Analysts cautious on Bumi Armada’s near-term earnings trajectory

KUCHING: Analysts are remaining cautious on Bumi Armada Bhd’s (Bumi Armada) near-term earnings trajectory given the uncertainties arising from Kraken’s lower charter payments.

This outlook comes even as Bumi Armada announced that its Armada Kraken floating production, storage and offloading (FPSO), operating on the Kraken field in the UK North Sea has completed the offloading of its first cargo on September 12, 2017.

According to AmInvestment Bank Bhd (AmInvestment Bank), Bumi Armada indicated that an interim agreement has been reached between the group and EnQuest for the payment of the charter rates based on the proportion of FPSO Kraken’s processing capability versus the field’s production rate.

AmInvestment Bank recalled that the FPSO Kraken will be receiving reduced charter rates due to technical problems which have caused lower-than-expected production rates.

While management indicated that the Kraken charter, even at the lower temporary rates, could still be profitable this year, the research firm remained conservative given the group’s past earnings disappointments.

AmInvestment Bank also recalled that Enquest had awarded a US$1.8 billion FPSO charter for an initial eight years – which includes 17 years of optional extension -- to Bumi Armada back in 2013.

While the group’s earnings from the second quarter of financial year 2017 (2QFY17) onwards could potentially improve from the full recognition of the FPSO vessel Armada Olombendo, which achieved first oil on February 8 this year, the research firm remained cautious on the company’s nearterm earnings trajectory given the uncertainties arising from Kraken’s lower charter payments.

AmInvestment Bank noted that even though offshore support vessel (OSV) utilisation rates are improving, management affirmed that charter rates are still weakening against the backdrop of the prevailing oil price which continues to slow down the progress of new potential projects.

All in, AmInvestment Bank maintained its ‘hold’ recommendation on Bumi Armada with unchanged forecasts and fair value of RM0.79 per share based on a 20 per cent discount to its sum-of-parts (SOP) valuation of RM0.99 per share.

The research firm’s valuations were maintained although the group’s long-delayed FPSO vessel Armada Kraken has managed to offload its first cargo on September 12, 2017.

“This is because the charter rates for the FPSO are currently uncertain pending the client Enquest’s full acceptance of the vessel,” it said.