream in year 2021.

Although it offered little or no contribution to the Group’s 2019 financial performance, we are confident that its contribution will grow significantly within the next few years as it enters into commercialisation phase. Given that O&G exploration, production and operations involve a variety of risks which may expose the Group to substantial liability. Kulim has ensured that the organisation practises high standard of safety precaution. Our Risk Management team continually monitors our date and has established a sound risk management strategy for the Group.

INDUSTRY DYNAMICS

In December 2019, the OPEC Reference Basket (“ORB”) value rose by $3.54 or 5.6%, month-on-month (“m-o-m”) to an average of $66.48/b, the highest value recorded since April in the same year. Similarly, ICE Brent increased by $2.46 or 3.9%, m-o-m to an average of $65.17/b, while NYMEX WTI increased by $2.73 or 4.8%, m-o-m to average $59.80/b. Oil prices were supported by optimism about the outlook of oil market fundamentals, following easing trade tensions between the US and China and continued market stabilisation efforts conducted under the Declaration of Cooperation (“DoC”). The market structure of all three (3) crude benchmarks ICE Brent, NYMEX WTI and DME Oman remained in backwardation. Money managers increased their speculative net long positions on the back of more bullish sentiment.

Global oil demand growth for 2019 was revised lower by 0.05 mb/d compared with the previous month’s assessment, and is now estimated at 0.93 mb/d.

Demand growth in OECD Americas was revised lower for the first half of the year due to the sluggish middle distillate demand. Slower than expected industrial fuel demand in OECD Asia Pacific also necessitated slight downward revisions. For 2020, oil demand growth is revised upwards by 0.14 mb/d from the previous month’s assessment and is forecast at 1.22 mb/d, mainly reflecting an improved economic outlook for 2020. As a result, total world oil demand is projected to rise from 99.77 mb/d in 2019 to 100.98 mb/d in 2020. Meanwhile, oil demand growth in the OECD region is forecast to increase by 0.09 mb/d, supported by OECD America, while non-OECD is expected to lead demand growth by adding 1.13 mb/d mainly in other Asia, especially India and China.

Non-OPEC oil supply growth for 2019 was revised upwards by 0.04 mb/d from the previous month’s assessment and is now estimated at 1.86 mb/d, for an average of 64.34 mb/d. The upward revision was lead mainly by US liquids output growth, which was revised higher by 46 tb/d, resulting in annual growth of about 1.66 mb/d in 2019. Non-OPEC oil supply growth in 2020 is also revised upwards by 0.18 mb/d from last month’s assessment and is forecast at 2.35 mb/d for an average of 66.68 mb/d. The upward revisions in Norway, Mexico and Guyana were partially offset by downward revisions to the supply forecasts of the US, Russia and other OECD Europe.

The US, Brazil, Canada and Australia were the key drivers for growth in 2019, and are expected to continue leading the growth in 2020, with the addition of Norway and Guyana. OPEC NGLs production in 2019 is estimated to have grown by 0.04 mb/d to an average of 4.80 mb/d and is forecast to grow to an average of 4.83 mb/d in 2020. In December, OPEC crude oil production dropped by 161 tb/d m-o-m to average 29.44 mb/d, according to secondary sources.

The tanker market strengthened in December 2019, as freight rates in both dirty and clean segments of the market surged. On average, dirty tanker spot freight rates rose by 29% m-o-m on the back of increased tonnage requirements and high bunker prices. In the clean tanker market, increased tonnage was observed in the different routes, leading to an increase in average clean tanker spot freight rates by 18% m-o-m. Enhanced market activity was seen to drive rates higher on all routes, affecting all tanker sectors in the market. Moreover, freight rates are expected to continue this hike in first quarter 2020, reflecting the cost of new low sulphur bunker fuel regulations implemented 1 January 2020.

Demand for OPEC crude in 2019 was revised downwards by 0.1 mb/d from last month’s report to stand at 30.6 mb/d, or around 1.0 mb/d lower than the 2018 level. Demand for OPEC crude in 2020 is also revised downwards by 0.1 mb/d from last month’s report, to stand at 29.5 mb/d, or around 1.2 mb/d lower than the 2019 level (Source: OPEC Monthly Oil Market Report, January 2020).

PETRONAS in its activity outlook for 2020 to 2022 expects the oil and gas industry to remain challenging next year amid a backdrop of global economic slowdown, geopolitical upheaval and prolonged trade tensions. PETRONAS also encouraged its partners to be conscious in managing costs, as well as implement activity levelling to sustain offshore activities and pursue innovative solutions in unlocking value in the supply chain. Nevertheless, the national oil company foresaw a steady outlook for drilling, production support, marine vessels and decommissioning activities. As for the downstream sector, a positive outlook is foreseen for turnaround and maintenance activities (Source: New Straits Times Business, December 2019).

UPSTREAM ACTIVITIES – INDONESIA

In November 2008, the Government of Indonesia 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 (“PC SKR”) 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, Kulim inked a Supplemental Agreement (“SA CSSPA”) with the vendors to revise the investment cost downwards to USD80 million, after taking into account the lower crude oil prices subsequent to the date of signing of the CSSPA.

The completion date of the CSSPA and SA CSSPA has been further extended to 31 December 2020, pending the fulfillment of approval by the Government of Indonesia and Satuan Kerja Khusus Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi (“SKK MIGAS ”) in respect of the Change of Control (“COC”) of the PSC.

The Government of Indonesia has approved the first Plan of Development (“POD”) for Sinamar area of SWBB PSC, with a projected gross revenue of USD938 million. Following the POD approval, PT RBBE shall comply with the provisions regulated by the Government of Indonesia and SKK MIGAS , to complete the development work at Sinamar area and continue the exploration programme at SWBB PSC.

Issuance of POD means that SKK MIGAS has confirmed the presence of economic quantity of hydrocarbon in the SWBB PSC area, marking the end of the exploration phase for the project and the commencement of the development phase

Currently, the parties are in the midst of dealing with their strategic partner and are in the stage of carrying out works that simultaneously fulfill the terms of POD-1 and rendering RBBE attractive to investor. The deal with the potential strategic partner is currently in proposal stage and is non-conclusive.

The potential opportunities mentioned above will be taken into account in determining Kulim’s future business direction, whereby they present great potential to be explored, particularly in generating new revenue and income streams for the Group.

E.A. TECHNIQUE (M) BERHAD

A public listed company since 11 December 2014, EA Tech is a marine vessel operator whose 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 in Perak, which has the capabilities in shipbuilding, ship repairs and minor fabrication.

FINANCIAL PERFORMANCE

During FYE 2019, EA Tech reported revenue of RM271.87 million. The biggest contributor to revenue remained the charter hire business, which in 2019 continued to enjoy high average utilisation rates of 80% to 90%, thereby maximizing earnings. Our marine transport vessels namely Nautica Muar, Nautica Renggam, Nautica Pagoh, Nautica Gambir and Nautica Langsat – all enjoyed higher utilisation rates in FYE 2019.
Notwithstanding the above, PBT was decrease to RM32.68 million from RM90.36 million recorded in FYE 2018. The decrease was mainly contributed by the lower foreign exchange gains recorded during FYE 2019.

OPERATIONAL REVIEW


Marine Transportation Services

In 2019, EA Tech was awarded a contract by PETRONAS Carigali Sdn Bhd (“PCSB”) on 31 May 2019 to provide a Temporary Storage Tanker (“TST”), including Station Keeping and Flexible Riser Tie-in for Sepat Derisk and Early Production System (“DEPS”) Project. The value of contract is worth approximately RM84.18 million.

One of the year’s highlights was undoubtedly the contract awarded by PETCO Trading Company Limited (“PTLCL”) for the Provision of Long-term Charter Coastal Vessel Services. Expected to commence in 2020, the contract is for a duration of five (5) years with five (5) extension options of one (1) year each. Total value of the contract is about RM239.12 million.

In order to fulfill the contractual obligations to PTLCL, it will entail capital investment to build and deliver three (3) units of 9000 MT Dead Weight Tonnes (“DWT”) product tankers. One (1) tanker will be built at our own Johor Shipyard and Engineering Sdn Bhd’s (“JSE”) shipyard at Hutan Melintang at a cost of USD16.60 million. The other two (2) product tankers will be built by Ningbo Zhenhe Ship Building Co Ltd at its shipyard in China at a contract price of USD14.18 million each.

On 20 June, EA Tech was awarded a contract by SUPB for the Provision and Operation of one (1) unit of 60 tonnes Bollard Pull Harbour Tug for its Regasification Terminal in Melaka.

EA Tech also offers a range of port marine services in a strategic move to diversify its earnings base and reduce its over dependence on the O&G sector. The range of port marine services include towage services that involve towing, pushing and maneuvering vessels into position; mooring services that wharfs, jetties, anchor and mooring buoys; and dockside mooring services that involve securing vessels, floating structures and fixtures at the wharf. Presently, we are one of two major players that are engaged directly by port operators to provide towing services.

Ship Repair and Minor Fabrication

As part of its vertical expansion plans, EA Tech ventured into shipbuilding, ship repair and minor fabrication activities in 2007. This is undertaken by a wholly-owned subsidiary, JSE, at its shipyard in Hutan Melintang, Perak. The shipyard has the capabilities to construct one (1) vessel of up to 100,000 DWT or six (6) harbor tugboats at any one time.
JSE has plans for the further development of the shipyard facilities. This includes the construction of Slipway No 1, which will have a 2000-tonnes capacity. Also in the pipeline is a 7,200 sq. ft. ship repair workshop. The cost of building the two (2) new facilities has been budgeted at RM3.70 million. Presently, JSE’s shipyard is only servicing the Group’s vessels. With the completion of the new slipway, JSE will be able to accommodate third party vessels.
Having its own shipyard is a distinct advantage for the Group. In-house capabilities enable the Group to effectively maintain its vessels to a high standard of operation and undertake repairs with fast turnaround to minimise downtime. In FYE 2019, EA Tech was able to reap savings of 15% to 20% from materials tax exemption and another 10% to 15% from labour and coordination.

OUTLOOK AND PROSPECTS

As at year-end 2019, four (4) vessels or 9% of our total fleet of 45 vessels are on short-term charters. This has resulted in a high utilisation rate of above 80%, assuring the Group of a steady revenue stream.

EA Tech also has a very healthy order book of approximately RM1.17 billion including the option periods, as at the end of 2019. We remain alert to tendering for new contracts. Our customer base continues to grow in tandem with our brand recognition.

Meanwhile, EA Tech’s efforts to grow its port operations to reduce its dependence on the O&G sector are showing results. The expanding port operations have provided with a steady recurring income for the past several years. The crew boats segment shows promising growth as more oil companies are turning to fast boats as a more economical alternative to helicopter services to ferry crew members to offshore structures. As a strategy for long-term sustainable growth, EA Tech will need to continue investing in its fleet to further strengthen its portfolio. Any expansion of the fleet size will be based on the contracts secured, with a minimum tenure of three (3) year.

DANAMIN ( M ) SDN BHD

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 400 professional employees, including certified contract workers, the company has branches that are strategically located in the vicinity of its customers’ facilities.

FINANCIAL PERFORMANCE

The principal contributors to Danamin’s revenue are its NDT and fabrication businesses. For the year under review, Danamin generated a revenue of RM35.64 million, a 30.01% decreased from RM50.92 million posted in 2018. In 2019, LBT recorded RM16.36 million from RM2.08 million registered in the previous year. About 85% of the revenue are derived from NDT while no major fabrication work was being taken place in 2019.

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 recognised Integrated Management System (“IMS”) standards to ensure effective and efficient operations, remain relevant in the industry and safeguard the sustainability aligned with strategic direction of the organisation. The IMS standards consist of ISO 9001:2015 (Quality), ISO 14001:2015 (Environmental) and OHSAS 18001:2007 (Safety and Health) accredited by Bureau Veritas (“BV”).

OUTLOOK AND PROSPECTS

Danamin continues the five (5) years contract for Inspection and Corrosion Monitoring Services (“ICMS”) with Petron as Group of Companies which will be ended by June 2023.