Armada Kraken FPSO final acceptance a positive surprise

KUCHING: Bumi Armada Bhd’s ( Bumi Armada) Armada Kraken floating production storage and offloading ( FPSO) vessel, which has been issued with the final acceptance certificate, has been met with positive surprise from analysts.

The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) was surprised by Armada Kraken FPSO’s final acceptance given that the company had just only announced the Amendment Agreement Two (AA2) two weeks ago.

“We were positively surprised on Armada Kraken FPSO’s final acceptance at this time given that the company had only announced the Amendment Agreement Two (AA2) on August 29, 2018, thereby implying a delay in the final acceptance as compared to its initial guidance of end- June,” Kenanga Research said.

The research arm recalled the terms under AA2 included compensation payment from Bumi Armada of US$ 15 million (or approximately RM60 million), further rectification works required on the FPSO and agreed compensation payments until the outstanding items are completed.

“Nonetheless, AA2 is expected to lead to a negative one- off earnings impact of US$ 25 million (or approximately RM100 million) in financial year 2018 (FY18).”

Kenanga Research highlighted that following the final acceptance of Armada Kraken FPSO, the company has now mitigated risk of default for the RM1.9 billion borrowings involved in Armada Kraken.

It explained that should final acceptance not achieved, the lenders could exercise their right to demand immediate full repayment of the borrowings.

“Additionally, we believe Bumi Armada will also be receiving the full charter rates for the FPSO post- final acceptance ( albeit possibly at a lower-than- original rate after renegotiations in AA2), as opposed to a discounted rate pre- final acceptance, thus leading to improved earnings visibility and cash flows from the FPSO.”

Meanwhile, Affin Hwang Investment Bank Bhd (Affin Hwang) noted that this latest development was in line with management’s timeline shared during the second quarter of 2018 (2Q18) analyst briefing.

“The positives from this acceptance is that earnings and cash flow certainty will be enhanced. The key focus moving forward is to rectify the remaining Kraken equipment, as production is not at optimum capacity yet,” the research firm said.

“Longer term positives hinges on the quantum of impairment write back, which depends on the speed of the rectification works done.”