ARMADA, via a 51:49 JV with related party Pexco, has secured the production sharing contract (PSC) for Akia exploration block in North Kalimantan, Indonesia. While the latest move will broaden ARMADA’s earnings base to the upstream segment, it will also alter the earnings risk profile of the company. We maintain our forecasts, TP of RM0.62 and OUTPERFORM call.

First foray into the upstream segment. ARMADA, via a 51:49 JV with related party Pexco (owned by ARMADA’s controlling shareholder), has signed the production sharing contract (PSC) for Akia exploration block in North Kalimantan, Indonesia, with the Ministry of Energy and Mineral Resources of Indonesia. The Akia PSC overs an area of 8,394 sq km which contains recoverable resource of 860 BCF of gas and 60 MMboe of oil and condensate.

Still at exploratory stage. The plan is to acquire new 3D seismic over the Tulip discovery to evaluate the potential for a fast-track development. The water depth at the Tulip discovery is 800m and Bumi Armada would provide and operate an FPSO and an FLNG or gas pipeline for the development, which leverages ARMADA’s core expertise in offshore assets. Hence, we believe it is still premature to factor in any potential upside at this juncture.

Reserves still mainly 2C. There are still various unknown variables in the new PSC signed as majority of the reserves, we believe, is in 2C category, which is more prospective compared to 2P reserves. Nevertheless, a loosely comparable field would be PM3 CAA PSC, owned by HIBISCUS (Not Rated) which has 2P reserves of 5.7m bbls of crude oil & condensate and 64.8 BSF. For context, it has achieved 21,526 bbls of crude production and 4,279 mmscf gas per day during the period of April-June 2023.

This is ARMADA’s first foray into exploration and production (E&P). While the latest move will broaden ARMADA’s earnings base to the upstream segment, it may potentially alter the earnings risk profile of the company (as E&P carries a much higher earnings risk vs. its breadand-butter FPSO operation). We take comfort that the initial investment will be manageable at USD5-USD20m based on our rough estimates by referring to Library of Congress research guide.

Forecasts. Maintained as the project is still at the exploration stage (earliest by end-FY24) where an indicative field development plan is formulated.

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) its sustained traction in its efforts to deleverage its balance sheet (current net gearing: 0.8x), (ii) long-term earnings visibility from substantial 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 production projects held back by weak crude oil prices, (ii) cost overruns and delays for EPCC projects, and (iii) clients do not exercise optional extensions for the FPSO fleet.

Source: Kenanga Research - 13 Oct 2023