Armada Kraken’s first oil a key re-rating catalyst

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KUCHING: The first oil discovery from the Kraken Development is projected by analysts to be a key re-rating catalyst to Bumi Armada Bhd’s (Bumi Armada) share price.

Bumi Armada announced in a statement on Bursa Malaysia that the group’s Armada Kraken floating production storage and offloading (FPSO) achieved first oil on the Kraken field in the UK North Sea.

It said the production rate is being increased in a phased manner and the floating production storage and offloading (FPSO) would be further commissioned for final acceptance.

“Achieving first oil on the Armada Kraken FPSO is an important milestone, as we work to deliver oil for our clients, Enquest PLC and Cairn Energy PLC, and work towards receiving the charter income for Bumi Armada.

“The commissioning and operating teams have made tremendous efforts to achieve this milestone while remaining focused on safety of all people onboard the FPSO, as well as, the integrity of our asset,” executive director and chief executive officer Leon Harland said in the statement.

Macquarie Equities Research (Macquarie Research) was positive on the announcement, noting that the delivery of first oil before its back stop date (end-June 2017) has eliminated execution risk and significantly lowered cancellation or contract renegotiation risks.

Upon full acceptance in third quarter of 2017 (3Q17), the research firm said Armada Kraken should deliver an estimated full charter rate of circa US$480,000 per day, a material boost to Bumi Armada’s cashflow and profit and loss (P&L).

The Armada Kraken is the third out of four FPO projects that Bumi Armada is starting-up this year.

The vessel was Bumi Armada’s first ever heavy oil production facility and has the largest liquid handling capacity in its fleet (460,000 barrels of liquid per day).

Armada Kraken marks the company’s entry into the North Sea as a production facilities owner, operator and duty holder.

“These are positive steps for the group as we continue to increase cash flow and revenue from the four major projects that were under construction in the last three years,” Harland added.

Macquarie Research believed that the first oil from Kraken would be a key re-rating catalyst to Bumi Armada’s share price.

The research arm of Public Investment Bank Bhd (PublicInvest Research) was also pleased with this latest development as Bumi Armada has successfully delivered the FPSO and hence met the negotiated contract back stop date and thus would not be penalised further for not meeting the initial delivery deadline of April 1, 2017.

As such, PublicInvest Research’s ‘outperform’ recommendation on Bumi Armada was reaffirmed with a target price of RM0.90 per share, derived by the research arm’s discounted cash flow (DCF) approach.

Macquarie Research expected that full commissioning of three new FPSOs by end-3Q17 will improve earnings and lift 18E free cash flow (FCF) to RM1.2 billion, translating to an attractive FCF/enterprise value (EV) of nine per cent.