This article first appeared in The Edge Malaysia Weekly, on March 7 - 13, 2016.
Bumi Armada Bhd is under pressure from a consortium of banks that helped finance the oil and gas company’s floating production storage and offloading (FPSO) vessel Armada Claire.
Last Friday, the company announced to Bursa Malaysia that Armada Claire’s contract at the Balnaves oilfield, off northwestern Australia, may have been terminated by Woodside Petroleum Ltd.
While Bumi Armada seems to be looking to fight the termination, suggesting that “the purported notice of termination is not valid and is in fact tantamount to a cancellation for convenience”, the fact of the matter is that the consortium of banks — which includes Japan’s Sumitomo Mitsui Banking Corp and France’s Natixis, among others — has financed Armada Claire, which is now without a charter contract.
“There is talk of compensation for the termination but nothing is sure as yet because the reasons for the termination are not known,” a source familiar with the matter tells The Edge.
Talk of Bumi Armada and Woodside being at loggerheads has been ongoing since 2014.
Thus, the banks were understood to have been seeking a guarantee from Bumi Armada for the duration of the four-year contract as opposed to the norm where a guarantee is required only in the construction phase.
Considering that Bumi Armada was hesitant to provide the guarantee then as it was akin to a contingent liability, it is unlikely that the banks will get one now.
Details are scarce with Bumi Armada not replying emails sent by The Edge, but it is understood that the production cost of the Balnaves field, which has about 17 million barrels of oil and 30 billion cu ft of gas, was in the region of US$438 million or about RM1.4 billion when the contract was awarded in September 2011.
Armada Claire (initially Armada Prima) was acquired in December 2010 as a conversion candidate for the FPSO project in the Balnaves field.
It is understood that the usual process for FPSOs entails two-part financing — the first during the construction phase and the second when the vessel receives the certificate of final acceptance, whereby the vessel owner can start collecting revenue to pay off debts incurred to build the FPSO. The guarantee is lifted in the second phase.
“In Armada Claire’s case, the certificate of final acceptance was delayed for some time [as] there were technical issues and word had got out that Woodside was looking at cancelling the contract … so the banks were seeking a guarantee for the duration of the entire charter period,” the source says.
The original charterer was Apache Corp, whose unit Apache Energy Ltd operated block WA-49-L of the Balnaves field. However, Apache’s interest was taken over by Woodside last year.
Some wonder if Woodside is as keen to develop the Balnaves field, given the current low oil prices. Last Friday, West Texas Intermediate was a shade below US$35 per barrel, in contrast to about US$55 in April last year when Woodside took over Apache’s assets, or its record high of US$110.53 in September 2013.
Another source doubts if Bumi Armada could have provided a guarantee as its financial performance has been far from stellar and could get worse now that its contract has been terminated.
“It is important to note that Armada Claire was built specifically for the Balnaves field, which means any new contracts will require much work, which means more funds,” the source adds.
In its financial year ended Dec 31, 2015, Bumi Armada suffered a net loss of RM234.57 million compared with a net profit of RM218.69 million in the previous year. Revenue dropped to RM2.18 billion from RM2.4 billion.
As at end-2015, Bumi Armada’s cash balance had shrunk to RM1.52 billion from RM3.3 billion in 2014 while its long-term debt had swelled to RM6.26 billion from RM5.17 billion. Its short-term borrowings had shot up 73% to RM1.77 billion and its gearing to 0.89 times from 0.43 times in 2014.
These are just some of the problems faced by the company.
The outlook for Bumi Armada’s US$1.4 billion (RM4.6 billion when signed in December 2013) Kraken oilfield FPSO contract, which has the option for 17 annual extensions, does not look good either. EnQuest PLC is a 60% owner and operator of the Kraken oilfield in the North Sea while UK-listed Cairn Energy PLC (25%) and First Oil PLC (15%) are the other owners.
On March 1, Moody’s Investors Service downgraded the corporate family rating of EnQuest to Caa1 from B3 and the probability of default rating to Caa1-PD from B3-PD. The Caa2 rating on the company’s 2022 senior global notes was confirmed while the outlook on all the ratings is negative.
Moody’s said, “This action is primarily driven by the concern over EnQuest’s ability to maintain sufficient liquidity over the medium term while investing in the strategic Kraken project in the North Sea that is scheduled to come to production in 2017. In spite of expected growth in production, EnQuest will generate negative free cash flow because of the lower oil prices and transition to a largely unhedged position in 2H2016 with debt/Ebitda leverage peaking in 2016 above four times. Sizeable investments in a low price environment will extend negative FCF generation in 2017, delay debt reduction and pressure liquidity in the next 12 to 18 months, when expansion will need to be funded by cash and available bank facilities.”
Another stronghold for Bumi Armada is Africa, where it won a RM9.5 billion FPSO contract at Block 15/06, East Hub, off Angola, from Italy’s Eni Angola SPA in 2014.
But Africa has one of the highest average finding costs of oil in the world, at US$35.01 a barrel, according to studies conducted in 2009, which would deter exploration activity.
It is also known in the market that Bumi Armada’s controlling shareholder, T Ananda Krishnan, who has a 34.92% stake in the company, has been looking to hive off his controlling block of shares but has yet to get the desired price.
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