Bumi Armada is contesting the termination of its contract with Woodside Energy Julimar.
PETALING JAYA: The delivery of Bumi Armada Bhd
’s new projects must be executed well by fourth quarter to address investor concerns on execution and termination risks before the stock could be re-rated, according to UOB Kay Hian Research.
“We understand there may be minor liquidation damages for Kraken. Further delays in sailaways can lead to more late delivery charges. Although it is difficult to avoid project delays in the current industry conditions, Bumi Armada can minimise this exposure due to its long-standing track record,” UOB Kay Hian said, adding that it maintain its “buy” with a target price of 92 sen on Bumi Armada.
Bumi Armada, the world’s fifth largest floating production, storage and offloading (FPSO) provider, has four major conversion projects in 2016, namely the Malta floating storage unit (FSU) – delivered, Armada Kraken – October 2016 delivery, Armada Olombendo – October 2016 delivery, and Karapan Armada Sterling III/Madura – fourth quarter delivery.
“Besides the Malta FSU, these FPSOs are larger than the terminated Armada Claire contract as they are of longer contract tenures (8-12 firm years). The discounted cash flow on FPSO Kraken and FPSO Olombendo are 14 sen per share and 17 sen per share respectively in our sum-of-the-parts valuation,” UOB Kay Hian said.
Armada LNG Mediterrana (Malta FSU) was the first of four projects to be delivered in 2016. It had a sailaway ceremony on Aug 1, 2016. Upon delivery, the FSU will operate at the Delimara LNG regasification terminal for ElectroGas Malta for an 18-year firm contract.
UOB Kay Hian said the Enquest’s Sept 8, 2016 briefing reaffirmed Kraken’s first oil target is on track.
“By 2017, Kraken is expected to ramp up significantly above Enquest’ current production of 42,000bpd, and Kraken alone will reduce the group’s unit operating cost to US$20 per barrel from the current US$25-27 a barrel.
“However, its second quarter earnings transcript revealed two negotiations that pertain to late delivery charges: a) Bumi Armada to refund US$65mil of the US$100mil upfront deposit over the next two years and b) some liquidation damages (LD) to be incurred up to a cap,” it said.
The research house said the LD information was confidential but it understood that LD clauses were normal, and its incurrence meant some amount of contract value discounted over a period.
“We believe the current level of LD was due to the readjustment of delivery from an earlier date. We recall from our May 2016 yard visit that there were requests for extra equipment from the client, which may have contributed to the late delivery. In this case, Bumi Armada could pursue variation orders to offset the LD,” it said.
It sees a minor impact on Kraken’s contract value for now as these costs are small and did not necessitate a valuation adjustment.
“Although 2016 is still a near-term pain for the group, we see the new projects have low termination risks given that these are critical production assets for the end clients’ incoming cash flow projects,” UOB Kay Hian said.
It advised long-term investors to look beyond the weak 2016 as the company had already recognised Armada Claire impairments, while the delivery of the four FPSO projects should see the stock re-rate from its current 0.7 times price-to-book valuation.
It added that these projects would provide cash flow visibility once they start on finance lease income, and may double the group’s profit base from 2017.
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