Bumi Armada’s debt still poses a challenge

ON Tuesday afternoon, something unexpected happened in the trading of oil and gas (O&G) outfit Bumi Armada Bhd.

The Main Market-listed company, whose shares had doubled in the previous six weeks, experienced a major selldown.

On that day, Bumi Armada’s shares peaked soon after trading began to hit a 52-week high of 50 sen. However, within minutes of that, the stock began plunging. By the end of the trading day, it had dropped by more than 20% from its opening to 40 sen, wiping out almost Rm400mil in market capitalisation.

The trading volume that day was more than triple the average, according to Bloomberg data.

Some speculated that the selldown was linked to an incident at an oil rig in the North Sea.

In particular, there was news that independent Uk-based exploration and production operator Enquest had “proactively down-manned” one of its O&G platforms called Thistle, which is located 201km northeast of Shetland. This was supposedly a precautionary move, following a subsea structural inspection.

Analysts, though, were quick to point out that this had nothing to do with Bumi Armada.

According to Aminvestment Research, the incident at the Thistle platform was not related to the Kraken oil field in the East Shetland Basin. This is where Bumi Armada is operating a floating production, storage and offloading (FPSO) vessel for Enquest.

“We view the selldown in Bumi Armada’s shares as overblown,” it said in a report.

However, yet another reason for Tuesday’s selldown could be a “market correction” of the stock, opines a dealer.

This is because Bumi Armada’s shares have been on an uptrend in the last six weeks.

Its share price had doubled to more than 48 sen within six weeks from 22 sen a share on Aug 29.

On a year-to-date basis, Bumi Armada’s share price has soared by more than 200%.

It should be noted, though, that the improvement in Bumi Armada’s share price could be related to improvements in its profitability and debt levels.

Not too long ago, Bumi Armada’s prospects were weighed down by its huge debt levels. It reported huge losses last year.

The company, however, returned to the black in the first quarter of its financial year ending Dec 31, 2019 (FY19).

For the first six months ended June 30, 2019, Bumi Armada posted a net profit of Rm140.42mil, compared with a net loss of Rm537.06mil a year ago.

The improvement in its bottom line came from higher contributions from the Armada Kraken FPSO vessel and the Armada Olombendo FPSO, which operate in Angola.

In FY18, Bumi Armada had recorded a massive net loss of Rm2.3bil on the back of a revenue of Rm2.42bil, the result of a kitchen-sinking exercise that entailed huge provisioning.

High debt concerns

Prior to the crude oil crash back in 2014, Bumi Armada had been the darling stock of investors, ramping up billions of ringgit worth of overseas contracts.

It was once traded at RM2.60 a share back in 2012.

Its current market capitalisation of Rm2.6bil is a far cry from its Rm14bil value back in 2014, just before global crude oil prices plunged below US$30 per barrel from US$120 per barrel.

That had put the O&G industry in a slump, which saw oil majors cutting expenses, which, in turn, pushed their service providers into dire straits.

As a result, Bumi Armada made a total of Rm4.4bil in impairments and at one point, was on the brink of bankruptcy.

Its stock price dipped to as low as 15 sen last December.

It was not until April this year that things started to take shape in Bumi Armada. This came about after the company managed to refinance some of its debts.

It also sold some assets.

Another lifeline came in the form of a loan from the company’s major shareholder – tycoon T Ananda Krishnan.

Bumi Armada chief executive officer Gary Christenson said in May this year that the group was targeting to sell off its offshore support vessel (OSV) business, as well as two of its FPSOS – Claire and Perdana.

Christenson said the OSV business had been dragging down Bumi Armada’s performance.

Notably, in September, Bumi Armada sold one asset – the FPSO Perdana – for Us$40mil. The asset had not been generating revenue for the group since 2017 and the proceeds have been earmarked for debt settlement.

Loan from Ananda Krishnan

Last month, Bumi Armada saw Ananda injecting Us$75mil (Rm314mil) into the group in the form of a loan.

The loan would give Bumi Armada some breathing space. This would possibly mean that the company needn’t embark on any fire sale of assets while continuing with its turnaround efforts.

The move has also been seen as a vote of confidence by the company’s major shareholder, which, in turn, has boosted investor confidence in the stock.

As at June 30, Bumi Armada’s borrowings stood at Rm9.9bil, an improvement from its Rm10.38bil borrowings as at Dec 31, 2018, and Rm11.52bil as at Dec 31, 2017.

Since then, shares in Bumi Armada have been on an upward trajectory. At the last closing price of 43.5 sen, Bumi Armada shares were trading at nine times the price-earnings (PE) ratio, which is still a far cry from its peers listed on Bursa Malaysia.

The other FPSO players on Bursa Malaysia, namely Yinson Holdings Bhd and MISC Bhd, have also seen their share prices skyrocketing since the beginning of the year, thanks to new contract wins.

Both Yinson and MISC’S share prices have surged more than 67% and 27% to RM7 and RM8.28, respectively. At the current share prices, Yinson is trading at a PE of 33.98 times, while MISC is at 20.49 times.

Meanwhile, asset divestments are still expected.

“Given the group’s still higher gearing, we expect further announcements to monetise the group’s OSVS, given its low overall utilisation rate of only 50%, idle construction vessels and up to a 40% stake in the fully operational Us$1.5bil Armada Olombendo, deployed at Eni’s Block 15/06 off Angola,” Aminvest says.

While Bumi Armada’s earnings improvement is a positive development, it will still face difficulties expanding its business as long as its debt levels remain high. This is because of the capital-intensive nature of the FPSO business.

Meanwhile, a company spokesperson in a late reply to Starbizweek says, “Bumi Armada’s senior management has highlighted that reduction of debt and a drive towards cost efficiency are among the key focus areas for the group, going forward. It is definitely the aim of the group to remain profitable and to continue focusing on safety, operational performance improvements and various financial efficiencies, including selective asset disposals.”

Bloomberg data shows that nine analysts have a “buy” call on Bumi Armada, three recommend “holding” the stock while another three have “sell” calls.