News

• Under the Statement of Claim, ARMADA has made a claim for damages in general for such repudiation, and the amount of such damages has now been quantified by ARMADA to include the sum of US$275.8m (being the amount of the termination payment to which ARMADA is entitled had the Contract been terminated without breach) plus any additional damages for loss of bargain caused to ARMADA as a consequence of Woodside's repudiation of the Contract. An additional sum of US$7.7m was sought for work done and materials supplied pursuant to the Contract.

Comment

• Developments have turned more positive with the potential claim being quantified, signalling that ARMADA had not breached any terms of the FPSO contract when they were delivering the project.

• While it appears to be likely that ARMADA would be able to receive their claims, the final amount of claims to be realised remains unclear for the time being as that the suit could go on for 1-year or longer. On top of that, its outstanding loan (undisclosed amount) on Claire has been settled by its own cash, allaying concerns of future interest costs on the project.

• Woodside appeared to be ready for a pay out to ARMADA given that they have made a provision worth US$128m on Balvanes field onerous lease, which is the field that Armada was operating at.

• In our opinion, we do not rule out a potential out-of-court settlement for an amount lower than stipulated in the contract to reach to an agreement earlier instead of the usual lawsuit.

• Concern on its upcoming FPSO Kraken project appears to be overplayed as Enquest, its main oilfield operator has yielded positive results on its development drilling on the field while the total project cost has been reduced significantly due to weakness in oil prices.

• We believe the group is still going to proceed with the Kraken project and is poised to start contributing to the group in late 2017.

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

• Reflecting the positive developments, we factor in the amount entitled by ARMADA on Claire by discounting the cash value to be received by 2 years on WACC of 12%, double of the discount rate for Claire project to account of uncertainty in final claim amount and time to final settlement, translating to 15sen/share.
• Consequently, we reiterate our Buy call on the stock with higher TP of RM1.00 (previously RM0.85). While share price has rallied recently, we believe the stock is still undervalued as the market has yet to fully factor in the potential claim value of Claire termination. That aside, we believe share price has also priced in a potential second termination of FPSO project, which is in our opinion, is overdone at this juncture.

Source: Hong Leong Investment Bank Research - 22 Apr 2016