Negative surprise as MISC faces counter claim from Sabah Shell
KUCHING: Analysts were negatively surprised at MISC Bhd ( MISC) being counterclaimed by Sabah Shell Petroleum Company Ltd (Sabah Shell) for works at the Gumusut– Kakap Semi-Floating Production System (GKL).
Last Friday, MISC announced that Sabah Shell has filed its statement of defence and counterclaim in which it refuted GKL’s claims and is counterclaiming against GKL for alleged defective work and alleged limited functionality of the Gumusut–Kakap SemiFloating Production System (Semi-FPS).
The counterclaim covers liquidated damages amounting US$ 583 million (circa RM2.5 billion) and a refund of the full amount paid to GKL under the adjudication decision rendered in the adjudication proceedings as well as the costs and expenses of the adjudication and arbitration proceedings.
Recall that GKL commenced the legal proceedings against Sabah Shell 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 November 9, 2012 between GKL and Sabah Shell.
In February, GKL was awarded a total sum of about US$ 255 million as additional lease rates via the adjudication proceedings.
The team at Kenanga Investment Bank Bhd ( Kenanga Research) said the move came as a negative surprise for MISC as the counterclaim is double the size of what was awarded in February this year.
Should Sabah Shell successfully get the counterclaim, the basic claim of US$ 583 million will pressurise MISC’s cash in hand, which stood at RM6 billion as of the first quarter of 2017 (1Q17).
“However, the limitation of liability clause from the contract will limit its exposure to only US$ 200 million,” Kenanga Research added.
Hong Leong Investment Bank Bhd ( HLIB Research) shared this negative sentiment as the sum of the counterclaim would more than offset the group’s gains from its previous claim against Sabah Shell.
“The potential impact to its bottom line is still uncertain as the merits of the claim are still being assessed by the company,” it explained.
“However, we take comfort from the fact that the contract under GKL provides a Limitation of Liability clause which limits GKL’s total liability to Sabah Shell to a maximum amount of US$ 200 million.
“In addition, we do not expect immediate cash flow impact for the group even if the counterclaim is successful. In such instance, it would only pay back Sabah Shell through reduction in lease rates of the GKL contract in contrast to a lump sum payment.”
HLIB Research made no changes to its forecasts for MISC as it has not factored in the additional lease rates to account for the variation works previously to remain conservative.
Kenanga Research also did not change its earnings for MISC as the arbitration hearing has been fixed for February 25 to March 16, 2019 with the arbitration award expected to be issued around 2020.
“However, we do not discount the possibility of provision pending further material development of the arbitration proceedings will be made in due course.”