ARMADA revealed that FPSO Kraken had finally achieved start-up after a recent shut-in. As such, production is now currently running at circa 60% of pre-shutdown levels. We are positive on the swift, albeit only partial restoration of Kraken’s production. We believe this will largely alleviate concerns of a major financial impact. We cut our FY23F earnings by 9% and our TP to RM0.62 (from RM0.75) but maintain our OUTPERFORM rating.

Kraken finally revived operations. ARMADA revealed that FPSO Kraken had finally achieved start-up after a recent shut-in. As such, production is now currently running at circa 60% of pre-shutdown levels. Nevertheless, ARMADA will conduct further testing and investigations to fully restore the vessel’s operational performance.

Recall that on 2 June, ARMADA reported that FPSO Kraken had experienced a production shut-in due to equipment failure. The reduced level of production for Kraken implies a reduction in bare boat charter (BBC) revenue. To recap, Kraken was first deployed at the North Sea by client, Enquest in Jun 2017. However, it did not receive full BBC rates from Enquest until 1QCY20, when it finally reached the threshold for minimal operational uptime.

Swift restoration is commendable. We are positive on the swift, albeit only partial restoration of Kraken’s production. We believe this will largely alleviate concerns of a major financial impact on ARMADA. However, some concerns may linger, clouding investor sentiment until Kraken’s operations finally normalize. They include: (i) prolonged delay until operations fully stabilizes, (ii) possibility that the “material” financial impact may turn out larger-than-expected, (iii) hefty repair and maintenance costs may not be fully covered by insurance, and (iv) Enquest may impose penalties or requires reimbursement from ARMADA. Nevertheless, we commend the company for quickly restoring operations to more than half of its full capacity. This is in less than a month since the first shut-in announcement.

We estimate that the shut-in may impact earnings albeit benign as reflected by a 9% cut to our FY23F earnings. This is based on our assumption that Kraken receives 60% BBC from Enquest for three months in Jun-Aug CY23.

Incorporating loss of BBC into our forecasts. As detailed above, we cut our FY23F earnings by 9% to account for Kraken’s shut-in. Additionally, given that Kraken’s risk profile is now escalated, we raise our beta assumption for the vessel’s DCF valuation. This is to account for increased risk of unplanned outages if the equipment failure relapses or cascades.

As a result of the above, our Sum-of-Parts TP on ARMADA is cut to RM0.62 (from RM0.75). Our valuation also reflects a 5% discount to factor in a 2-star ESG rating as appraised by us (see Page 5).

We like ARMADA due to: (i) continued traction in efforts to deleverage its balance sheet (current net gearing: 0.8x), (ii) long-term earnings visibility from sizeable orderbook in excess of RM20b (including potential extensions), and (iii) it being the front runner for an USD1b EPCC contract for FPSO Cameia. Maintain OUTPERFORM

Risks to our call include: (i) offshore exploration and productions projects are placed on the backburner as a result of crude oil price weakness, (ii) cost overruns and delays for EPCC projects, and (iii) FPSO contract extensions are not exercised.

Source: Kenanga Research - 22 Jun 2023