Highlights

• We visited the FPSO Kraken under convers ion at Keppel’s s hipyard in Tuas, Singapore yesterday:

• The FPSO Kraken conversion project for Enquest is progressing well with majority of the conversion works on the FPSO done (close to 95% overall completion). It is currently undergoing precommissioning works (25.4% completion) and T&I phases (25.2% completion). Target sail away of the FPSO is on 31ST July 2016 and 1st oil of the Kraken deepwater field in the North Sea is targeted on 16th November 2016. Therefore, the group would see its maiden full year contribution from its 2nd largest FPSO asset (after FPSO Olembendo) in 2017, making it a bumper year for the group.

• During the visit, we were also briefed that the processing facility on FPSO Kraken is also more technically challenging. This is due to the low pressure of the heavy crude to be produced Kraken field (owned by Enquest) thereby necessitating water injection method to be implemented to extract oil from the deepwater well. The asset would process 500,000 barrels of liquid/day upon commissioning, whereby 400,000 bbls/day would be sea water and remaining would be crude oil. This s howcas ed Arm ada’s capability as a s olution provider for FPSO which would also cater to oil companies working in harsh offshore environment.

• Aside from its technically advanced processing capability, it is also designed slightly differently from other conventional FPSO with soundproof walls built for its accommodation deck, to avoid unnecessary noises caused by the rough s ea in North Sea for the comfort of the operating FPSO crew. Moreover, it also features an in-house turret whereby it is designed to withstand harsher weather conditions in the deepwater fields, in contrast to the conventional external turret used by FPSOs in common.

• The Kraken project would s till be cas h flow pos itive for Arm ada’s client, Enquest, with its estimated lifting costs slightly exceeding USD25/bbl. Possibility of premature contract termination on Kraken remains low for the time being and we bel ieve this would be the group’s major project as a FPSO owner in the foreseeable future. Its other upcoming projects (Olembendo, Malta FSU and Madura) are also currently under conversion at the same yard and they are progressing well to contribute to the group positively in year 2017.

Forecast

• Maintained pending upcoming 1Q16 results.

Catalysts

• i) Further FPSO CAPEX cost savings (ii) successful execution of its existing FPSO projects under conversion

Risks

• Fluctuation in oil price; Project execution ability; Delay in contracts award.

Valuation

• We maintain a Buy call on the stock with TP at RM1.00 based on SoP-driven valuation methodology. We opine that the stock is undervalued with the market still pricing in the uncertainly on premature contract termination excessively.

Source: Hong Leong Investment Bank Research - 19 May 2016