• Reiterate Add with a higher SOP-based TP of 75 sen on a lower Ke of 13% (from 16%), as we believe earnings will recover strongly from 3Q23F.

• This is on the back of the full recovery of FPSO Kraken from 7 Aug 2023 and the contribution of the FPSO Armada Sterling V from Nov 2023F.

• Other re-rating catalysts include the Sterling V potentially receiving standby rates and the TGT-1 contract potentially extended.

Key Re-rating Catalysts Are Kraken’s Recovery and Sterling V Start

We forecast BAB to report an average 3Q23F and 4Q23F core net profit of RM182m each, a sharp recovery from 2Q23’s RM57m and almost back in line with 1Q23’s RM198m. This is on the back of the restoration of the FPSO Kraken’s production from 0% on 29 May 2023, when it experienced the failure of three transformers, to 60% from 11 Jun, 90% from 20 Jul and finally to 100% from 7 Aug 2023. While the RM90m loss of revenue in 2Q23 cannot be recovered, there is the potential to recover the RM40m in transformer repair costs if a rootcause analysis study concludes that the fault lies with the manufacturer, Trasfor SA. BAB also purchased four new transformers to replace the four existing ones, with two already delivered last month and another two to be delivered in Dec 2023F. Furthermore, BAB targets its 30%-owned Sterling V FPSO to achieve first oil in late-Oct 2023F and for the bareboat charter to commence thereafter. Even if potentially delayed by weather or other operational reasons beyond BAB’s control, we expect this associate to contribute some 15% of our FY24F core net profit forecast.

Sterling V Standby Rates and TGT-1 Extension Are Potential Upsides

Discussions are ongoing for the Sterling V to receive standby rates from charterer ONGC because the FPSO arrived offshore India in late-2022 but could not proceed with the charter due to various issues unrelated to BAB directly. If standby rates are successfully secured for an assumed 9-month period at just US$30,000/day (which is half of typical daily operating costs for the vessel), our FY24F core EPS may be enhanced by 1.4%. The FPSO Armada TGT-1’s charter may also be extended beyond its existing Nov 2024F expiry as the charterer Pharos Energy is requesting PetroVietnam to extend its PSC concession to 2031F, which could contribute a further 15 sen/share to our SOP as well as lift our FY25F core net profit forecast by 11%. A potential announcement by EnQuest of a Bressay oilfield tie-in to the FPSO Kraken is another positive newsflow that may help rerate BAB’s share price, even though it may not enhance our SOP or earnings forecasts.

Downside Risk: Rights Issue Possible in the Next 1-2 Years

One word of caution: we expect BAB to execute an equity rights issue in 1-2 years’ time to fund its new ventures in UK CCS and Indonesian gas. These include a 50% JV in the UK to inject CO2 into the seabed, a 51% participating interest in Indonesia’s Akia PSC to extract oil and gas and a JV to liquefy gas from Indonesia’s Madura gas fields. Our initial estimate is that BAB may need to secure at least RM4bn of new equity.

Source: CGS-CIMB Research - 2 Oct 2023