Caution over Bumi Armada’s possible bid for Nigeria FPSO

Upstream reported on Friday that Bumi Armada was the frontrunner to provide a floating production storage and offloading (FPSO) vessel for Eni

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Bumi Armada and sum-of-parts based target price of 85 sen if it is secures the contract to provide a floating production storage and offloading (FPSO) vessel for Eni’s Zaba Zaba development offshore Nigeria.

“Our initial estimate is that the contract, if secured, will only add a maximum of five sen a share. Maintain Hold as the Zaba Zaba FPSO may have high local content requirements,” it said on Monday.

Upstream reported on Friday that Bumi Armada was the frontrunner to provide the vessel.

However, it cautioned that ongoing local and overseas corruption probes into the purchase of the OPL 245 block, there was potential for the Zaba Zaba development to face legal obstacles in the future. 

Hence, it is essential for Bumi Armada to protect itself by writing full compensation provisions into any FPSO charter contract in case the development is legally halted. 

“The high local content requirements in Nigeria increase the risk of cost overrun for the FPSO project, in our view. 

“How well Bumi Armada manages this risk will be key to determining whether it will achieve its stated goal of c.10% internal rate of return on its FPSO investments. 

“While the Zaba Zaba charter contract was reported to be of very high value, the capex is also likely to be very high and earnings may not flow in until 2022F at the earliest. 

“Hence, our initial guesstimate is for the charter contract to be worth no more than five sen a share to Bumi Armada on a discounted cashflow basis, which we have not included into our target price,” it said.