We visited Keppel shipyard in Singapore for Armada Kraken and came back feeling more certain over its ability to deliver by 2H16. Thus far, the project is slightly ahead of schedule at 86.7% completion. In our view, termination risk remains low and we expect full year earnings from Kraken project in FY17. No changes to our forecast pending 1Q16 results announcement end of the month. Maintain MARKET PERFORM call with SoP-driven TP of RM0.80.

Slightly ahead of schedule. Yesterday, we attended the site visit, specifically for FPSO Kraken at Keppel Shipyard organised by ARMADA along with 10 other analysts. The USD1.1b FPSO is slightly ahead of schedule at 86.7% completion. All topside, marine equipment and major heavy lifting have been procured, delivered and installed except for one more module, including a power module, cold vent and boiler stack. The project team is also currently working on topside integration spools installation and integration cables pulling as well as final touch up on accommodation cabins.

Targeting first oil in November. The vessel is expected to sail away by end of July and to arrive at Kraken Field, located in the North Sea East Shetland Basin in September this year. The suezmax-converted FPSO has a storage capacity of 600,000 bbls. The produced water treatment system installed within is designed to process 480,000 barrels of reservoir water with heavy oil and solids per day and produce 80,000 bbls of oil per day (bpd) ultimately. ARMADA is projecting first oil in mid-November this year. This is probably earlier than Enquest, the field owner’s expectation of hitting first oil in 2017.

Termination risk remains low. The Kraken heavy oil field in Block 9/02b is currently 70.5% owned by EnQuest while the remaining 29.5% stake by its sole co-venturer Cairn Energy. It is one of the largest current development projects in the UK North Sea with an estimated reserve of 140m bbls of heavy oil recoverable over 25 years and peak production of 50,000 bpd. We believe the termination risk on Kraken contract is low given that (i) the project is still the priority to Enquest despite stretched cash flow position and (ii) relatively low lifting cost (estimated at below USD20/bbl). According to Enquest’s latest presentation slides, the company is looking to reduce its operating cost to USD20/bbl from USD25- 27/bbl in FY17 post Kraken. This should allow Enquest to continue its oil production with positive cash flow at low oil price environment.

Significant recurring earnings driver. Recall that ARMADA secured this bareboat charter contract and also a reimbursable contract for operations and maintenance (O&M) of the FPSO for a fixed eight years worth USD1.4b with options for 17 annual extensions. Should the contract is exercised accordingly, it will contribute more than 30% to its FY17E earnings and underpin its bottomline in the long run.

Maintain MARKET PERFORM with an unchanged TP of RM0.80 based on SoP valuation. No changes to our forecast pending 1Q16 results announcement end of the month. We believe both its OSV and T&I business segments’ earnings are expected to stay weak in the mediumterm in view of the weak oil prices which will cap oilfield exploration and development activities. Upside risks to our call are: (i) better-than-expected OSV and T&I segments, (ii) better-than-expected FPSO execution, and (iii) faster-thanexpected recovery in oil prices.

Source: Kenanga Research - 19 May 2016