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This article first appeared in The Edge Financial Daily, on November 11, 2015.

 

Bumi Armada Bhd
Nov 9 (RM1.11)

Maintain hold with a target price (TP) of RM1.05: The TP implies 0.9 times price to book. The operators’ incoming floating, production, storage and offloading units (FPSOs) and recovery in asset utilisation will be a significant boost to long-term earnings, taking on a strong case that the Armada Perkasa is likely to see its contract extended beyond 2016. 

However, this is only a 2017 horizon. We see risk of more earnings slippage and impairments remain, subject to macro-conditions and assurance that earnings delivery and performance of the FPSOs are on track.

According to management, oil price is not a direct factor for its impairment test. 

Recall the group impaired its offshore service vessel (OSV) and transportation and installation (T&I) divisions using a 10-year horizon of market fundamentals, including supply/demand dynamics. We understand this was based from a starting point of second quarter  of 2015 (2Q15) OSV utilisation of 54%, and the current costs of operating the vessels. Nevertheless, further impairment risk is still relevant. 

We expect OSV utilisation to further decline in the short term, given the industry’s view that 2016 upstream capital expenditure could be another sharp decline from 2015 levels — though this may not necessarily change the company’s 10-year view on utilisation. 

On its FPSO side, several events could prompt impairments on FPSO, which could include breach of Bumi Armada’s operational performance conditions, client default/non-payment, underestimating the depreciation of the assets, and premature termination or contract revision with inadequate compensation.

In its operational FPSO fleet, the Armada Perkasa’s third extension contract has the closest expiry date (July 2016) and the end-client, Afren plc, had a financial restructuring with bondholders. 

Bumi-Armada_fd111115_theedgemarkets

Afren is consistently paying for the FPSO charter fees, as the Okoro East field is still producing at a healthy 14,000 barrels per day. According to Energy Maritime Associates, Afren initially had plans to construct a mobile offshore production unit to replace the FPSO from 2016. 

However, the restructuring plan was a blessing in disguise as Afren altered its plans and will continue with the existing FPSO. We concur that the Armada Perkasa has a strong case to see contract extension (further options available until July 2018), as we understand that the daily rates for the current extensions are 30% cheaper than the rates during the firm contract tenure (2008 to 2013).

We maintain our earnings forecasts, which are below consensus by 30% to 40%. We believe earnings performance through the second half of 2015 (2H15) to 2H16 will likely be poor, arising from weaker OSV utilisation, flattish revenue contribution from FPSOs (until 2017), and T&I losses. The group is conducting an ongoing cost rationalisation due to a weak revenue outlook. — UOB KayHian, Nov 9

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