Ananda’s Ar­mada in a storm

Bumi Ar­mada’s high capex in the last three years and hic­cups in some of its oper­a­tions have put a strain on its bal­ance sheet and the spot­light on its ma­jor share­holder

The Star Malaysia - StarBiz - - Front Page - Sto­ries by M. SHAN­MUGAM and TOH KAR INN

A com­bi­na­tion of volatile oil prices and strained bal­ance sheet have piled the pres­sure on Ananda Kr­ish­nan-con­trolled Bumi Ar­mada. What tran­spired in the com­pany which prided it­self as among the for­mi­da­ble FPSO ser­vice providers in the world?

IF any­body thought the worst was over for Bumi Ar­mada af­ter it sailed through a bru­tal down­turn in the oil and gas in­dus­try three year ago, they were proven wrong last week.

An in­ter­nal memo from ex­ec­u­tive di­rec­tor and group chief ex­ec­u­tive of­fi­cer Leon Har­land painted a som­bre pic­ture of the oil and gas com­pany that is con­trolled by low-pro­file bil­lion­aire T. Ananda Kr­ish­nan.

Hark­land told em­ploy­ees that the com­pany had not made much progress with re­gard to im­prov­ing its fi­nan­cials. Cash­flows are tight and it has lim­ited its ef­forts to pur­sue new work.

He fur­ther stated that the fi­nan­cial sit­u­a­tion has caused the group to be se­lec­tive in pur­su­ing new jobs and it hopes to com­plete its re­fi­nanc­ing of a US$500mil fa­cil­ity by the first quar­ter of next year.

The mes­sage to em­ploy­ees sup­pos­edly trig­gered the stock to fall to an all-time low.

At 15.5 sen per share, Bumi Ar­mada’s mar­ket cap­i­tal­i­sa­tion is only RM910mil. Its value was RM13.5bil in May 2014, just be­fore oil price started its slip­pery slope down from its high of US$120 per bar­rel. Even at the nadir of oil price cri­sis when crude went be­low US$30 per bar­rel in early 2015, Bumi Ar­mada fetched a val­u­a­tion of al­most RM5­bil.

The value de­struc­tion is huge. Ananda’s 34.9% stake is now worth only RM318mil, com­pared with more than RM1.75bil three years. In­vestors such as the Em­ploy­ees Prov­i­dent Fund, Per­modalan Na­sional Bhd and Kumpu­lan Wang Amanah Pen­cen are sit­ting on pa­per losses.

It is more painful for those who sub­scribed for Bumi Ar­mada’s rights is­sue that was done at RM1.35 per share in Oc­to­ber 2014. The com­pany raised RM1.9bil which was used mainly to ex­pand its busi­ness.

In 2015 and 2016, Bumi Ar­mada’s cap­i­tal ex­pen­di­ture was high, which stretched it fi­nances.

Bumi Ar­mada re­cent fall started with the com­pany mak­ing an­other heavy pro­vi­sion in its third quar­ter re­sults re­leased two weeks ago. It made im­pair­ments to the tune of RM1.04bil, its se­cond ma­jor pro­vi­sion in three years.

The pro­vi­sions were for a float­ing, pro­duc­tion, stor­age and of­fload­ing (FPSO) ves­sel called Ar­mada Kraken that was fi­nally de­ployed to an oil and gas field in North Sea. The other part of the pro­vi­sion came for its fleet of off­shore sup­port ves­sels.

A few days af­ter the re­sult was out, the in­ter­nal memo was the talk­ing point in the stock mar­ket.

Some view the memo as a warn­ing shot to em­ploy­ees on the need for the com­pany to take fur­ther mea­sures to cut cost.

“I would not be sur­prised if the com­pany em­barks on a down­siz­ing ex­er­cise. It has hap­pened be­fore and right siz­ing tech­ni­cally should bring about bet­ter re­sults on the longer term,” says an ex­ec­u­tive in the oil and gas in­dus­try.

How­ever, there is also an­other view – which is more dam­ag­ing to the stock price – that the com­pany would not have the fi­nan­cial mus­cle to bid for new jobs.

Although Har­land had said the com­pany would not make a cash call from share­hold­ers, in­vestors are not con­vinced.

Bumi Ar­mada has net li­a­bil­i­ties of RM9.6bil as of Sept 30. In­ter­est ser­vic­ing it­self for the first nine months this year came up to RM390mil. It has an or­der book of RM22.3bil and look­ing at RM12.5bil more in po­ten­tial projects.

In the im­me­di­ate term, it has US$500mil loan that has to be re­fi­nanced by the first quar­ter next year. A suc­cess­ful re­fi­nanc­ing should ease the re­pay­ment sched­ule of the com­pany that has a gear­ing of two times.

Man­age­ment has in­di­cated to an­a­lysts that it was look­ing at sev­eral op­tions to raise funds such as mon­etis­ing some of its as­sets. A cash call is the last re­sort.

Some re­search houses such as AmRe­search and KAF high­light the “ris­ing risk” of a cap­i­tal rais­ing through eq­ui­ties, es­pe­cially if the group se­cures new jobs.

How­ever, a fund man­ager says that it is highly un­likely for Bumi Ar­mada to un­der­take a rights is­sue at cur­rent lev­els.

“It would not raise much money and gives rise to a huge di­lu­tion. Why would share­hold­ers, par­tic­u­larly Ananda agree to any fund rais­ing through the is­suance of shares?” says a fund man­ager.

Tran­si­tion hit by stretched fi­nances

The year 2017 is a tran­si­tion for Bumi Ar­mada, a com­pany that started off by mainly pro­vid­ing off­shore marine ser­vices to oil and gas com­pa­nies.

The tran­si­tion is a switch in the com­pany’s earn­ings de­pen­dency from the low-mar­gin and highly-com­pet­i­tive off­shore marine ser­vices to the more lu­cra­tive but cap­i­tal in­ten­sive float­ing pro­duc­tion ser­vices.

The off­shore marine ser­vices are largely bro­ken into the sup­ply of off­shore sup­port ves­sels (OSV), which work on short con­tract tenures and ves­sels that un­der­takes sub-sea works, par­tic­u­larly pipe-lay­ing and trench­ing ac­tiv­i­ties. Bumi Ar­mada has 44 OSVs and three ves­sels for sub-sea ac­tiv­i­ties.

Bumi Ar­mada is among the top five compa- nies in the pro­vi­sion of float­ing pro­duc­tion ves­sels for off­shore oil and gas works. It has eight FPSOs and one ves­sel for stor­age and of­fload­ing of gas.

In 2013, be­fore the col­lapse of oil prices and its strat­egy to grow its FPSO busi­ness, Bumi Ar­mada was more de­pen­dent on the OSV mar­ket. It had more than 50 OSVs and only four FPSOs. Two out of the four FPSOs were op­er­at­ing in Nige­ria where the cost of pro­duc­ing oil is high at about US$80 per bar­rel.

The two Nige­rian FPSOs – Ar­mada Perkasa and Ar­mada Per­dana – are no longer part of Bumi Ar­mada’s oper­a­tions fol­low­ing the col­lapse in oil prices.

Ar­mada Perkasa was sold last year while oper­a­tions on Ar­mada Per­dana is sus­pended be­cause the char­terer, Erin En­ergy Corp, which is an in­de­pen­dent oil and gas compa- ny, could not pay on time. In the lat­est de­vel­op­ment, the Nige­rian arm of Erin En­ergy has been placed un­der re­ceiver/man­ager.

Apart from Nige­ria, Bumi Ar­mada also ran into prob­lems with a FPSO – Ar­mada Claire – in Aus­tralia in 2016. The client ter­mi­nated the char­ter and the mat­ter is now sub­ject to ar­bi­tra­tion. In the mean­time, Ar­mada Claire is moored in Batam, In­done­sia.

The volatile oil prices, which caused a re­duc­tion in the de­mand for OSVs and Bumi Ar­mada’s ag­gres­sive move into the FPSO busi­ness that re­quired high cap­i­tal ex­pen­di­ture in 2015 and 2016, caused a strain in its fi­nan­cials in the last two years.

The util­i­sa­tion of the OSV ves­sels was about 35% in the se­cond quar­ter and im­proved to 44% in the third quar­ter of this year. The char­ters on OSVs barely cover the cost of oper­a­tions.

As for the FPSO busi­ness, the com­pany de­liv­ered four ves­sels in 2017 and 2018 but saw its fi­nances stretched.

Har­land aptly sums up the com­pany’s predica­ment in the 2017 an­nual re­port mes­sage to share­hold­ers.

“It was chal­leng­ing with sub­stan­tially re­duced ac­tiv­ity in OSV, the ter­mi­na­tion of the Ar­mada Claire FPSO char­ter, chal­lenges with the Ar­mada Per­dana FPSO in Nige­ria, plus on­go­ing con­struc­tion of four FPO projects in the ship­yards.

“As a re­sult, we have been hit by re­duced in­come whilst cap­i­tal spend­ing needed to con­tinue at the same time and we have been re­ly­ing on cor­po­rate debt fa­cil­i­ties as re­sult,” he had said.

On a brighter note, out of the eight FPSOs in Bumi Ar­mada’s sta­ble, six are mo­bilised and have started con­tribut­ing to the com­pany. Con­tri­bu­tion from the FPSO busi­ness is more than the OSV busi­ness for the nine months this year.

Cat­a­lyst and con­cerns

Go­ing for­ward, the cat­a­lyst for Bumi Ar­mada is the out­come of its debt fi­nanc­ing, mon­eti­sa­tion of its as­sets such as the FPSO, the mo­bil­i­sa­tion of Ar­mada Claire and its sub­sea ves­sels se­cur­ing work in the Caspian Sea.

On debt fi­nanc­ing, an­a­lyst are ex­pect­ing the US$500mil un­se­cured loan to be re­fi­nanced con­sid­er­ing the im­proved free cash­flow of the com­pany, par­tic­u­larly from its FPSO busi­ness where six out of the eight ves­sels are in oper­a­tions.

The two FPSOs de­ployed this year are Ar­mada Kraken that is op­er­at­ing in North Sea and Ar­mada Olombendo that is de­ployed to An­gola. For the first nine months of this year, net cash flow from op­er­at­ing ac­tiv­i­ties im­proved to RM591.5mil com­pared with RM35.9mil last year.

“Of the US$500mil debt, the com­pany has al­ready re­paid US$120mil and is ne­go­ti­at­ing with bankers to re­fi­nance the re­main­der. It should not be a prob­lem as long as cash flows im­proves,” said a fund man­ager.

AffinHwang, which has a price tar­get of 55 sen for Bumi Ar­mada, high­lighted the im­proved cash-flow of Bumi Ar­mada in a re­search note.

As for Ar­mada Claire, it has been re­ported that the FPSO is the fron­trun­ner to se­cure a char­ter for an oil and gas field in Brazil that has been awarded to a com­pany from Aus­tralia. The other bid­ders pulled out due to price con­cerns leav­ing Bumi Ar­mada as the sole con­tender.

“Any news on the Ar­mada Claire would only ar­rive to­wards the mid­dle of next year pro­vided oil prices re­main at cur­rent lev­els,” says the fund man­ager.

Out­side the FPSO busi­ness, Bumi Ar­mada’s two ves­sels un­der­tak­ing sub-sea ac­tiv­i­ties in the Caspian Sea are ex­pected to come un­der some scru­tiny in the next two months.

Ac­cord­ing to UOB Kay Hian, the big­gest risk to earn­ings at this junc­ture is the re­newal of char­ter for Bumi Ar­mada’s two ves­sels un­der­tak­ing sub-sea works in Caspian Sea.

“We un­der­stand that both ves­sels are bid­ding for jobs in Rus­sia, Kaza­khstan and Turk­menistan with out­come to be known by end-2018. As­sum­ing this, ac­tiv­ity may be high in se­cond and third quar­ters of next year. But it is not guar­an­teed that the ves­sels will earn rev­enues for all of 2019,” it said in a re­search re­port.

Most re­search houses have adopted a cau­tious stance on Bumi Ar­mada even though it has a strong share­holder such as Ananda. None of Ananda’s com­pa­nies have gone un­der and oil and gas still holds a spe­cial place in his heart.

Hence the spec­u­la­tion of Ananda tak­ing Bumi Ar­mada pri­vate per­sists.

How­ever, peo­ple close to the ty­coon says that he is pay­ing close at­ten­tion to the de­vel­op­ments in Bumi Ar­mada and look­ing at the com­pany and its po­si­tion in the volatile oil and gas in­dus­try.

“The share­hold­ers are get­ting anx­ious. There may be some changes in the man­age­ment if the com­pany con­tin­ues to spring neg­a­tive sur­prises. Ananda is sharp and wants to see plans ex­e­cuted well.

“He is look­ing at Bumi Ar­mada. But not with the view of tak­ing it pri­vate as what the mar­ket spec­u­lates,” says an ex­ec­u­tive fa­mil­iar with the work­ings of Ananda.

Close at­ten­tion: Sev­eral re­search houses have adopted a cau­tious stance on Bumi Ar­mada even though it has a strong share­holder such as Ananda.

Tough times: Although Har­land had said the com­pany would not make a cash call from share­hold­ers, in­vestors are not con­vinced.

Heavy pro­vi­sion: Ar­mada Kraken is fi­nally de­ployed to an oil and gas field in the North Sea.

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