This article first appeared in The Edge Financial Daily on November 7, 2018

KUALA LUMPUR: Bumi Armada Bhd has missed its proposed October deadline to restructure some US$500 million (RM2.09 billion) worth of unsecured short-term loans due in three tranches by May 2019. This raises concerns that the debt-laden group might be facing challenges to seek new loans.

When contacted, an executive of Bumi Armada told The Edge Financial Daily that the group had postponed the debt restructuring deadline to first half of next year.

“We are working with the lenders on a holistic plan which is expected to be finalised by [the] first half of 2019,” said the executive.

The saving grace is that Bumi Armada has managed to settle the first tranche of debts which were due last month. Still, analysts commented that given that the new tentative deadline could possibly stretch until end-June, it indicates that Bumi Armada needed more time. And this could be that banks remain cautious about getting exposure to the oil and gas sector despite the steady recovery in crude oil prices.

Bumi Armada’s operating cash flow was at RM588.26 million in the first six-month period ended June 30. Nearly half of the cash flow was for the interest payment of RM245.97 million.

On top of the US$500 million of unsecured debts, Bumi Armada has short-term debts of RM2.22 billion plus RM1.95 billion debts that are ring-fenced around FPSO Kraken can be reclassified into long-term debts amid final acceptance.

Bumi Armada is expected to release its third-quarter financial results this month. The group’s revenue growth in the floating production and operation (FPO) segment could be undermined by a shrinking top line in its offshore marine services segment.

Analysts do not rule out any possibilities of further impairments in the third quarter ended Sept 30 (3QFY18).

In addressing concerns over its liabilities, Bumi Armada has been pointing out to the investing fraternity that it still has a US$1.5 billion euro medium-term note to tap into.

However, that option is more of a stop-gap measure, according to analysts.

“The company will need to have funding on standby for any upcoming contracts in the FPSO (floating production, storage and offloading unit) segment,” explained AmInvestment Research analyst Alex Goh.

HLIB Research’s Sean Lim concurred. “They will need to find off-takers for the notes … who are willing to lend them to repay other debts. It will be easier if the funding is for new projects.”

Apart from refinancing its current debts, Bumi Armada also needs fresh funds to execute new projects should it win new jobs.

The key contracts that it is bidding currently include the FPSO tender for Eni’s ZabaZaba development project in Nigeria, and the FPSO tender by India’s Oil and Natural Gas Corp opened in May for the KG-DWN-98/2 block off India’s east coast.

Each of the two projects would require capital expenditure of at least US$1 billion, according to analysts.

Furthermore, another FPSO, Claire, is currently the sole bidder of a five-year charter (with option to extend for three plus three years) from Karoon Gas Australia Ltd in Brazil’s Santos Basin. It is understood that FPSO Claire will incur retrofitting costs of under US$300 million if the project is secured.

Bumi Armada, in keeping prudent, reportedly said it is only seeking to secure one project first, and expects any wins to materialise by late 2019 at the earliest.

Alternatives to resolve debt woes

Bumi Armada has been wanting to sell off non-chartered assets.

Its peers, like Sapura Energy Bhd, which divested profitable assets and is in the midst of roping in a high-potential partner who would pump in fresh capital, and Velesto Energy Bhd, which has completed rights issue, seem to act quicker.

But analysts said Bumi Armada may have difficulty in getting a similar bargain for the profit-making FPO division assets.

Previous delays in achieving final acceptance for its FPSOs could be keeping interested parties on their toes. FPSO Kraken had undergone RM477.2 million impairments in 2QFY18.

Bumi Armada explained previously that the impairment amount was obtained through an assessment based on the terms in an amended agreement between its wholly-owned subsidiary Armada Kraken Pte Ltd and the charterers.

“It comes down to pricing [of the assets], the confidence of interested parties towards the company, and the sort of yields [investors] are going to get,” said HLIB’s Lim.

Recall that Bumi Amrada’s debt woes came largely from spending on asset acquisition at the peak of the oil boom. It would be an uphill task to sell assets at the purchase prices in current market conditions.

The assets include the group’s offshore support vessels (OSVs) which were 40% utilised in the first half of FY18. From 44 OSVs in March, Bumi Armada still has “over 40 OSVs” presently, said the company.

Meanwhile, there is also the less popular option for a recapitalisation exercise, which Bumi Armada repeatedly said is not being considered as an option.

“That remains to be seen,” said AmInvestment’s Goh. O&G investors cannot be blamed for being sceptical, given the cash calls of other O&G giants like RM4 billion in Sapura Energy and RM1.81 billion in Velesto Energy are examples.

Separately, the hearing for Bumi Armada’s US$283.81 million claim against Woodside Energy Julimar Pty Ltd for FPSO Claire’s early contract termination in 2016 also started last month — although analysts are mixed on the scale of the compensation, if successful.

As at Oct 26, Bumi Armada’s order book stands at a healthy RM32 billion, of which about 63% or RM20 billion is firm charters. But that is across long periods.

As at end-June, Bumi Armada retained a gearing of around 1.8 times with total borrowings of RM9.25 billion.