News

• ARMADA filed a Writ of Summons (“Writ”) in the Supreme Court of Western Australia claiming for (1) a declaration that the Contract was repudiated by Woodside purporting to terminate the Contract by issuing the Notice of Termination dated 4 March 2016 to ABPL, (2) damages for breach of contract in respect of such repudiation, the amount of which will be quantified at a later stage (3) the additional sum of US$66.2m for work done and materials supplied pursuant to the Contract, and (4) interest, costs and such other relief as the Court may think fit .

Comment

• Encouraging development on the premature termination case by Woodside as this implies that ARMADA will be able to recover its partial investment on FPSO Claire as opposed to our conservative assumption of zero value for the contract to take into account the worst case scenario.

• US$66.2m is an additional payment to be claimed by ARMADA for work done that was not included in the work scope of the original contract. This amount would be claimed on top of the currently unknown termination fee to be claimed for the existing contract.

• We have decided to maintain our conservative view for the time being as the damages for breach of contract payable by Woodside is still uncertain coupled with uncertain timeline for the conclusion of lawsuit. This could be a prolonged lawsuit battle due to the weak O&G environment, making it much less compelling for oilfield operators to succumb to full repayment of the termination fee despite protection clause being present.

• Risk of total 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 US$1.5bn CAPEX for 2016 involving Wheatstone LNG and Pluto projects.

• Further development on the potential damage payout for contract breach may turn out to be a catalyst for its recently battered-down share price to recover from the current low.

Risks

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

Forecasts

• Maintain forecast.

Valuation

• Maintain Hold call on the stock with TP reduced to RM0.85 from RM1.01 based on SOP valuation method as we have accounted for higher risk premium for Armada Perkasa and Armada Kraken to factor in higher counterparty risk. Such risk premium will only be removed upon further clarity on lawsuit claims.

Source: Hong Leong Investment Bank Research - 16 Mar 2016