This article first appeared in The Edge Financial Daily on October 29, 2018
Bumi Armada Bhd
(Oct 26, 40.5 sen)
Maintain buy with an unchanged fair value of 90 sen: We are positive on Bumi Armada Bhd’s upstream report that it could have found a charter replacement for its currently idle floating production, storage and offloading (FPSO) vessel Armada Claire.
The group is likely to secure the charter from Australian independent Karoon Gas’s Neon and Goia (formerly Echidna and Kangaroo) field developments in Brazil’s Santos basin after other prospective bidders Modec International, SBM Offshore, BW Offshore and Bluewater pulled out due to price concerns, which left Bumi Armada as the sole preferred bidder.
While the group has offered a price tag near Karoon’s budget, there are some issues needed to be ironed out as the award of the contract is expected over the next few months. Bumi Armada is jointly bidding with Schlumberger and Subsea 7, which will handle the project’s subsea infrastructure.
There are concerns over the financing capability of Karoon, which is looking for partners to share the risk and cost of the Neon development. Karoon plans to farm out a portion of its interest before proceeding with the Neon development.
Karoon requires an FPSO with a capacity of 40,000 barrels per day that will not require much conversion to handle Neon’s light 39-degree API oil, while operations at Goia is scheduled to start at a later date. Karoon is offering a five-year firm charter agreement, with two options for three years each. Once the contract is awarded, Bumi Armada will retrofit its floater Armada Claire to the Brazilian standard.
Recall that in March 2016, Woodside Petroleum unexpectedly issued a notice of termination in March 2016 to Bumi Armada for the Armada Claire working on the Balnaves oilfield off Western Australia. The Armada Claire, with a production capacity of 30,000 barrels per day and storage capacity of one million barrels, is currently moored in Batam, Indonesia.
Management has not provided an exact book value for Armada Claire as Bumi Armada is seeking legal claims against Woodside’s contract termination. Assuming that the remaining book value of Armada Claire is US$100 million (RM418 million), the project’s internal return rate of 12% and weighted average cost of 6%, we estimate that this charter could raise Bumi Armada’s financial year 2020 (FY20) earnings by 7% but with a much smaller 2% accretion to our sum-of-parts valuation.
The group’s current order book of RM32 billion, of which 63% comprise firm charters, accounts for a comfortable 12.8 times its FY18 forecast (F) revenue. The group remains on the prowl for new FPSO charters in West Africa and Brazil. Currently, the stock trades at a compelling price-earnings ratio of six times its FY19F earnings against a backdrop of improving balance sheet risks. — AmInvestment Bank, Oct 26