Bumi Armada (BAB) announced its Armada Kraken Floating Production Storage Offloading (FPSO) vessel was recently shut-in following the failure of critical hydraulic submersible pump (HSP) transformers. Given HSP is a specialised equipment and a key requirement for Kraken to lift heavy oil in North Sea, both BAB and its client, EnQUest attempted a restart and undertake a remediation program though was unsuccessful. Kraken FPSO remains shut-in, as a result. On the other hand, BAB is tapping on the shut-in period to expedite key maintenance activities which was initially planned to be executed in 3QFY23. While financial impact of this incident cannot be estimated at this juncture, management expects it to be material to BAB. We cut our earnings by 8% for FY23 as we are taking a conservative stance by assuming the shut-in period would be prolonged for a quarter and only return to production on a phased basis. Although, we are cautious on the short-term earnings impact, we retain our Outperform rating on the basis of stable long-term recurring income. Our TP is reduced to RM0.70 (from RM0.75).

• Short-term earnings impact. According to BAB, the financial impact of this incident cannot be estimated at this juncture but is expected to be material. On this basis, we conservatively cut our revenue estimates by ~RM150m from our initial FY23 forecast under a worst-case scenario assuming the shut-in period would be prolonged for three months from June onwards. There is significant scope for upward revision however if Kraken could restart at below capacity in the coming weeks before it steps up its production until it meets the full capacity as per its restart plan.

• Strong balance sheet to absorb the impact. Due to critical and specialised nature of the HSP equipment, we expect BAB would spend significant capital expenditure for the repair works while maintaining its operating expenses. However, we believe BAB can absorb the financial impact given its strong cash reserve of RM678m with net gearing ratio of 0.82x after it fully repaid Kraken’s project finance debt 3 months ahead of schedule. BAB’s long-term outlook remains solid with stable recurring income from its FPSO operations.

Source: PublicInvest Research - 6 Jun 2023