This article first appeared in The Edge Financial Daily on April 19, 2018

Bumi Armada Bhd
(April 18, 86 sen)
Maintain neutral with an unchanged target price (TP) of 90 sen: Bumi Armada Bhd announced that its wholly-owned subsidiary Bumi Armada (Singapore) Pte Ltd (BASPL) has received a notice from Erin Petroleum Nigeria Ltd (EPNL) advising of a “force majeure event”, subsequently requesting for an immediate and orderly shutdown of operations on the floating production storage and offloading (FPSO) unit Armada Perdana. Additionally, it also received a notice of seizure/attachment of goods from a third party informing that the entire crude oil produced and to be produced and stored in Armada Perdana has been seized in relation to certain legal proceedings, but of which Bumi Armada is not party to. While the news flow is negative, we are neutral on this development as issues with EPNL is common knowledge and had already been ongoing since 2015, coming to a head in June last year when Bumi Armada suspended operations on the FPSO due to long outstanding amounts owed by EPNL. Our earnings estimates and valuations have already excluded these contributions much earlier. We retain our “neutral” call with an unchanged TP of 90 sen.

On June 21, 2017, Bumi Armada announced that it was suspending the bare-boat charter and operations and maintenance contracts on the FPSO Armada Perdana due to long-standing delays in payments due from EPNL. On Aug 9, 2017, it announced that it will allow the flow of produced oil into the FPSO’s cargo tanks following meetings with Nigeria’s petroleum resources department and EPNL despite payments remaining outstanding. Subsequently, on Oct 5, Bumi Armada announced that it is permitting the continuing flow of produced oil into the Armada Perdana cargo tanks and a one-off cargo offtake. A substantial portion of the proceeds from the sale of the said cargo was to be used for payment in partial settlement of outstanding amounts leading up to the overnight announcement in what can be seen as a tit-for-tat move to “avoid” fulfilling further bligations.

Bumi Armada’s stand is that the “force majeure” declaration is obviously wrongful under the operational and maintenance services contract, though it can also be argued if that is applicable considering that operations have been suspended since June last year. We reserve further comment pending clarity on contract terms. Bumi Armada is naturally reviewing its legal options to uphold the contractual rights of operating entities affected by this, which may include but are not limited to legal proceedings. Estimated financial impact of credit risk recovery to the results of the group for the financial year ending Dec 31, 2018, is approximately RM30 million. Most provisions (RM161 million of receivables in 2015) and/or write-offs (in 2016) with regard to this particular FPSO have already been made in previous financial years, hence no material impact is expected should there be residual amounts. — PublicInvest Research, April 18