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FSPO contract timely for Bumi Armada

by Ronnie Teo, ronnieteo@theborneopost.com. Posted on February 20, 2013, Wednesday

KUCHING: Bumi Armada Bhd (Bumi Armada) has finally been awarded the Cluster-7 FSPO contract from the Oil and Natural Gas Corporation Ltd (ONGC) in India after a relatively dry year of contracts for floating, production, storage and offloading (FPSO), which analysts view as long time coming.

OSK Research Sdn Bhd (OSK Research) analyst Danny Chan in a research report yesterday outlined that this would boost Bumi Armada’s order book to swell in excess of RM9 billion with this award.

“With its sixth FPSO award, we believe that its firm contract period order book should swell to some RM9.5 billion, which is 30 per cent higher than its order book as at end of 2012,” he said.

“While the contract is likely to enhance the company’s net profit by RM40 million to RM50 million, we are making no changes to our FY13 earnings estimate as we have previously factored in the potential contribution from two FPSO contracts in 2013.

“As the value of this contract is lower than what we imputed in our earnings model, we have adjusted our earnings model accordingly and assumed a larger contract value for the other anticipated FPSO contract.” To note, Bumi Armada announced on Bursa Malaysia late Monday that its jointly controlled entity, SP Armada Oil Exploration had received a notification of award from India’s ONGC for the charter hiring of one FPSO for the Cluster-7 field in India.

The contract is for a fixed period of nine years, valued at US$740 million with an optional extension period of seven years, valued at US$340 million.

SP Armada Oil Exploration is a joint venture between Bumi Armada and Shapoorji Pallonji and Company Ltd of India.

ONGC on the other hand is India’s state owned oil company listed on the Bombay Stock Exchange and the National Stock Exchange of India.

The FPSO will be owned and operated by SP Armada in the ONGC Cluster-7 field located about 210km off the western coast of Mumbai, India.

The FPSO will have minimum storage of 510,000 barrels of oil and delivery is expected to be within 21 months from the date of award.

“As highlighted previously, the contract award was not a surprise for us as we opined that Bumi Armada stood a high chance of securing this contract although the award was slightly slower than we originally anticipated,” Chan highlighted.

“The award underscores ONGC’s trust in Bumi Armada’s delivery model, following from its previous FPSO contract for the Armada Sterling, which is currently working in ONGC’s D1 marginal field located 200km offshore from Mumbai.” Meanwhile, HwangDBS Vickers Research Sdn Bhd analyst Quah He Wei in another research note on the group affirmed that this contract came as no surprise, having already included one FPSO win for the financial year 2013 (FY13).

“The contract award does not surprise us as we have already imputed one FPSO win for FY13 and its daily charter rate of US$225, 000 also comes within our expectation.

“Nevertheless, we revised down our FY13 and FY14 earnings by four per cent each, as our previous forecast has assumed a new win on a wholly-owned basis.

“We adjusted our target price lower to RM3 to impute our earnings downgrade.

“We believe the new FPSO win has been priced in, and consensus’ earnings estimates could be overly optimistic.

“While earnings visibility remains healthy with its estimated RM8 billion order book, we believe that its growth prospects do not justify its current rich valuation of 23 times of the financial year 2013 earnings per share.” OSK Research’s Chan affirmed that this was the beginning of more to come this year, pegging the stock for its good earnings visibility given the long-term nature of its FPSO contracts.

“Given that the lacklustre performance of Bumi Armada’s share price in the 2012, we advocate investors to stay invested in the stock as the company is likely to secure more awards this year such as Malaysia’s Belud and Indonesia’s Madura contracts, which may be a catalyst for the stock.”

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