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Monday, December 15, 2014

Bright spot for Bumi Armada

THE inking of Bumi Armada Bhd’s ten-year RM4bil Madura floating production storage and offloading (FPSO) contract is timely.
Bagging the contract might have helped improve sentiment surrounding the stock but was not enough to stem the selling pressure in the oil and gas universe after news that projected world demand for oil was cut yet again as crude oil continued its slump.
The confluence of factors in the oil and gas sector have seen the stock beaten down 58% year-to-date as plunging oil prices spooked investors into dumping oil and gas stocks.
It is currently trading 34% below its net tangible asset per share of RM1.57.
Amid the weak sentiment in the oil and gas sector, its head honcho Hassan Basma, who has helmed the firm for nine years, tendered his resignation due to family reasons.
The contract, which was awarded to Bumi Armada and its 50% partner PT Armada Gema Nusantara, was first announced in August but the parties didn’t sign on the dotted line until Thursday.
With a closure after a few postponements, the development serves as a catalyst for the counter.
Even with the good news, investors’ appetite for oil and gas stocks is so low that the news barely registered a ripple in Bumi Armada’s share piece. The stock managed to trade to a high of RM1.05 before ending the day 1 sen lower at RM1.02 compared to the previous close.
The charter contract is for the Madura BD field development in Indonesia and was slated for commencement in the fourth quarter of 2016.
CIMB Research says based on Bumi Armada’s 50% stake, the latest contract will lift its orderbook by 9%, bringing the total order to a record of RM23.4bil, which is trailing only behind SapuraKencana Petroleum Bhd’s RM26.2bil orderbook.
On top of that, Bumi Armada has contract extension options worth up to RM12bil.
The Indonesian contract also comes with options of annual extensions for up to five years. AllianceDBS Research puts a value of some RM498mil to these extensions.
“For now, our sum-of-parts-based target price remains unchanged at RM2.10, and already includes a discounted cashflow value of 11 sen for the Madura contract.”
The research house notes that contribution for the Madura contract will be negligible over the construction phase in the financial years ending Dec 31, 2016 (FY16) to 2017 as it will be less than 5% of the group’s overall net profit.
Alliance DBS Research reckons that the RM1bil capital expenditure for the Madura contract will come from the RM1.9bil that Bumi Armada raised from a recent rights issue.
However, the research unit added that it is reviewing the earnings contribution from the Madura contract and is looking to review offshore support vessel charter rate estimates.
“With crude oil prices weakening further, we see more risks for the group’s fleet going forward.”
On the other hand, PublicInvest Research points out that there is low risk in the termination of the Madura contract as any cessation will be “subject to penalty of the full contract value at the point”.
The research unit opines that FPSOs are a safe haven considering the long term contracts that are entered into. In comparison, exploration and production players have to consider the economic viability of their projects, considering the plummeting oil prices.
Meanwhile, CIMB Research says Bumi Armada is bidding for four FPSO contracts in Ghana, Nigeria, Namibia and Angola, indicating that this company is not slowing down its appetite for growth.
Bumi Armada is the world’s fifth largest FPSO operator, with nine FPSO vessels.
“We continue to like Bumi Armada for its solid earnings visibility given the long-term nature of FPSO contracts, and its good leverage in the international market. All nine FPSO contracts are outside Malaysia and have no oil price connections,” CIMB Research adds.
While some analysts are paying a close watch over oil and gas companies with high debt levels, Bumi Armada has a relatively low gearing level. JP Morgan puts Bumi Armada’s FY2014 gearing at 0.36 times, compared with SapuraKencana Petroleum Bhd (1.17 times) and Perisai Petroleum Teknologi Bhd (0.67 times).
Choppy waters for O&G companies
The sector’s outlook though, remains bleak.
A number of international oil majors have announced that they will cut their capital expenditure by some 20% next year.
Petroliam Nasional Bhd has also announced that it will cut capex by 15% to 20% in line with the global trend.
It has been reported that global oil and gas exploration projects exceeding US$150bil in value are likely to be deferred as low oil prices affect their economic viability.
The International Energy Agency is cutting its forecast for global oil demand for the fourth time in five months as oil consumption grew less by 230,000 barrels a day than what it estimated last month.
Meanwhile, supply from producers out of the Organisation Petroleum Exporting Countries (Opec) is higher than expected.
The West Texas Intermediate crude fell below US$60 per barrel while Brent declined to the lowest since July 2009, as producers sought to protect their market share.
Bloomberg survey just out yesterday, says analysts and traders expect the drop in oil prices to extend next week.
Clearly, if oil prices remain at these low levels for a long period of time, then all service providers, including the likes of FPSO operators like Bumi Armada will feel the impact. However, proponents of the oil and gas sector maintain that oil prices would recover in the longer run, thus highlighting the value that companies like Bumi Armada offer to investors, especially at its current beaten down price.
http://www.thestar.com.my/Business/Business-News/2014/12/13/Bright-spot-for-Bumi-Armada/?style=biz

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