Bumi Armada aims to improve balance sheet

  • Business
  • Saturday, 15 Sep 2018

The contracts were associated with the floating production, storage and offloading (FPSO) vessel Armada Perdana, and the suspension was first announced last June after delays to the bare-boat charter payments as well as irregular payments on the operations and maintenance contract.

WHILE a number of analysts agree that the worst may already have been priced into Bumi Armada Bhd, there are some concerns the company may need to resort to raising funds given its high gearing position and the need to brighten its outlook in order to secure jobs moving forward.

The company is well aware of this issue and tells StarBizWeek that it is looking at a number of approaches to improve its balance sheet.

“These include a Euro Medium Term Note (EMTN) facility, a possible private trust structure, asset disposals, debt refinancing or alternative fund sources,” a Bumi Armada official says.

“The structures under review are long-term in nature, which is aligned to the business we are operating in.

“The company has yet to make a firm decision on the structure but will make an announcement at the appropriate time,” the official adds.

Bumi Armada had reported a shock loss in its recent second quarter ended June 30 that had brought its shares to a 21-month low of 51 sen but it had stabilised at this level following the decline.

High impairments in the oil & gas company had caused it to report a net loss amounting to RM585.48mil.

It had recognised an impairment charge of RM477.2mil and RM1.7mil for the Armada Kraken floating production, storage and offloading (FPSO) unit and the group’s joint-venture company, PT Armada Gema Nusantara respectively.

This marks its first quarter of losses after five successive quarters of churning in improved profits since its first quarter of the financial year 2017 (FY17).

Delving deeper into its balance sheets, analysts have highlighted a need for the company to address its high net gearing level of 1.8 times.

Commenting on the recent news that Bumi Armada had secured the final acceptance for the Armada Kraken floating production storage and offloading (FPSO) vessel, Maybank Investment Bank said this development is a positive step for the company as it removes termination risk and de-risks earnings.

Bumi Armada had on last Friday announced to Bursa Malaysia that it had been issued with the final acceptance certificate in accordance with the Bareboat Charter without any major safety incident.

“This enables Bumi Armada to recognise an additional 10-20% of its bare-boat charter. In addition, that would also enable Bumi Armda to access the US$1.5bil medium term notes, which is associated with the final acceptance.

With the removal of this risk, Bumi Armada’s next move would be to work on its balance sheet,” Maybank Investment Bank says in its report.

“Bumi Armada needs to refinance its RM6.2bil short-term debt, of which 31% is related to the Kraken project.

“We do not rule out prospective corporate exercises (e.g. placement, rights issue, selling of strategic assets, private trusts) to de-gear. Its net gearing level stood at 1.8 times as at June 30,” the report adds.

Maybank Investment Bank also notes that the high gearing level can affect cashflows which could impede its debt servicing efforts.

It also notes that Bumi Armada will find it challenging to capitalise on the buoyant FPSO prospects until it addresses its highly geared balance sheet.

The research house kept its hold rating on Bumi Armada with a target price of 55 sen.

According to its second quarter financial report’s balance sheets, Bumi Armada had cash and cash equivalents amounting to RM1.42bil as at June 30 and short and long term borrowings of RM11.048bil.

According to information obtained from analysts, its management had recently guided that the recent final acceptance would mean Bumi Armada being able to restructure some RM1.947bil of its short term borrowings (payable in 12 months) to long term borrowings on its balance sheets.

This is because the company was able to obtain a final acceptance from EnQuest, the client for the Armada Kraken project.

“While in totality, its debt profile has not changed.

“But when you look deeper this final acceptance will ease the short term cash requirements on Bumi Armada to pay back the short term loan,” AffinHwang Capital’s research analyst Tan Jianyuan tells StarBizWeek.

Meanwhile, CGSCIMB says in its report that the final acceptance obtained by Bumi Armada from EnQuest is truly a long awaited development for the oil and gas company.

Bumi Armada had agreed on Aug 29 to pay EnQuest US$15mil as the full and final settlement for all claims prior to Jul 31, 2018 and is expected to incur a further US$10mil in costs to bring the FPSO to final acceptance.

In the second quarter of this year, Bumi Armada had expensed an estimated US$12mil for repairs of Kraken equipment, and impaired the Kraken asset by US$119mil as the calculated present value of the penalties that EnQuest had imposed on Bumi Armada for the unresolved technical impediments for the remaining seven-year firm and 17-year option periods.

CGSCIMB estimates that the internal rate of return of the Kraken charter over the eight-year firm period has now dropped to around 3%, from the target of a circa. 10% at its inception, after factoring in the liquidated damages and upfront fee refund that was negotiated in 2016.

“With the line now clearly drawn under the Kraken provisions, and with the share price having de-rated rapidly post second quarter results, we believe there is greater upside risk than downside risk.

For instance, if the FPSO’s technical impediments are resolved in the future, the penalties no longer need to be paid to EnQuest, and Bumi Armada’s valuation can be revised upwards by the portion of the US$119mil impairment that can be written back,” CGSCIMB says with an unchanged “add” rating and a target price of 73 sen.

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