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Monday, March 7, 2016

Brokers Report: Bumi Armada - Surprise Termination from Woodside

Downgrade to Underperform from Outperform with lower Target Price (TP) of RM0.80

Bumi Armada Bhd

  • Last Friday, Bumi Armada Bhd (ARMADA) announced that it has received a Notice of Termination from its client Woodside Petroleum Ltd (Woodside) to terminate Armada Claire, the Floating Production Storage and Offloading (FPSO) unit, which has been operating at the Balnaves oilfield, north off Australia since first oil delivery in August 2014. 
  • ARMADA states that the Notice of Termination is not valid and tantamount to a cancellation of convenience or a repudiation of contract, which is entitled for compensation. Hence, it intends to initiate legal proceedings against Woodside. 
  • Recall that the contract is worth USD457m under a fouryear period expiring at 2018 with an option to extend up to 2022. 

  • We were negatively surprised by this news having been guided that all the operating FPSOs are still intact during the 4Q15 analyst briefing last month except for one small client having problem servicing full payment of which provision for doubtful debt was made.
  • Therefore, it put to question the sustainability of all these FPSOs as well as the upcoming FPSOs which are soon to sail away by July this year.
  • We believe there should be compensation if a breach of contract can be proven, but the amount of compensation is unknown at this juncture. 
  • However, we reckon that this will strain its cash flow and the balance sheet as the chances of Armada Claire being redeployed is low given the challenging environment with limited demand of FPSO units. (Refer overleaf for more details.)  

  • Four of its FPSO projects (Kraken, Olombendo, Madura and Malta) in the pipeline are on track with conversion in the shipyard, looking to sail away by July this year.
  • Despite Armada Perkasa being extended for another year, we suspect that the allowance for doubtful debt provided could be on this FPSO, raising further concerns on the sustainability of FPSO contracts.
  • Both its OSV and T&I business segments’ earnings are expected to stay weak in the medium-term in view of the weak oil prices which will cap oilfield exploration and development activities. The company has already cold staked 18 vessels and is looking to cold stake two more in the near-term.  
  • FY16/17E net profit is cut by 16.1/14.2% to RM278.6522.1m after excluding contribution from Armada Claire going forward.
  • Our SoP-driven TP is revised down to RM0.82 from RM1.17 after: (i) excluding Armada Claire’s valuation, (ii) increasing WACC to 6.48% from 6.13% in view of higher risk of contractual default from clients, and (iii) imputing higher-than-expected net debt as at FY15.  
  • Upside Risk: (i) Better-than-expected OSV and T&I segments, (ii) Better-than-expected FPSO execution, and (iii) Faster-than-expected recovery in oil prices.
  • Woodside is a listed petroleum exploration and production company in Australia with 65% interest in the Balnaves oil field. While the actual reason for the termination is not disclosed, we do not discount Woodside’s intention to halt production given that the field experienced a natural reservoir production decline to 4,611bbl/day in 4Q15 from 7,662bbl/day in 3Q15, which is way below the initial estimate of 30,000bbl/day. Note that Woodside has made a one-off onerous lease charge of USD128m on Balnaves field to reflect the shortfall between asset value and lease obligation, implying that the field is not economically feasible to extract under current oil price environment.
  • ARMADA secured a syndicated term loan facility of USD198m for Armada Claire in Apr 2013. Assuming the loan were to be repaid within the contract period, the remaining loan attached to Armada Claire could still be more than USD100m and payable in the next three years. The loss of cash flow raises concerns on its debt obligation repayment as ARMADA has a relatively high net gearing of 0.9x.   
Source: Kenanga Research - 07 March 2016

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