This article first appeared in The Edge Financial Daily on August 11, 2017 - August 17, 2017

Bumi Armada Bhd
(Aug 10, 69 sen)
Maintain hold recommendation with an unchanged fair value (FV) of 79 sen per share: We have maintained our “hold” recommendation on Bumi Armada Bhd with unchanged forecasts and FV based on a 20% discount to our sum-of-parts valuation of 99 sen per share. 

Bumi Armada has allowed oil to be produced from the OML 120 block, Oyo field, off Nigeria by independent oil and gas operator Erin Energy Corp to flow into its wholly-owned floating, production, storage, and offloading vessel (FPSO) Armada Perdana’s cargo tanks. 

Even after a series of meetings with Nigeria’s Department of Petroleum Resources and Erin Energy, the latter’s debts are still outstanding. Hence, the oil will not be offloaded from Armada Perdana until a debt resolution has been reached with the stakeholders. While this means that the FPSO operation is still largely suspended, it may mean that there is some progress in the negotiations.

Recall that on June 20 this year, Bumi Armada suspended Armada Perdana’s operations following irregular payments for the operation and maintenance (O&M) services together with long-delayed charter payments involving the OML 120 block, Oyo field, off Nigeria by Erin Energy.

In the first half of this year, two of Bumi Armada’s FPSOs, including Armada Perkasa, were operating in Nigeria, but were only being remunerated for their O&M services since the second quarter of 2016 (2Q16). This was without being compensated for the bareboat charter, which makes up the main bulk of their revenues.

As the outstanding Armada Perdana and Perkasa claims by Bumi Armada have been fully provided for in financial year 2016 (FY16), we estimate a 4% to 5% reduction in forecast earnings for FY17 to FY19 stemming from the loss of O&M revenue recognition from the two Nigerian vessels. 

Besides Armada Perdana’s operation in Nigeria, the remaining FPSO operation in Africa is in Angola by Armada Olombendo which achieved first oil on Feb 8 this year. 

Even with the full recognition of the massive US$1.5 billion (RM6.43 billion) Armada Olombendo, we remain cautious about the company’s near-term earnings trajectory given the uncertain penalties which could arise from delays in the commencement of the FPSO Kraken’s contract in the North Sea.

Recall that some of Kraken’s undisclosed late delivery provisions were only up to the backstop date of April 1, 2017, which was later extended to July 1 this year. The backstop date gives the client the right to terminate the charter. With penalties potentially accruing at US$6 million a month, negotiations with the client Enquest are still deadlocked. 

Given the past earnings disappointment, the group needs to convincingly navigate past its 2QFY17 results to reach its rerating inflection point. — AmInvestment Bank Research, Aug 10