Bumi Armada shares down 21%

PETALING JAYA: Bumi Armada Bhd's share price took a beating yesterday, plummeting as much as 25 sen or 25% after the termination of its Armada Claire floating production storage and offloading (FPSO) contract.
The termination also prompted research houses to downgrade the stock, which closed the day 21 sen or 21% lower to 79 sen on some 153.4 million shares done, the third most actively traded counter.
AmResearch has downgraded Bumi Armada to "sell" from "hold" call, with a lower fair value of 86 sen. Hong Leong Investment Bank (HLIB) Research also downgraded the stock to "hold" from "buy" based on a reduced target price of RM1.01 from RM1.17.
Recall that Bumi Armada had signed a US$458mil (RM1.9bil) contract for an initial four-year fixed-term charter with an option for four annual extensions in September 2011 with US-based Apache Energy Ltd. Apache subsequently sold its Australian unit Apache Julimar Pty Ltd (AJPL) to Australia-listed Woodside Petroleum Ltd. AJPL has a 65% working interest in the WA-49-L block in the Balnaves Field, off north-western Australia.
HLIB Research said it is a negative surprise because typically FPSO contract terms and clauses are structured tightly to protect downside risk of FPSO asset players by requiring its client to reimburse a significant cash sum upon premature contract termination.
"In our opinion, it could be a desperate move by FPSO client to at least temporarily reduce its cash burn amid sub-US$40 oil price environment," it noted.
While exact payout is classified for now as the lawsuit will be ongoing, Woodside Energy Julimar Pty Ltd is expected to pay about RM900 million cash, according to HLIB Research's on the back of envelope calculations.
It said the risk of non-recovery of the potential payout by Woodside remains low for now given that its equity value stood at US$14.2 billion as per reported in its latest 2015 annual report.
"Nevertheless, we believe Woodside would not agree to the full payment as it has already committed US$1.5 billion capital expenditure for 2016 involving Wheatstone LNG and Pluto projects," it added.
The research house believes a more likely scenario would be a settlement out off court through renegotiation of the contract terms involving charter rate discounts or deferment of monthly payments.
It said Bumi Armada would be in a more difficult situation as it is much harder for the group to look for another FPSO client under the current oil price scenario, which provides similar return on assets as implied by the original contract.
While Bumi Armada intends to fully enforce its rights under the contract, including initiating legal proceedings against Woodside for its unlawful contract termination, AmResearch does not expect any near-term mitigating impact to the loss in FPSO contributions given the likely protracted legal process.
"We estimate that the loss of this charter could reduce Bumi Armada's firm order book as at 31 Dec 2015 by 1% to RM27 billion and decrease option value by 2% to RM15 billion," it opined.
AmResearch has cut the Bumi Armada's FY16 to FY18 earnings by 11% to 15% due to the discontinuation of the Armada Claire FPSO charter.
It is concerned that this may not be the final FPSO termination as the EnQuest-operated Kraken project may face financial viability concerns if low crude oil prices persist towards the end of the year.
Bumi Armada currently has charter contracts for eight FPSO and one floating regasification unit. It is still looking for two new FPSO projects in Vietnam and Brazil, for which the contract awards could materialise this year, despite concerns over potential termination of its existing FPSO charters.