Bumi Armada climbs on Armada Kraken first oil

This article first appeared in The Edge Financial Daily, on June 29, 2017.
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KUALA LUMPUR: Offshore energy facilities and services provider Bumi Armada Bhd’s shares climbed as much as 6.25% yesterday after it announced its Armada Kraken floating production storage and offloading (FPSO) has achieved first oil in the Kraken field in the UK North Sea.

“Achieving first oil on the Armada Kraken FPSO is an important milestone, as we work to deliver oil to our clients, EnQuest plc and Cairn Energy plc, and work towards receiving the charter income for Bumi Armada,” said Bumi Armada chief executive officer Leon Harland in a statement yesterday.

Bumi Armada’s shares climbed 4.5 sen to 76.5 sen before paring some gains to settle at 75 sen yesterday, still up three sen or 4.17% from its last close, valuing it at RM4.46 billion. It was the third most active stock on Bursa Malaysia, with 28.75 million shares traded.

With the first oil struck, production rate is now being increased in a phased manner, and the FPSO will be further commissioned for final acceptance, said Bumi Armada.

In a note yesterday, CIMB Research’s Raymond Yap said the first oil from the FPSO is a significant milestone that will reduce Bumi Armada’s risk premium. “As Bumi Armada had provided for compensation payments up to July 15 in the best-case scenario, we estimate Bumi Armada can write back up to US$5.3 million (RM22.79 million) in provisions that were earlier made in the fourth quarter of 2016 (4Q16),” he said.

The research house earlier estimated the Armada Kraken FPSO’s firm charter period to start on Jan 1, 2018, which Yap acknowledged now was a conservative target as the Kraken field operator, EnQuest, had disclosed it expected to produce oil from the Kraken field during the second half of 2017.

He now expects commencement of the firm charter period for the FPSO to happen during 4Q17 and be another catalyst to the stock price.

Meanwhile, Yap believes Bumi Armada may have to make a cash call to raise RM1 billion to reduce the size of its short-term debt. It may need another RM1 billion if it wins the bid to supply an FPSO for ONGC’s KG-DWN-98/2 

project in India, he said.

He said a rights issue may happen only after all of Bumi Armada’s assets are producing and only in conjunction with other options, such as private placements and asset sales, which would reduce the impact of a dilutive rights issue. “The key downside risk is the possibility of a larger-than-expected rights issue,” he added.

As for the commercial bid for ONGC’s KG-DWN-98/2 project, it will be around August, he said, with the expression of interest and pre-qualification due by the third week of July.

Given that Bumi Armada’s Indian partner, the Shapoorji Pallonji Group, currently has two FPSO contracts with ONGC, he said ONGC will likely look favourably on Bumi Armada’s joint venture partnership with the Shapoorji Pallonji Group for the KG-DWN-98/2 project.

The Armada Kraken, according to Harland, is the third of four FPO projects Bumi Armada is starting up this year. “She is our first ever heavy oil production facility and has the largest liquid handling capacity in our fleet (460,000 barrels of liquid per day) and she marks Bumi Armada’s entry into the North Sea as a production facilities owner, operator and duty holder,” he said.

He added that these are positive steps for the group as it continues to increase cash flow and revenue from the four major projects that were under construction in the last three years.