Bumi Armada's total order book as at end-March 2016 was RM36.4bil
UALA LUMPUR: CIMB Equities research is retaining its target price of 92 sen for Bumi Armada
, which is 27.8% above the last traded price of 72 sen as prospects are looking much brighter after the floating production storage and offloading (FPSO) unit Kraken achieved first oil last Friday.
The research house said on Wednesday the latest development reduced Bumi Armada’s risk premium, and it may start its firm charter period during 4Q17F.
“Bumi Armada other FPSO assets are also moving in the right direction, with the reactivation of FPSO Claire a strong possibility. All these are major share price catalysts. As such, we keep our Add call and our sum-of-parts based target price,” it said.
To recap, the research house said the risks surrounding FPSO Kraken have dissipated significantly.
EnQuest, the operator of the Kraken field, announced recently that first oil was achieved from the FPSO Kraken on June 23, within the guidance of June 30.
“This 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$5.3mil in provisions that were earlier made in 4Q16,” it said.
As negotiations with EnQuest are still ongoing, CIMB Research said it had not factored in any writebacks into its model.
In its model, it ssumed that FPSO Kraken’s firm charter period will start on Jan 1, 2018.
This is conservative as EnQuest has disclosed that it expects to produce oil from the Kraken field during 2H17F.
“Also, we understand that a UK regulatory health and safety check onboard the FPSO Kraken is scheduled for September 2017, which is one of the final steps of the acceptance process,” it said.
The commencement of the firm charter period for the FPSO Kraken may happen during 4Q17F and be another catalyst to the stock price.
The commissioning process for the FPSO Olombendo is progressing well and, as more systems get commissioned, its earnings will rise.
“We understand that the vessel is already earning 90% of its full bareboat charter (BBC) rate during 2Q17F, up from 80% during 1Q17.
“We expect that it will earn 100% of its BBC during 3Q17F.
“The Karapan Armada Sterling 3 FPSO has not yet commenced its firm charter period; we have pencilled in a Oct 1 start, which should not be too far off in view of Husky-CNOOC’s guidance for a 2H17F ramp-up.
“The upside may come from the stand-by fees that Bumi Armada is entitled to from January 2017 as the vessel was delivered to the Madura BD field before end- 2016,” it pointed out, however, it had not factored in any upside from the stand-by fees.
The seven-year firm charter contract for the FPSO Armada TGT1 is ending in November 2018 and, beyond that, there are a further eight annual option periods.
Soco International Plc disclosed that the TGT field offshore Vietnam is being redeveloped with many more wells to be drilled.
“Hence, we believe that the FPSO charter has a high chance of renewal. In the negotiations with potential charterers of the FPSO Claire, Bumi Armada is open to exploring flexible charter hire rates, which may depend on the oil price and production rates.
“In this way, the economics of the marginal field development are improved and the potential for FPSO reactivation is also enhanced, which will be pure upside for our valuation of Bumi Armada.
“We believe that Bumi Armada may have to raise RM1bil in equity to reduce the size of its short-term debt and another RM1bil in the event that it wins the bid to supply an FPSO for ONGC’s KG-DWN-98/2 project.
“In our view, 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. Hence, the impact of a dilutive rights issue can be reduced. The key downside risk is the possibility of a larger-than-expected rights issue,” it said.
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