News

• Armada has received a Notice of Termination from Woodside Energy Julimar Pty Ltd (“Woodside”) purporting to terminate the contract in relation to the charter of the Armada Claire Floating Production Storage and Offloading ("FPSO") unit ("Contract"), which has been operating in the Balnaves Field, off northwestern Australia since delivering first oil in August 2014.

• The Company intends to fully enforce its rights under the Contract, including initiating legal proceedings against Woodside for its unlawful purported termination of the Contract.

Comment

• This is a negative surprise to us 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 to temporarily reduce its cash burn amid sub-US$40 oil price environment.

• We believe cash flow streams from Armada Claire would be suspended while the law suit filed against Woodside is ongoing. While exact payout is classified for now as the lawsuit will be ongoing, Woodside is expected to pay circa RM900m cash representing PV of remaining cash flows based on our on the back of envelope calculations.

• Risk of non-recovery of the potential payout by Woodside remains low for now given that its equity value stood at US$14.2bn 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 USD1.5bn CAPEX for 2016 involving Wheatstone LNG and Pluto projects.

• A more likely scenario would be settlement off court through renegotiation of the contract terms involving charter rate discounts or deferment of monthly payments, in our view.

• In our DCF valuation, we have valued Claire at RM0.16/share, 13.3% of our TP. Given the uncertainty of the lawsuit outcome, we have decided to take out our NPV for the project to remain prudent in our analysis. 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.

Risks

• Heightened risk of FPSO contract termination.
• Execution risk, including oil spills and their clean-up costs.
• Plunge in crude oil price.

Forecasts

• FY16 and FY17 core net profit is cut by 15% and 11% respectively after excluding contribution from Armada Claire.

Valuation

• Downgrade the stock to Hold from Buy based on TP of RM1.01 from RM1.17 based on SOP valuation method post exclusion of Claire NPV.

Source: Hong Leong Investment Bank Research - 7 Mar 2016