Back in June, Bumi Armada (ARMADA) reported that FPSO Kraken had experienced a production shut-in due to the sudden failure of its HSP transformer units, said Kenanga Research (Kenanga) in the recent Company Update Report.
Thereafter, on 21 June, the Floating Production Storage and Offloading (FPSO) finally achieved start-up and was able to operate at circa 60% of pre-shutdown levels.
“We are positive on the progressive restoration of Kraken’s production. Based on this rapid pace, we gauge that operations are on track to fully normalise within the next 1-2 months,” said Kenanga.
This is given their expectations that ARMADA will resume further testing and investigations to fully restore the vessel’s performance. Nevertheless, Kenanga applauded ARMADA for reinstating operations close to full capacity in less than two months since the first shut-in announcement.
But some concerns linger. As such, the above will cushion concerns of a major financial impact on ARMADA. Recall that the company had
earlier guided of a material impact during Kraken’s full shut-down.
On the flip side, investor sentiment may still be dragged by the lingering concerns below:
(i) possibility that the magnitude of the financial impact will turn out larger-than-expected.
(ii) substantial vessel repair and maintenance costs will not be fully covered by insurance.
(iii) client enquest may request for reimbursement or impose penalties on ARMADA.
To recap, as a conservative measure, Kenanga had earlier factored in partial loss of bareboat charter income from Kraken in Jun-Aug CY23.
“As such, our current forecasts reflect a benign 9% impact from this shutdown. We also maintain our Sum-of-Parts target price of RM0.62 and Outperform call,” said Kenanga.
Kenanga likes ARMADA for:
(i) Sustained traction in its efforts to deleverage its balance sheet.
(ii) Long-term earnings visibility from a substantial orderbook in excess of RM20b.
(iii) It is the leading contender for a USD1b EPCC contract for FPSO Cameia.
Risks to Kenanga’s call include:
(i) Offshore production projects being held up due to weak crude oil prices.
(ii) Cost overruns and delays for EPCC projects.
(iii) Clients do not exercise optional extensions for the FPSO fleet.
