This article first appeared in The Edge Malaysia Weekly on March 26, 2018 - April 1, 2018

OIL and gas outfit Bumi Armada Bhd is mulling the setting up of a special purpose vehicle (SPV) and injecting some of its floating production storage and offloading (FPSO) assets into it, as part of a larger plan to ease its debt burden.

Bumi Armada is understood to be looking to raise US$500 million (RM1.96 billion) via the exercise, which will see it retaining as much as 49% of the SPV, with the remainder likely to be held by controlling shareholder Tatparanandam Ananda Krishnan, or parties linked to him.

In response to questions from The Edge on the exercise, Bumi Armada says, “There are no confirmed plans at this stage in relation to any FPSO asset injection exercise.”

However, bankers familiar with the deal say it is one of the proposals being considered seriously.

“It’s a smart move, the FPSOs all have locked-in charter contracts now and can fetch better valuations. This way, with Bumi Armada controlling 49% of the SPV, a chunk of the debt is also taken off the company’s balance sheet,” says a broker.

Bumi Armada adds that it “is continuously assessing options available to raise funds to further strengthen its balance sheet and to fund new projects. These options may include potential share placement, asset divestment, establishing equity partnerships and obtaining debt funding”.

To recap, Bumi Armada has one liquified natural gas (LNG) floating storage unit and operates seven FPSOs worldwide. It also operates 44 offshore support vessels (OSVs), not including subsea construction vessels, in regions as diverse as West Africa, Latin America, the Caspian Sea and home base Southeast Asia.

In a nutshell, Bumi Armada’s asset-heavy approach resulted in considerable uncertainty during the oil price crash in early 2016, when crude oil traded below US$30 a barrel. During the period, the company incurred massive impairments and maintenance costs amid low utilisation and charter rates, which adversely impacted its ability to pare down debt.

Excluding a term loan ring-fenced by the Armada Kraken FPSO contract of RM2.15 billion, Bumi Armada had short-term debt of RM3.85 billion in end-2017.

This is against the group’s shrinking deposits, cash and bank balances totalling RM1.85 billion in end-2017, from RM3.02 billion the year before.

It also has long-term debt of RM6.02 billion, bringing total borrowings to RM11.52 billion in end-2017.

However, MIDF Research analyst Aaron Tan opines that despite the high gearing, the company’s debt level is now “very manageable” as compared with two years ago.

“The group’s operating profit is very healthy at above RM1 billion last year … As long as they are profitable and there is nothing to rock the boat, creditors will still allow them to draw down [funding as required],” he says.

Tan adds that Bumi Armada’s operations are largely predictable. With most impairments completed in the three years ended December 2016, the company returned to the black last year, buoyed by a pickup in oil price and more upstream activities.

For its financial year ended Dec 31, 2017 (FY2017), Bumi Armada booked a net profit of RM352.25 million from a loss of RM1.97 billion the year before. Revenue nearly doubled to RM2.4 billion from RM1.32 billion in FY2016.

Through the year, Bumi Armada’s FPSO segment recorded 99% utilisation uptime and its offshore marine services (OMS) segment posted an operational profit, although vessels under that segment continued to suffer from a low utilisation rate of around 50%.

Regardless, leveraging its FPSO assets is one way for Bumi Armada to lighten its balance sheet. While giving away control of the FPSO assets will eat into its earnings — 93% of its RM22.3 billion order book in end-2017 consisted of FPSO contracts — there is less room to leverage the OMS segment amid the persisting oversupply of OSVs in the market.

Bumi Armada’s share price has rebounded from its all-time low of 55 sen in December 2016 to above 80 sen presently, after undergoing a roller-coaster ride in 2017.

However, the share price is still about 70% lower from the group’s IPO price of RM3.03. Bumi Armada’s listing was the largest in 2011.

The counter has traded below RM1 for about two years. If the company is able to maintain or better its FY2017 performance under current market conditions, any corporate exercise to further clean up its balance sheet should bring investor interest back.

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