ARMADA announced that an additional hydraulic submersible pump (HSP) transformer on FPSO Armada Kraken has been reconditioned and reinstalled. Following this, the vessel’s operations are now fully restored to pre-shutdown levels. This is within our expectations as we had earlier factored in partial loss of charter income from Kraken in Jun-Aug CY23. We maintain our forecasts, TP of RM0.62 and OUTPERFORM call.

In addition, ARMADA will install a new HSP transformer following its estimated arrival in September. This will add to the current three working HSP transformers to enhance the vessel’s reliability.

Finally, back in full steam. To recap, back in 2 June, ARMADA announced that FPSO Kraken had experienced a production shut-in due to the sudden failure of its HSP transformer units. Subsequently, 3 weeks later on 21 June, the FPSO achieved start-up and was able to operate at circa 60% of pre-shutdown levels. About a month thereafter, on 20 July, one HSP was reconditioned and reinstalled. Following this, the vessel’s operations were partially restored to 90% of pre-shutdown levels.

Clouds of uncertainty have cleared. We are positive on the swift normalization of Kraken’s production within 3 months since the first shut-in announcement. Hence this will clear the clouds of uncertainty that previously loomed over Kraken’s operational setback.

On the flip side, some lingering concerns include: (1) the possibility that the financial impact arising from this shutdown will turn out larger than expected, (2) hefty vessel repair and maintenance costs will not be fully covered by insurance, and (3) client Enquest may request for financial reimbursement or impose penalties.

Forecasts maintained. To recap, we had earlier factored in partial loss of bareboat charter income from Kraken in Jun-Aug CY23. As such, our current forecasts reflect a muted 9% impact from this shutdown.

We also maintain our sum-of-parts TP of RM0.62 and OUTPERFORM call. Our valuation 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) the traction in efforts to reduce its net gearing (current: 0.8x), (ii) long-term earnings visibility from large order book in excess of RM20b (including extension options), and (iii) it being the leading contender for a USD1b EPCC contract for FPSO Cameia.

Risks to our call include: (i) offshore projects are placed on the back burner due to weak crude oil prices, (ii) cost overruns and delays for EPCC contracts, and (iii) clients do not exercise contract extensions for the FPSO fleet.

Source: Kenanga Research - 10 Aug 2023