KUALA LUMPUR (May 6): Affin Hwang Capital has downgraded Bumi Armada Bhd to a “sell” from a “hold” previously, with its target price maintained at 13 sen, as upsides appear to have been priced amid sustained low oil prices.

The research house said it believed that its floating production and storage offloading (FPSO) vessels, particularly Olombendo and Kraken, face a low risk of contract terminations.

“Both FPSOs are looking at high-up times moving into 1Q20. The risk lies more towards the OMS [offshore marine services] segment on potential downward revisions and rates and weaker demand,” it said.

Affin Hwang opined that the current environment is still proving to be economically viable for EnQuest to continue production as Kraken’s crude quality commands a US$8-10/bbl premium to Brent prices.

Moreover, the field is a substantial project to EnQuest, and is expected to make up 38% of its total production portfolio.

“The remaining capex will continue to be focused on the Kraken well campaign, reaffirming our view of a low risk of termination,” it said.

The research house observed that over half of its fleet is on long-term charter contracts that extend into 2020, while the contracts of the remainder will expire this year.

“However, we are not too overly concerned as OMS only makes up a small part of the business, with a RM43 million recorded operating loss in FY19, cushioned by its FPSO operating profit of RM675 million,” it said.

In comparison, its OMS division is seen to have a higher risk to earnings given the likelihood of rate negotiations and non-contract extensions post firm period expiry.

“But there is likely going to be a 3-6 month lag before this happens as clients will heed any sign of oil prices stabilising based on the previous oil price crisis,” it said.

Affin Hwang does not envision the risk of an equity call as Bumi Armada’s operating cash flow after the operational recovery of the Kraken vessel is strong enough to meet its short-term debt obligations.

However, it believed that the prolonged low oil prices still poses a lot of uncertainties to the industry.

“At the current level, we believe risk/reward is still skewed towards the downside, as such we downgrade Bumi Armada to a ‘sell’,” it said.

As at 3.33pm, Bumi Armada traded unchanged at 18 sen, with a market capitalisation of RM1.09 billion.