Company Insight

We recently met management of Bumi Armada for an update. Current FPSO bids for Kraken are coming to the final stage with the result to be announced by end of this month. Upstream recently reported that Bumi Armada has the edge over Teekay (the other shortlisted candidate) due to shorter delivery time given the conversion FPSO proposal. The capex for the FPSO is around US$1bn with contract firm period of 9 years. The production life for the field is anticipated up to 25 years and first oil is targeted in 2016.

The Madura project is still on the process of reviewing but the timing of result announcement is uncertain at current moment after recent Indonesia graft scandal. The FPSO is estimated to cost US$450m with contract firm period of 6-7 years. Belud project in Malaysia remain on the table after 2-months since open tender. The company is also looking at several projects in West Africa at average US$1bn capex with one of the project in Angola to be announced in 1H14. Overall, the company is bidding for 12 projects globally.

The company is not planning to venture into Brazil in the short term given the huge capex involved (average US$2bn per FPSO) and high local content required. FSRU and FLNG segments provide new growth opportunity going forward. The company will focus on small-scale FSRU and currently tendering for several projects in Asia and East Africa. Management also see pick up in the speed of FPSO project awards partly due to some oil operators are shifting focus from shale gas project to oil field project given the huge investment and commitment involved in extracting shale gas.

Comment

We came away from the meeting feeling positive about future prospects. Although we concede award timing is uncertain, we continue to believe the company will secure at least 1 mid-size FPSO (US$1bn capex) or 2 smaller FPSO wins in FY14. To note, we see upside risk to our forecasts from FY13 onwards if the company manages to secure both the Kraken (US$1bn capex) and Madura (US$450m capex) projects. The potential project win in Angola, which will likely be announced by 1H14 (~US$1bn capex), will further prompt us to raise our earnings forecasts. Other business segments like OSVs, T&I and oilfield services are expect to run smoothly. We have not captured any contribution from FSRU projects in our earning assumptions. This will be the wild card for the company.

Recently, the company has proposed multi-currency Euro medium-term note (EMTN) programme worth US$1.5bn to raised fund for its expansion plan. This suggests confidence in securing one of these tenders. Balance sheet remains relatively strong with gearing ratio at 0.8x which still provides room for FPSO expansion. We believe Bumi Armada can handle 2 new FPSO projects (~US$1bn capex) per annum.

Risks

• Increased competition as new players enters the market.
• Execution risk, including oil spills and their clean-up costs.
• Unusual high portion of vessels dry docking or under repair.

Forecasts

Unchanged.

Valuation

We continue to like the company’s prudent approach in tendering projects and outstanding execution capability. Hence, we maintain a BUY call with a unchanged TP of RM4.30 based on unchanged 20x FY14 EPS of 21.5 sen/share.

Source: Hong Leong Investment Bank Research - 17 Oct 2013