Investment Highlights

• Our BUY recommendation is maintained on Bumi Armada with unchanged forecasts and fair value of RM1.22/share, which implies an FY19F PE of 16x.

• We continue to view the risk profile of the group as substantively improved with its clientele’s upcoming full acceptances of the floating production, storage and offloading (FPSO) vessels Olombendo and Kraken, supported by minimal 4QFY17 impairment charges.

• However, Bumi Armada has received a notice from Erin Petroleum Nigeria Limited (Erin) advising of a purported force majeure event and requesting immediate, orderly shutdown of operations on its wholly-owned FPSO Armada Perdana, which is currently operating in OML 120 block, Oyo field, off Nigeria.

• The group also received a notice of seizure/attachment of goods from a third party informing that Armada Perdana’s entire crude oil produced and to be produced and stored has been seized/attached by a writ of attachment of the Federal High Court, Lagos in legal proceedings to which Bumi Armada Group is not a party.

• Recall that on 20 June last year, Bumi Armada suspended Armada Perdana’s operations following irregular payments for the operation and maintenance (O&M) services together with long-delayed charter payments by Erin Energy Corporation.

• However, since then, Bumi Armada has allowed oil to be produced from the field to flow into Armada Perdana’s cargo tanks. As Erin’s debts are still outstanding even after a series of meetings with Nigeria’s Department of Petroleum Resources and Erin Energy, the oil was not to be offloaded from Armada Perdana until a debt resolution has been reached with the stakeholders.

• The group is of the view that Erin is not relieved from its obligation to make full payment of all payments and the purported force majeure declaration is wrongful under the operational and maintenance services contract.

• This is a negative development as we understand that the announced FY18F credit risk impact estimated at RM30mil (7% of FY18f earnings) involves the demobilisation of the vessel from the field, and not the remaining outstanding debt of Erin, of which some provisions have already been made. As negotiations were still ongoing, management has not revealed the full potential outstanding claim against Erin at this stage, which involves a shutdown, not a termination of the charter contract.

• To improve its balance sheet profile, the group plans to issue euro medium-term notes, of which US$1.5bil are still untapped, proposed back in 2013 together with disposal of minor stakes in completed FPSO projects such as Olombendo once full acceptance has been achieved. The stock currently trades at a compelling FY18F PE of 12x vs. the sector’s 20x with near-term earnings recovery in the horizon.

Source: AmInvest Research - 18 Apr 2018