Second extension for Bumi Armada’s FPSO contract, share price hits 52-week low

PETALING JAYA: Bumi Armada Bhd, which has seen some RM5bil being wiped out from its market capitalisation since mid-June when oil prices began to fall, has said that it has postponed the execution date of its RM3.76bil contract with Husky-CNOOC Madura Ltd (HCML) for the second time.

The floating production, storage and offloading (FPSO) contract was first announced on Aug 19 when its unit, Bumi Armada Offshore Holdings Ltd, along with its joint-venture company PT Armada Gema Nusantara, were appointed as the FPSO lease contractor for the Madura BD Field via a letter of intent (LOI) issued by HCML.

Bumi Armada did not provide details as to why it was extending the execution of the contract, merely stating that relevant internal approvals were being procured for it.

The international offshore oilfield services provider’s share price extended its losses yesterday, shedding a further three sen to hit a 52-week low of RM1.36.

It isn’t clear if the delay in inking this FPSO deal is linked to the declining price of crude oil, which hit US$77.34 (RM257.31) per barrel yesterday.

Indications are that this FPSO deal will be inked soon as Bumi Armada said in its filing yesterday that the parties had finalised clarifications and were procuring relevant internal approvals to execute the contract.

An analyst who tracks Bumi Armada, the world’s fifth-largest FPSO vessel owner, said extension of contracts between parties was something that often happened in the oil and gas (O&G) industry, as parties sometimes needed more time to finalise commercial terms.

“The FPSO market is still quite intact despite the recent sharp drop in oil prices as an FPSO is normally attached to a long-term production contract. But for future investments in FPSO, most oil majors are still on a ‘wait-and-see’ mode,” he said.

Bumi Armada, controlled by tycoon T Ananda Krishnan, currently has an order book of RM22bil.

At its low price now, it is trading at a price-to-earnings (PE) ratio of 17.5 times

However, this is still higher than the PE multiple of most other listed O&G service providers on Bursa Malaysia, as the sector has been aggressively sold down since mid-June.

In a report yesterday, UOB Kay Hian, while maintaining its “buy” call on Bumi Armada, lowered its net profit forecasts for 2014 to 2016 by 6.9%, 7.4% and 6.1%, respectively.

“We conducted a thorough valuation study on Malaysian O&G stocks and concluded that most O&G stocks should trade at 10 to 12 times their long-term average earnings in view that oil prices should sustain above US$70 per barrel,” said UOB in an O&G report that still maintains an “overweight” call on the sector.

Yesterday, Bumi Armada and the other two parties extended the period for the execution of the contract to supply the FPSO vessel for the Madura BD Field in Indonesia.

Bumi Armada said the LOI would be terminated on Nov 27, unless an extension is mutually agreed between the parties of the actual contract signed before then.

The Madura BD Field is located about 65km east of Surabaya and about 16km south of Madura Island, offshore Indonesia.

The contract for the FPSO vessel supply was for a fixed period of 10 years, with options of five annual extensions worth US$147mil (RM469mil), if the options were fully exercised by HCML.

AllianceDBS Research said that despite the recent weakness in crude oil prices, it remained positive on Bumi Armada.

“The group is backed by a record RM22bil order book – excluding the Madura project – which including optional extensions would reach RM32bil. Earnings visibility is good for the next five years with the FPSO contracts in the bag.

“The only weakness for the group could be in its offshore support vessel business, where charter rates would drop or there could be idle vessels if crude oil prices trend lower,” it said in a recent note to clients.

Meanwhile, RHB Research in a recent sector report said it was cautious on the risks, but believes that most projects will see through to production, even at the current oil price levels of around US$80 to US$85 per barrel, as leading indicators show some projects are close to the engineering, procurement and construction stage, and a few oil majors may prioritise production targets, more importantly.

“Utilisation rebound for deepwater drilling and crude oil supply disruption, leading to more demand for production or new sources of supply, could hasten FPSO project planning,” it said.