Public Invest:
Bumi Armada (BAB)’s wholly-owned subsidiaries, Bumi Armada (Singapore) Pte Ltd (BASPL) and Armada Oyo Limited (AOL), have each issued a notice of suspension to Erin Petroleum Nigeria Limited (EPNL). This is to suspend the provision of services for Armada Perdana by BASPL and AOL under the operational and maintenance services (O&M) contract and bareboat charterparty contract (charterparty) respectively. The suspension is attributed to the longstanding delays in payments due to AOL, coupled with irregular payments on the O&M contract to BASPL. We are not fazed with the suspension, considering Armada Perdana had no revenue contributions previously (however, we understand there was a minimal revenue contribution in 1QFY17) coupled with non-receivables for a prolonged period. We had therefore conservatively not accounted for the contract and hence maintain our Outperform recommendation with an unchanged TP of RM0.90 derived by our DCF approach. The suspension is assumed to not have any impact on BAB’s performance as it had been fully provided for in FY16.
- What happened? According to the press statement release, BAB’s Executive Director and CEO, Leon Harland stated that Erin refused to provide the Group with a clear structure of how they intend to comply with the contractual agreements as well as repay the amounts owing, despite BAB’s repeated attempts to resolve the situation amicably. As the situation has been prolonged, the Group made the decision to enforce its rights under the contracts and to be paid in accordance with the contractual terms. The Group has expressed however that they are willing to work with their clients to reach mutually agreeable solutions during challenging times or events, on a good faith basis. However, such solutions must be sufficient and reasonable, as a resolution to the outstanding amounts that Erin owes to BAB.
- Contract details. i) O&M contract – for the provision of O&M services for Armada Perdana deployed at the Oyo Field Development located offshore of Nigeria. On 25 March 2014, Oceanic, novated its rights and obligations under the O&M Contract to EPNL, with the O&M contract amended further on 30 June 2015 between BASPL, EPNL and AOL. ii) Charterparty – for the charter of Armada Perdana to Oceanic by AOL.
- Operational Impact. i) O&M Contract - BASPL is suspending the performance of its obligations under the O&M Contract except for the critical maintenance and other activities to mitigate occupational health and safety and environment risks. ii) Charterparty - AOL is suspending the performance of its obligations under the charterparty. Both operational suspensions are effective from 12.00 pm Lagos time (5.00pm Malaysia time) on 21 June 2017.
Source: PublicInvest Research - 22 Jun 2017
Hong Leong Invest:
News
- Armada has suspended the bareboat charter and operations & maintenance (O&M) on FPSO Perdana to Erin Energy Corporation due to longstanding delays in payments due to Armada.
- The potential settlement amount by Erin is unknown at this juncture as Armada is now in discussion to reach a mutual agreement on the appropriate settlement.
Financial Impact
- We are not surprised about the announcement as the client has stopped paying FPSO charter to Armada since start of 2016. No earnings are recognised in the year for Armada Perdana.
- It would not have a major impact to our earnings forecast as we have not accounted earnings contribution from Armada Perdana for 2017
- The group on this FPSO as it has provided RM91.4m for doubtful debts in FY16 to account for potential non-payment by Erin. Further provision by the group would be subject to the final settlement amount of the contract post cancellation.
- Loans on the asset have already fully pared down years ago. Therefore we do not anticipate further liability to be incurred by the group.
Pros/Cons
- The announcement is actually more beneficiary for Armada compared to the current situation.
- In addition, Armada would be able to redeploy the asset to be utilised for bidding of other FPSO contracts if Erin is not paying up on its obligations.
Risks
- Execution risk;
- Prolonged low oil price; and
Forecasts
- Maintain forecast.
Rating
HOLD ( ↔ )
- Earnings are expected to be stronger this year with new projects expected to come on stream. However, the continued delay in delivery of Armada Kraken would place overhang on the sentiment on the stock.
Valuation
- SoP-driven TP is maintained at RM0.72 with HOLD call maintained on the stock. Our valuation has already excluded value from Armada Perdana.
Source: Hong Leong Investment Bank Research - 22 Jun 2017
Kenanga Research:
Notice of suspension issued. Yesterday, ARMADA’s wholly-owned subsidiaries, Bumi Armada (Singapore) Pte Ltd (BASPL) and Armada Oyo Limited (AOL), have each issued a notice of suspension to Erin Petroleum Nigeria Limited (EPNL), a subsidiary of Erin Energy Corporation, to suspend the provision of services by BASPL and AOL under the operational and maintenance services contract and bareboat charterparty contract respectively. The suspension of operations is due to longstanding delays in the charterparty payments due to AOL, as well as irregular payments on the O&M contract to BASPL.
Not a surprise to us. This is not surprising to us as we have been guided that EPNL has not been paying the bareboat charter revenue since 4Q15 and ARMADA has stopped recognising revenue from Armada Perdana in FY16. Recall that Armada Perdana commenced its operation in January 2014 and the firm contract will expire in end 2020 with the option to extend for another 2 more years. Based on our back of envelope calculations, the remaining 3.5 years firm contract value should sum up to USD168m assuming charter rate of USD48m/annum.
Next option. ARMADA stated that it will continue to evaluate all available options including the possibility of working with EPNL to arrive at an amicable solution. Should they fail to reach an agreement, ARMADA, will fully enforce its rights against EPNL based on advice from external counsel.
No changes to our earnings estimates as we have excluded PERDANA from our forecasts. Besides this, ARMADA has also fully provided for the outstanding amount claimed and hence it will not have significant financial impact to the company in FY17.
Kraken aiming to hit first oil by July. We are guided that ARMADA is targeting to hit first oil by July for Kraken FPSO. While Armada LNG Mediterrana is already on hire, Armada Olombendo and Karapan Armada Sterling III are working towards full acceptance after achieving first oil in February and May, respectively. On the other hand, both OSV and T&I segments’ earnings are expected to stay lacklustre in the medium-term with continuous downside pressure on DCR given that the OSV oversupply might not be neutralised in near-term.
Maintain OUTPERFORM. All in, we maintain our OUTPERFORM call on the stock with unchanged SoP-driven TP of RM0.90 in view of better QoQ earnings improvement with Kraken in the picture. Our TP of RM0.90/share implies 12.6x FY18E PER and 0.8x FY18 PBV, which is in line with the industry sector valuation.
Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.
Source: Kenanga Research - 22 Jun 2017