bumi armada malaysia add (previously hold) consensus...

Offshore & Marine│Malaysia│June 7, 2017

Shariah Compliant

Company Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Bumi Armada On track for a brighter future

We resume coverage of BAB with an Add, and an SOP-based target price of 92 sen. ■With two terrible years now behind it, BAB can look forward to better prospects.

Of BAB’s four new FPSO/FSU projects, two are already up and running, while two ■more are due to commence during 2H17F. Earnings and cashflows will improve.

If BAB secures a replacement contract for the Armada Claire, or wins the KG-DWN-■98/2 FPSO bid, there will be even more upside for the share price.

The key risk is that BAB will likely have to raise new equity for capex funding. ■

BAB is now past two nightmare years… Despite the ‘safety’ of long-term contracts, BAB suffered the non-payment of bareboat charters on the Armada Perkasa and Armada Perdana FPSOs from FY15, and the premature termination of the Armada Claire FPSO contract in FY16, as a consequence of the fall in oil prices, on top of specific reserve-related issues. BAB also failed to deliver the Armada Kraken FPSO on time, and failed to achieve first oil by the backstop date, resulting in more than US$100m in compensation payments to its charterer in FY16.

…with the FPSO and OMS businesses both suffering The OMS business was also impacted by falling charter rates and falling utilisation rates since mid-FY14, ultimately delivering core EBIT losses from FY15 onwards. Both the OSV and T&I vessels were impacted, with both types of vessels at only 50% utilisation during FY16. Over the past three years, BAB made RM2.2bn in asset impairments and provided for RM325m for doubtful debts across the FPSO and OMS segments, totalling 18% of BAB’s mid-2014 market capitalisation. However, BAB is now turning the corner.

FY17F marks a new beginning for BAB… During 1Q17, BAB delivered its best results in a year, with a core net proft of RM81m. In future quarters, we expect a stream of progressively-better results, and positive newsflow in relation to its new projects – the Armada Olombendo, Kraken and Karapan Armada Sterling 3 – as they achieve final acceptance and begin their firm charter periods from 2H17F. BAB is “very confident” that the Kraken will achieve first oil before 30 June, and thus avoid further compensation provisions, with provision writebacks even possible.

…and even more upside if new contracts are secured The Armada Claire is being offered for deployment to several operators of marginal fields while BAB is preparing to bid for ONGC’s KG-DWN-98/2 FPSO project. Meanwhile, on the OMS side, the KP1 pipelay barge is being prepared for work in Indonesia during 2H17F. We have not factored any potential contract wins into our target price.

Key risks have been reflected in our target price If BAB wins the ONGC project, we believe that it will have to issue around RM1bn of new equity, most likely in the form of rights shares, to part-fund the capex. Another risk relates to whether the charter of the Armada Perdana FPSO might be prematurely terminated if Erin Energy cannot survive its cashflow crisis. We have taken these risks into account by factoring the dilutive impact of a potential rights issue into our target price, as well as by excluding the DCF value of the Armada Perdana charter from our SOP valuation.

Our SOP-based valuation is reasonable and achievable We believe that our SOP valuation is reasonable because we have discounted the FPSO cashflows for up to only 75% of the option periods of the existing vessels (excluding the Armada Perdana), with zero contribution from potential new contract wins, and factored in the dilutive impact from a potential rights issue. We have also valued BAB’s OMS fleet based on the prevailing rock-bottom secondhand market prices.

SOURCE: COMPANY DATA, CIMB FORECASTS

Malaysia

ADD (previously HOLD) Consensus ratings*: Buy 9 Hold 8 Sell 1

Current price: RM0.75

Target price: RM0.92

Previous target: RM1.02

Up/downside: 23.5%

CIMB / Consensus: 5.1%

Reuters: BUAB.KL

Bloomberg: BAB MK

Market cap: US$1,024m

RM4,370m

Average daily turnover: US$2.37m

RM10.41m

Current shares o/s: 5,866m

Free float: 65.0% *Source: Bloomberg

Key changes in this note

Our forecasts have been comprehensively revised as a result of transfer of coverage.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -5.1 0 4.9

Relative (%) -6.4 -3.3 -2.6

Major shareholders % held Objektif Bersatu Sdn Bhd 34.9 Permodalan Nasional Bhd 12.4 Employees Provident Fund 5.1

Analyst(s)

Raymond YAP, CFA

T (60) 3 2261 9072 E [email protected]

Financial Summary Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Revenue (RMm) 2,180 1,417 1,905 2,358 2,060

Operating EBITDA (RMm) 1,010 335 1,098 1,548 1,250

Net Profit (RMm) (235) (2,028) 340 892 743

Normalised EPS (RM) 0.06 (0.04) 0.06 0.15 0.13

Normalised EPS Growth 24% (169%) 162% (17%)

FD Normalised P/E (x) 12.79 NA 12.85 4.90 5.88

DPS (RM) 0.008 - - - -

Dividend Yield 1.10% 0.00% 0.00% 0.00% 0.00%

EV/EBITDA (x) 10.81 43.07 13.20 8.48 9.29

P/FCFE (x) NA 3.23 NA 6.57 4.97

Net Gearing 89% 176% 168% 126% 95%

P/BV (x) 0.60 0.77 0.73 0.63 0.57

ROE 4.9% (3.7%) 5.8% 13.8% 10.2%

% Change In Normalised EPS Estimates (34.3%) 70.9%

Normalised EPS/consensus EPS (x) 1.21 2.05 1.56

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Price Close Relative to FBMKLCI (RHS)

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Oil & Gas - Equipment & Svs│Malaysia│Bumi Armada│June 7, 2017

2

On track for a brighter future

EXECUTIVE SUMMARY

BAB is on track for recovery

Bumi Armada (BAB) was first listed on 25 June 1997. It was subsequently privatised by Usaha Tegas on 18 April 2003, and relisted on 21 July 2011.

At the time of its first listing, BAB was a domestic provider of Offshore Service Vessel (OSV) tonnage, and also focused on offshore Subsea Construction (SC) and Transportation and Installation (T&I) work in Malaysia.

In the intervening eight years before the second listing, BAB exited from the offshore SC business, upgraded its OSV fleet, and entered into the Floating Production Storage Offload (FPSO) market.

At the time of its second listing in mid-2011, BAB owned and operated two FPSOs (Armada Perkasa and Armada Perdana), was in the final stages of commissioning the Armada TGT1, had secured a conditional award for the Armada Claire, and had secured a letter of award for the Armada Sterling 1.

In FY13, BAB secured two awards for the Armada Sterling 2 and the Armada Kraken, while in FY14, BAB secured another two awards – for the FPSO Armada Olombendo, and for the Karapan Armada Sterling 3. In FY15, BAB secured one Floating Storage Unit (FSU) contract for the Armada LNG Mediterrana. In our view, BAB more or less achieved its IPO guidance of securing at least two medium-sized FPSO contract awards, or one large-sized FPSO contract award, per year.

As a note to readers, all of BAB’s FPSOs are 100% owned, with the exception of the India-based FPSOs (Armada Sterling 1 and Armada Sterling 2), and the Indonesia-based FPSO (Karapan Armada Sterling 3), which are between 49% and 50% owned by BAB due to local ownership regulations in both countries.

The anatomy of the downturn

The good times began to reverse with the onset of the oil price downturn from mid-2014. During FY15, three FPSO charter contracts were beginning to face issues as a result of the low oil price – the two charterers for the Armada Perkasa and the Armada Perdana were no longer paying their Bareboat Charter (BBC) hire as a result of specific-company cashflow and specific-reserve production issues. And the oil production for the Balnaves field, offshore northwest Australia was drying up, causing Woodside to prematurely terminate the charter for Armada Claire in March 2016.

The Offshore Marine Services (OMS) division, which includes the OSV fleet, as well as the Subsea Construction (SC) fleet – previously known as the Transportation and Installation (T&I) division – also saw its utilisation rates and charter rates descend precipitously from mid-2014 onwards, to hit a low of around 50% at end-FY16.

Meanwhile, BAB faced internal project execution issues on the Armada Kraken project, which is already more than one year late in achieving first oil. This resulted in BAB paying or providing for more than US$100m combined during FY16 in liquidated damages, refund of upfront fees, and ‘supplementary payments’ to its charterer, EnQuest.

BAB reported large net losses for FY15 and FY16 as a result of the problems and issues noted above, which required BAB to make huge asset impairment charges against its FPSO and OMS assets, make doubtful debt provisions against receivables from Armada Perkasa and Armada Perdana, stop recognising revenue from Armada Perkasa and Armada Perdana from 2Q15 onwards, and provide for compensation agreed with EnQuest in relation to the Armada Kraken delivery delays.


3

The future looks brighter

We believe most of BAB’s troubles are behind it, and the outlook is considerably brighter from this year onwards.

BAB is “very confident” that the FPSO Armada Kraken will achieve first oil by 30 June 2017. If this is achieved, the risk of additional provision for ‘supplementary payments’ to EnQuest will be limited, if any, and there may even be the possibility of a writeback in the provisions made in 4Q16.

The Armada Olombendo FPSO has already been earning 80% of its BBC hire rate from first oil on 8 February 2017, and we expect it to achieve 100% of its BBC hire rate upon full acceptance of the vessel by mid-FY17F.

The Karapan Armada Sterling 3 achieved first gas on 6 May 2017, and we expect it to achieve acceptance and earn its BBC rate from 1 October 2017 onwards.

The Armada Perkasa was sold to its charterer, Amni, in early-FY17, helping BAB avoid decommissioning costs.

For the OMS division, the Armada Hawk was sold in late-FY16, and a buyer for the Armada Condor offshore construction vessel has been identified. The sale of the idled vessels will help BAB reduce operating costs. Meanwhile, the Armada KP1 pipelay barge is expected to find employment during 2H17F in Indonesian waters.

BAB is offering the currently-idle Armada Claire to several potential charters for employment in smaller and marginal offshore oilfields.

Meanwhile, ONGC has set a deadline of 31 July 2017 for interested parties to submit technical and commercial bids for the FPSO that will be required to produce oil from the KG-DWN-98/2 field, offshore east coast of India. BAB has tied up with its long-time Indian partner, the Shapoorji Pallonji group, to bid for the contract.

More distant possibilities include the potential to restore the Armada Perdana charter contract, which still has four more years of its firm charter period to run, although this may be difficult to achieve given how weak Erin Energy is financially. Also, if and when BAB succeeds in claiming for damages for the premature termination of the Armada Claire through the Australian legal system, there could be additional upside for BAB’s SOP valuation.

The risks appear to have been factored into the share price

The charter contract for the Armada Perdana is at risk of a potential collapse of its charterer, Erin Energy. Based on our calculations, BAB’s current share price excludes the remaining value from the Armada Perdana charter contract, hence a potential termination of the charter is unlikely to affect the share price, apart from a possible knee-jerk reaction.

The negotiations on additional compensation, or ‘supplementary payments’, to EnQuest for the delays surrounding the Armada Kraken FPSO are still ongoing and BAB may have to make even more provisions in its 2Q17F results. However, we suspect that the majority of the provisions have already been made.

The commencement of the firm charter period for the Karapan Armada Sterling 3 has been delayed on account of delays over the commissioning of Husky-CNOOC’s onshore gas terminal. The onshore gas terminal is now ready, but we are unclear as to when exactly the full contractual firm period can officially begin. We think that 1 October 2017 would be a reasonable estimate, and we do not believe that a variation in the precise date of commencement will move the needle too much on the valuation of BAB.

We believe that BAB will probably have to undertake a rights issue once it secures, or as it prepares to bid for, the c.US$1.2bn FPSO contract for the development of ONGC’s KG-DWN-98/2 field. If BAB secures this contract together with its Indian partner, we believe that BAB will have to raise up to RM1bn in additional equity, most probably via a dilutive rights issue. However, we think that a new contract win, even when paired with a rights issue, is likely to lift the share price, rather than weaken it.


4

Bottom-up SOP valuation of 92 sen/share

We have incorporated a potential RM1bn rights issue into our SOP computation (based on 2,000m new rights shares at RM0.50 issue price), without including potential contract wins for either the Armada Claire or for ONGC’s FPSO requirement on the KG-DWN-98/2 field.

We have also assumed that only 75% of the option periods for BAB’s existing fleet of FPSOs are ultimately exercised, and have excluded entirely any remaining future value from Armada Perdana’s charter contract.

For the OMS fleet, we have used the prevailing rock-bottom secondhand market values to value the fleet at low liquidation values, reflecting the prevailing conditions in the market.

Our bottom-up SOP valuation is 92 sen/share, which suggests that BAB’s share price remains undervalued despite recovering from a low of 55 sen on 25 November 2016. If BAB secures new contracts for the Armada Claire, or wins the ONGC charter contract, there is very likely more upside to our SOP valuation and target price.

On the basis of the prevailing risk-reward ratio, we resume coverage of BAB with an Add recommendation, and an SOP-based target price of 92 sen.

Figure 1: Impact of potential rights issue on our target price

SOURCES: CIMB, COMPANY REPORTS

Potential rights issue?

Assumed amount to be raised (RM m) 1,000

Rights issue price (RM/share) 0.50

Number of rights shares to be issued (m) 2,000

Impact of potential rights issue on our target price

Scenario 1 Scenario 2 Scenario 3 Base case

Full firm + option

period

Full firm + 25% of

option

Full firm + 50% of

option

Full firm + 75% of

option

RM m RM m RM m RM m

Pre-rights

Valuation of BAB's existing business (RM m) 6,147.8 4,329.1 4,935.3 5,541.6

Existing no of shares (m) 5,866.3 5,866.3 5,866.3 5,866.3

Valuation of BAB's existing business (RM/share) 1.05 0.74 0.84 0.94

Post-rights


Add: Value of rights issue 1,000.0 1,000.0 1,000.0 1,000.0

x Total value (RM m) 7,147.8 5,329.1 5,935.3 6,541.6


Add: New rights shares 2,000.0 2,000.0 2,000.0 2,000.0

y Enlarged share base (m) 7,866.3 7,866.3 7,866.3 7,866.3

z = x / y Valuation on ex-rights basis (RM/share) 0.91 0.68 0.75 0.83

Gross up for implied bonus element in rights 0.91 0.91 0.91 0.91

Cum-rights equivalent (RM/share) 1.00 0.75 0.83 0.92


5

Key directors and management

Tunku Ali Redhauddin assumed the office of Chairman on 18 June 2013, replacing Dato’ Sri Mahamad Fathil.

Mr Hassan Assad Basma resigned as CEO effective 1 January 2015, and was replaced by Mr Chan Chee Beng as Acting CEO. Mr Chan relinquished his position to Mr Leon Harland on 16 May 2016, who subsequently took over as CEO. Mr Harland had previously worked with SBM Offshore, the largest FPSO player in the world, as well as at Heerema Marine Contractors.

On 18 November 2013, Mr Kenneth Murdoch was appointed to the position of CFO, taking over from Mr Shaharul Rezza, who assumed the position of Head of OSV Business. Mr Murdoch left BAB on 17 November 2016, and Mr Pierre Savy took over as acting CFO. Mr Savy had previous experience as the finance director of SBM Offshore in Kuala Lumpur, and as the CFO of Technip Asia Pacific before that.

Major shareholders

Usaha Tegas Sdn Bhd is the major strategic shareholder of BAB, holding a 34.92% stake via Objektif Bersatu Sdn Bhd. Usaha Tegas is the private investment vehicle for Malaysian tycoon, Ananda Krishnan Tatparanandam.

Saluran Abadi Sdn Bhd holds a 6.14% stake – this is a discretionary trust for the benefit of Bumiputera interests. Permodalan Nasional Berhad holds a 8.44% stake via Amanah Saham Bumiputera, while the Employees Provident Fund holds a 5.13% stake.

SWOT analysis

Figure 2: SWOT Analysis


Strengths

BAB has had experience with the conversion and operations of nine FPSOs and one FSU, with a maximum oil processing capacity of 80,000 bopd and with the largest being of a VLCC hull (302,000 deadweight tonnes, or dwt). BAB had operated its very first FPSO, the Armada Perkasa, since 1997 and had redeployed the Armada Perkasa to three different fields on two continents. This is important, because it proves that BAB has the internal capability and requisite experience to undertake FPSO jobs.

For ONGC’s KG-DWN-98/2 FPSO, ONGC was reported to have “tightened the financial and technical qualification criteria for the FPSO project… it aims to pre-qualify only those contractors that either own or operate at least one FPSO of minimum 80,000 dwt. The contractor should also have leasing, operations and maintenance experience of not less than five years during the past decade,” according to Upstream. BAB has no issues with these requirements, since it has been an FPSO operator since 1997 and most of its FPSOs are larger than 80,000 dwt.

BAB’s fleet of 49 OSVs can also complement its FPSO operations, and can be cross-marketed to BAB’s customer base.

Strengths Opportunities

BAB has had experience in the conversion and operations of at least nine FPSOs, BAB is bidding for several FPSO contracts, which could contribute to future earnings.

which is the foundation for the bidding of future contracts. ONGC's KG-DWN-98/2 project is the closest to being awarded.

BAB's fleet of 49 OSVs can complement BAB's FPSO operations, and can be BAB has two ready FPSO hulls, the Armada Intrepid and Armada Claire, which can

cross-marketed to BAB's customer base across both divisions. be offered to customers for deployment in a relatively short time span.

Weaknesses Threats

BAB's high level of net gearing may impair its ability to secure net projects, unless The one-year late delivery for Armada Kraken, and delays in achieving first oil by April

it raises new equity from shareholders. may result in the payment of additional 'supplementary payments'.

BAB is exposed to the OSV and T&I segments which are currently experiencing The bareboat charter for the Armada Perdana has not been paid since 4Q15, and its

poor demand and rates due to oil majors' capex cutbacks. charterer, Erin Energy, is under a great deal of financial stress.


6

Weaknesses

BAB currently has a high net gearing of 1.84x as at 31 March 2017. While BAB remains within its debt covenant requirements, BAB does not have the cash resources to fund additional capex if it succeeds in securing a new FPSO project. As such, we believe BAB will have to raise new equity from its shareholders, possibly via a rights issue.

BAB is exposed to the OSV and SC (T&I) segments which are currently experiencing poor demand and rates due to oil majors' capex cutbacks. We expect BAB to report a low level of losses for all our forecast years for the OMS division.

Opportunities

BAB is bidding for several FPSO contracts, which could contribute to future earnings. Of the four projects which BAB is interested in, ONGC's KG-DWN-98/2 project will require technical and commercial tenders to be submitted by 31 July 2017, with first oil targeted for March 2020. As such, it is the closest to being awarded. Other potential projects include Eni NAE’s Zaba Zaba field offshore Nigeria, Hess’s TCTP block offshore Ghana (Deepwater Tano-Cape Three Points), and Petrobras’ Buzios development, offshore Brazil.

BAB has two ready FPSO hulls, the Armada Intrepid and Armada Claire, which can be offered to customers for deployment in a relatively short time span. The Armada Intrepid is a relatively old FPSO hull purchased from BP, and may require rework before it can be redeployed. However, the Armada Claire is a relatively new vessel (its conversion was completed in April 2014, and its contract with Woodside ran for only 1½ years before being terminated), and hence can be redeployed more easily. BAB is currently offering the Armada Claire to several potential charterers for deployment in small and marginal offshore oilfields.

Threats

The one-year late delivery for Armada Kraken, and delays in achieving first oil by April 2017 may result in the payment of additional 'supplementary payments' to EnQuest. The negotiations are still ongoing, and there is still some chance of additional provisions to be made in 2Q17F. However, we believe that most of the provisions have already been made.

The bareboat charter for the Armada Perdana has not been paid since 4Q15, and its charterer, Erin Energy, is under a great deal of financial stress. If the banks do not support Erin Energy’s planned drilling capex, which is essential to lift production from the field, and help fund work that is needed to restore production from a problematic well, Erin Energy runs the risk of folding. If such an eventuality materialises, the remaining 4-year firm contract period for the Armada Perdana will most likely be terminated prematurely.


7

BUMI ARMADA’S FPSO BUSINESS

Background and recent history

BAB currently has a fleet of 10 FPSO and Floating Storage Unit (FSU) vessels, of which eight are currently under contract and two are laid up. One FPSO, the Armada Perkasa, was recently sold to its charterer, who had exercised its purchase option.

At the time of BAB’s relisting in July 2011, it had two running contracts for the Armada Perkasa and the Armada Perdana and was about to commence a contract for the Armada TGT1 (awarded late-2009, first oil August 2011). BAB also had two other contracts on hand, i.e. the Armada Claire, for which the conditional letter of award was secured in March 2011, and the Armada Sterling 1, which was awarded to BAB in late-June 2011.

BAB won five contracts from its mid-2011 IPO to the oil price collapse in mid-2014

BAB’s stated goal at the time of its IPO was to secure awards for either two medium-sized projects, or one large-sized project, per year. However, 2012 turned out to be a very quiet year.

In 2013, BAB succeeded in securing two contracts, i.e. the Armada Sterling 2, which was awarded in February 2013, and the Armada Kraken, which was awarded in late-2013.

A further two contracts were secured in 2014: 1) the Letter of Intent (LOI) for the Armada Olombendo, which is the largest-ever FPSO project for BAB, was issued in March 2014 and the final contract was signed in August 2014, and 2) the LOI for the Karapan Armada Sterling 3 was issued in August 2014, with the official contract signed in December 2014.

In April 2015, BAB signed an agreement to charter an FSU LNG Mediterrana but this contract is very small and immaterial to the overall scheme of things.

In the three years subsequent to its IPO, i.e. 2012-2014 and prior to the oil price collapse, BAB managed to secure contracts for:

Two medium-sized FPSOs (the Armada Sterling 2 and Karapan Armada Sterling 3), and

Two large-sized FPSOs (the Armada Kraken and Armada Olombendo), not counting the FSU contract.

Hence, BAB largely met its IPO promise of securing either two medium-sized projects or one large-sized project per annum.

Figure 3: Bumi Armada's FPSO/FSU fleet


Type Type Processing capacity Dwt

Year hull

built

Year converted

into FPSO Builder

Vessels in service

1 Armada Perdana FPSO 40,000 bopd 164,004 1984 2009 Keppel Shipyard

2 Armada TGT 1 FPSO 55,000 bopd 147,834 1996 2011 Keppel Shipyard

3 Armada Sterling FPSO 60,000 bopd 107,222 1997 2012 Keppel Shipyard

4 Armada Sterling II FPSO 26,500 bopd 107,160 1999 2014 Keppel Shipyard

5 Karapan Armada Sterling III FPSO 110,000 mmscfd 95,898 1999 2016 Keppel Shipyard

6 Armada Kraken FPSO 80,000 bopd 166,546 2007 2016 Keppel Shipyard

7 Armada Olombendo FPSO 80,000 bopd 301,963 1999 2016 Keppel Shipyard

8 Armada LNG Mediterrana LNG/FSU

125,877 cu m storage

capacity 69,846 1985 2016 Keppel Shipyard

Armada Perkasa - sold in early 2017

1 Armada Perkasa FPSO 30,000 bopd 58,557 1975 1997 Keppel Shipyard

Laid-up FPSO vessels

1 Armada Intrepid FPSO 220,000 bopd 154,000 1998 Harland & Wolff

2 Armada Claire FPSO 80,000 bopd 102,123 1993 2014 Samsung HI


8

The unravelling after mid-2014

Market conditions changed dramatically after mid-2014 and BAB has struggled, along with the rest of the industry, given the limited new FPSO awards since then.

It also had to deal with the premature termination of the Armada Claire contract in March 2016, and the non-payment of bareboat charters for the Armada Perkasa and Armada Perdana which was a problem that began sometime during 2015.

Aside from the above market headwinds, BAB had to contend with its own internal project execution issues, which manifested itself most dramatically in the Armada Kraken, for which BAB delivered late to its client by one year or more, resulting in liquidated damages and refund of advances collected earlier by BAB.

Some of BAB’s clients also had issues, namely Husky-CNOOC, which had contracted the Karapan Armada Sterling 3. The vessel could not start its commercial operations even though it had been delivered to Husky-CNOOC by late-2016 because the latter had not completed its own landside gas receiving terminal infrastructure.

The net result was a stream of bad news that clobbered the share price, pushing it from an average of RM2.30 to RM2.40 prior to mid-2014 down to a historic low of RM0.55 on 25 November 2016.

Is the worst over?

We believe that most of the bad news, at least on the operating front, is on its last legs.

The Armada Perkasa was sold to its charterer, Amni, in early-2017F, and BAB managed to recover the residual net book value of its asset. Although BAB probably did not recover all of the unpaid BBC hire that was rightfully due to it, the charter was also at the final 1½ years of its full option period, so by selling the vessel to Amni, BAB successfully avoided the costs of demobilising the asset.

The Armada Olombendo is in the final stage of its testing phase and is already earning 80% of its bareboat charterhire (BBC) since its first oil milestone on 8 February 2017. Once testing is completed, which is expected in 3Q17 at the latest, BAB will be able to earn 100% of the Olombendo’s BBC. In our model, we have assumed that Armada Olombendo will achieve final acceptance by 1 July 2017.

The Armada Kraken is close to its first oil, which BAB is “very confident” of delivering before 30 June 2017. If BAB succeeds in doing so, the prospects for additional provisions for ‘supplementary payments’ to its client, EnQuest, will be limited and there may even be the prospect of a provision writeback. After the first oil threshold is passed, the Armada Kraken will need a further 3-6 months for testing before the client can give final acceptance, upon which the Armada Kraken can begin earning its BBC. In our model, we have assumed that Armada Kraken’s firm charter period begins on 1 January 2018.

Finally, the Karapan Armada Sterling 3 achieved first gas on board on 6 May 2017, and the firm contract period should begin sometime in 2H17 (we have assumed 1 October 2017).

What else could go wrong?

We are unclear if the contract for the Armada Perdana can survive a possible collapse of its charterer, Erin Energy, which is in deep financial distress. This is potentially the one last ‘big’ bad news that might happen, although our valuation of BAB suggests that BAB’s share price has already excluded the residual DCF contract value of the Armada Perdana.

So, while from a theoretical valuation standpoint, a potential termination of the Armada Perdana contract should not have an impact on the current share price level, we cannot be totally certain if the sentiment surrounding BAB could be hurt again.


9

The negotiations on additional compensation, or ‘supplementary payments’, to EnQuest for the delays surrounding the Armada Kraken FPSO are still ongoing and are apparently more complex than earlier anticipated, according to BAB. There remains potential that BAB may have to make even more provisions for ‘supplementary payments’, which could be incorporated into the 2Q17F results. However, this is not our base case.

While the Karapan Armada Sterling 3 arrived at the Madura BD field, offshore Indonesia, before the end of 2016, and achieved first gas on board on 6 May 2017, it has not been able to commence its official firm period due to certain delays over the commissioning of Husky-CNOOC’s onshore gas terminal. Under the terms of the FPSO charter, BAB does not have the right to collect standby payments from the charterer. Husky-CNOOC has guided for the ramping up of its production from 2H17F, but we are unclear as to when exactly the contractual firm period can officially begin. Our model assumes a 1 October 2017 start date.

Figure 4: Bumi Armada's FPSO fleet firm charter periods, and estimated utilisation of onboard processing capacity


What could surprise on the upside?

BAB is currently bidding for four new potential FPSO projects. Most of these projects are not expected to materialise anytime soon, since each of the projects have to go through multiple regulatory, technical, commercial, and political hurdles. The only exception to this is ONGC’s requirement for a VLCC-hull FPSO with oil processing capacity of 90,000 bopd, to be located at Cluster 2A of the KG-DWN-98/2 block, offshore India. ONGC is targeting first oil from this FPSO in March 2020.

We believe that a contract win will require BAB to undertake an equity-raising exercise (most probably via a rights issue) to beef up its balance sheet for the purposes of capex spending. There is also a possibility that BAB may do an equity-raising exercise, prior to, and in preparation for, future contract bidding.

BAB is offering the Armada Claire to several charterers for potential deployment to smaller and marginal offshore oilfields. Any contract win here will be a bonus as the current BAB share price assumes zero future earnings from the Armada Claire.

Additional upside is possible if BAB manages to potentially collect compensatory damages on the premature termination of Armada Claire. However, the process of recovering damages from the Armada Claire may take three years or more, so the potential upside, if any, is not imminent. Despite BAB filing its Statement of Claim with the Supreme Court of Western Australia in April 2016, no date for the trial has been fixed yet.

A more distant possibility is for BAB to recoup the bareboat charters that have not been collected for the Armada Perdana for the past year, and to resolve issues surrounding the continuation of the bareboat charter hire for Armada Perdana for the rest of the firm contract period. However, investors should not get their hopes too high yet, as there are many obstacles, and the proverbial Sword of Damocles continues to hang over the charter contract for the vessel and over its charterer’s own survival.

Type Processing capacity

Estimated 2016

volume processed Offshore oilfield

Firm contract

start

Firm contract

end

Maximum

option period

Vessels in service

1 Armada Perdana 40,000 bopd 4,800 bopd Oyo, Nigeria Jan-14 Dec-20 Dec-22

2 Armada TGT 1 55,000 bopd 34,000 bopd Te Giac Trang, Vietnam Nov-11 Nov-18 Nov-26

3 Armada Sterling 60,000 bopd 35,000 bopd N B Prasad, India (D-1) Apr-13 Apr-20 Apr-26

4 Armada Sterling II 26,500 bopd 15,000 bopd B-192, India (C-7) Feb-15 Feb-24 Feb-31

5 Karapan Armada Sterling III 110,000 mmscfd n.a. Madura BD, Indonesia Oct-17 * Sep-27 * Sep-32 *

6 Armada Kraken 80,000 bopd n.a. Kraken, North Sea Jan-18 * Dec-25 * Dec-42 *

7 Armada Olombendo 80,000 bopd n.a. East Hub 15/06, Angola Jul-17 * Jun-29 * Jun-37 *

* estimated

OOil & Gas - Equipment & Svs│Malaysia│Bumi Armada│June 7, 2017

10

Figure 5: Contracting status of Bumi Armada's FPSOs


1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Ongoing contracts - subsidiaries

Armada

Perdana (first

oil Dec 2009)

Armada TGT1

(first oil Aug

2011)

Armada Kraken

(first oil

expected by

Jun 2017)

Armada

Olombendo

(first oil Feb

2017)

Armada LNG

Mediterrana

(first LNG Jan

2017)

Ongoing contracts - JVs

Armada Sterling

1 (first oil Apr

2013)

Armada Sterling

2 (first oil Feb

2015)

Armada Sterling

3 (first gas May

2017)

Terminated contracts - subsidiaries

Armada Perkasa

(first oil May

2008, contract

terminated

early-2017 upon

vessel sale)

Armada Claire

(first oil Aug

2014, charterer

terminated Mar

2016)

2020F 2021F2012 2013 2014 2015 2016 2017F 2018F 2019F

Hoang Long JOC - Option period 8 years Nov 2018 - Nov 2026)

Eni NAE - Firm period 5 years Jun 2010 -Jun 2015, but terminated Dec 2013.

Hoang Long JOC - Firm period 7 years Nov 2011 - Nov 2018

Woodside - Firm period 4 years

Aug 2014 - Aug 2018; Option period 4 years Aug 2018 - Aug

2022. Charterer terminated contract Mar 2016.

Afren - Firm period 5 years

Jul 2008 - Jun 2013Afren - First

option period 1 year Jul 2013 -

Jun 2014

Erin Energy - Firm period 7 years Jan 2014 - Dec 2020; Option period 2 years Jan 2021 - Dec 2022.

ONGC- Firm period 7 years Apr 2013 - Apr 2020; Option period 6 years Apr 2020 - Apr 2026.

ONGC - Firm period 9 years Feb 2015 - Feb 2024; Option period 7 years Feb 2024 - 2031.

ONGC - Firm period 10 years expected to start Oct 2017 - Sep 2027; Option period 5 years Oct 2027 -Oct 2032.

EnQuest- Firm period 8 years expected to start Jan 2018 - Dec 2025; Option period 17 years Jan 2025 -Dec 2041.

Eni Angola- Firm period 12 years expected to start mid-2017 - mid-2029; Option period 8 years mid-2029 - mid-2037.

ElectroGas Malta - Firm period 18 years Jan 2017 - Jan 2035; no option period.

Erin Energy -

Option period

Afren - Second & third option period 2

years Jul 2014 - Jun 2016; Amni took over from Jul 2015 - Jun 2016 after

Afren went into court administration.

Amni - Fourth period 1 year Jul 2016 - Jun 2017, but vessel sold early-2017and contract

ended.


11

Armada Perdana

The FPSO Armada Perdana is 100%-owned by BAB, and has been on charter since January 2010 at the Oyo field, offshore Nigeria. The vessel was converted by Keppel Singapore in 2009 at a total capex cost of US$450m from a 1984-built suezmax-sized hull, and has an oil processing capacity of 40,000 bopd.

The charter contract for the FPSO was originally awarded by Eni Nigerian Agip Exploration Ltd (Eni NAE) on 15 April 2008, and commenced its charter on 1 January 2010 for a firm contract period of five years to 31 December 2014, with five more annual options up to 31 December 2019.

Subsequently, Eni NAE gave up operatorship of the field, hence the charter contract with Eni NAE was ended by mutual agreement on 31 December 2013. The contract was assumed by Oceanic Consultants effective from 1 January 2014, which in turn, provided the use of the FPSO and the related services to the new operator of the Oyo field, CAMAC Energy Inc. CAMAC Energy Inc has since been renamed Erin Energy Corporation.

According to its website, Erin Energy Corporation is an independent oil and gas exploration and production company focused on energy resources in sub-Saharan Africa, including current production and other exploration projects offshore Nigeria, as well as exploration licenses offshore Ghana, Kenya and Gambia, and onshore Kenya. Erin Energy is headquartered in Houston, Texas, and is listed on the New York and Johannesburg Stock Exchanges. Erin Energy has a 100% interest in Oil Mining Leases 120 and 121 located offshore Nigeria. The OML 120 block contains the Oyo field which is located approximately 75 km offshore.

In the first two years of the contract with Eni NAE, BAB gave a charter rate discount, because Eni NAE had 'over-drilled' and hit gas reserves below the oil accumulation. As a result, Eni NAE achieved an oil production rate of only 5,000 bopd, from an anticipated 30,000 bopd. BAB agreed to give a charter rate discount for the first two years of the contract, as that was the amount of time that was needed to rectify the well.

The new contract with Erin Energy commenced on 1 January 2014, as mentioned above, for a period of seven firm years to 31 December 2020, and may be extended for a further two annual options up to a maximum of 31 December 2022. We estimate the BBC rate for the firm period at US$133,000/day.

Recent problems faced with the FPSO Armada Perdana charter contract

Erin Energy began facing problems in 2H14, when the oil price collapsed, and when both producing wells, the Oyo-5 and Oyo-6 wells, were shut-in from September 2014 as part of the Oyo field redevelopment campaign. As a result, production dipped in 3Q14, while Erin Energy did not produce a single barrel of oil in 4Q14 and 1Q15.

Production improved in FY15, when the Oyo-7 well commenced maiden production from mid-June 2015, while the Oyo-8 well commenced maiden production in early-May 2015. However, Erin Energy did not earn any revenue until 3Q15, as it did not sell any oil until then. From September 2015, the Oyo-8 well was shut-in for technical reasons, and did not resume production until May 2016.

In FY16, other production issues came to the fore. The Oyo-7 well was shut-in from July 2016 due to high water production from the well, leading to a loss of 1,400 bopd in production. Hence, only the Oyo-8 well was in production since 3Q16. At that time, Erin Energy attempted an intermittent nitrogen lift gas injection from the facility to attempt to bring the Oyo-7 well back into production, but it was not fully implemented due to some operational constraints.

In 1Q17, the Oyo-7 well remained shut-in, and the only producing well in the Oyo field was the Oyo-8, which produced only 5,500 bopd, significantly below the FPSO Armada Perdana’s processing capacity of 40,000 bopd.

As a result of the underperformance of its well production, and the collapse in oil price, Erin Energy is facing severe cashflow issues. The last time that Erin


12

Energy made cash net profit was in 1Q14, at just US$0.4m in that quarter. Since then, Erin Energy has been bleeding on a cash basis, even after adding back non-cash expenses like depreciation and impairment charges.

Figure 6: Erin Energy's financial performance and Oyo field production data


This compelled BAB to make a provision against receivables from Erin Energy amounting to RM160.9m in 4Q15, as a result of the slow payment during FY15. Although BAB continued to receive the Operations and Maintenance (O&M) rate, it was advised by its auditor to make a provision against the overdue BBC receivables.

Some BBC hire was received by BAB in 1Q16, but BAB has ceased recognising BBC revenue from the Armada Perdana since 2Q16. O&M revenue is currently still being recognised as it is still being paid, but this yields nothing for BAB on a net basis, since this is merely to recoup the O&M expenses that have been spent on the vessel on behalf of the client.

Can Erin Energy survive the liquidity crunch? Erin Energy’s auditors, Grant Thornton LLP, said in their audit report accompanying the 2015 and 2015 Annual Reports, that they had “substantial doubt about the Company’s ability to continue as a going concern”, despite the measures that the management of Erin Energy plans to take to address the liquidity issues.

As of 31 March 2017, Erin Energy's total current liabilities of US$279m (excluding short-term debt) exceeded its total current assets of US$15m (excluding free cash and restricted cash balances), resulting in a working capital deficit of US$264m.

In addition, Erin Energy had approximately US$42m in short-term debt and US$64m in long-term debt, against its free and restricted cash balances of merely US$28.5m.

Under these circumstances, Erin Energy cannot pay its financial obligations, much less spend on the capex required to drill new wells and lift production rates.

According to Erin Energy’s 1Q17 results report, it is “currently pursuing a number of actions, including (i) obtaining additional funds through public or private financing sources, (ii) restructuring existing debts from lenders, (iii) obtaining forbearance of debt from trade creditors, (iv) reducing ongoing

Period Production * Average

selling price

Crude oil

sales *

Net

attributable

profit/(loss)

Net cash

profit/(loss) #

Notes

bopd US$/bbl US$ m US$ m US$ m

1Q 14 1,700 109.11 19.9 -4.6 0.4 The Oyo-5 and Oyo-6 wells were producing.

2Q 1,600 110.40 14.9 -11.9 -5.9 The Oyo-5 and Oyo-6 wells were producing.

3Q 800 100.90 19.0 -42.2 -20.5 The Oyo-5 and Oyo-6 wells were both shut-in from Sep 2014 as part of the

Oyo field redevelopment campaign.

4Q 0 0.00 0.0 -37.4 -46.3

1Q 15 0 0.00 0.0 -33.1 -32.4

2Q 6,700 0.00 0.0 -9.2 -9.1 The Oyo-7 well commenced maiden production from mid-Jun 2015, while

the Oyo-8 well commenced maiden production from early-May 2015.

3Q 10,200 50.2 28.7 -58.7 -15.4 The Oyo-7 well was producing, but the Oyo-8 well was shut-in from Sep

2015.

4Q 2,500 138.76 39.7 -330.0 -15.7 The Oyo-7 well was producing, but the Oyo-8 well remained shut-in.

1Q 16 1,800 30.54 4.9 -32.4 -27.6 The Oyo-7 well was producing, but the Oyo-8 well remained shut-in.

2Q 5,400 45.58 23.2 -22.6 -7.7 The Oyo-7 well was producing, and the Oyo-8 well resumed production from

May 2016.

3Q 6,100 49.07 28.6 -23.5 -4.6 The Oyo-8 well was producing, but the Oyo-7 well was shut-in from Jul

2016 due to high water production from the well, leading to a temporary

production loss of about 1,400 bopd.

4Q 5,800 56.61 21.1 -63.9 -44.4 The Oyo-8 well was producing, but the Oyo-7 well remained shut-in.

1Q 17 5,500 52.41 31.3 -26.5 -1.1 The Oyo-8 well was producing, but the Oyo-7 well remained shut-in.

* net of royalties

# excluding depreciation and impairments

Oyo field data Erin Energy's financial performance


13

operating costs, (v) minimising projected capital costs for the 2017F exploration and development campaign, (vi) farming-out a portion of its rights to certain of its oil and gas properties and (vii) exploring potential business combination transactions.”

“Our level of indebtedness has, or could have, important consequences to our business because 1) a substantial portion of our cash flows from operations will be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, general corporate or other purposes; 2) it may impair our ability to obtain additional financing in the future for acquisitions, capital expenditures or general corporate purposes; 3) it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and 4) we may be substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to downturns in our business, our industry or the economy in general.

“In addition, the terms of the Term Loan Facility and the MCB Finance Facility restrict, and the terms of any future indebtedness including any future credit facility may restrict, our ability to incur additional indebtedness and grant liens because of debt or financial covenants we are, or may be, required to meet and compliance with certain negative covenants restricting the incurrence of addition indebtedness. Thus, we may not be able to obtain sufficient capital to grow our business or implement our business strategy and may lose opportunities to acquire interests in oil properties or related businesses because of our inability to fund such growth.

“Our ability to comply with restrictions and covenants, including those in the Term Loan Facility, the MCB Finance Facility or in any future credit facility, is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants in the Term Loan Facility and the MCB Facility could result in a default, which could permit the lenders to accelerate repayments and foreclose on the collateral securing such indebtedness.”

BAB is currently in discussions with Erin Energy’s lenders to extend cashflow support for additional drilling work and well rectification capex, in order that production rates can recover. However, the discussions are very challenging, and we are unclear if the bankers can be convinced to extend more credit.

Is there light at the end of the tunnel?

Erin Energy is currently working on relocating an existing gaslift line to well Oyo-7 to enable continuous gaslift operation to assist in restoring lost production volumes. According to the company, “for cost effectiveness, the relocation of the gaslift line to well Oyo-7 is now planned to be combined with the Oyo-9 subsea equipment installation scheduled for 2H17”.

On 6 March 2017, Erin Energy announced that it has chartered a drillship at a rate of US$195,000/day to drill a development well at the Oyo-9 well from June 2017. According to Riglogix, this Oyo-9 drilling campaign will take 2½ months, implying a cost of US$15.2m in drillship charter hire alone, although the actual drilling cost will be much higher when including the cost of materials. With a free cash balance of only US$8.5m as at 31 March 2017, Erin Energy would require financial support from either its bankers or its shareholders to spend on development drilling.

Erin Energy anticipates spudding the Oyo-9 well in mid-June 2017 and first production from the well to be in September 2017. The Oyo-9 is expected to add an additional 6,000-7,000 bopd of production, which will be tied back to FPSO Armada Perdana.

Assuming that 1) the Oyo-8 well continues at its current production rate of 5,500 bopd, 2) the gaslift line succeeds in restoring Oyo-7 well’s production to 1,400 bopd, and 3) the Oyo-9 development well successfully delivers 6,000-7,000 bopd of extra production from September 2017, Erin Energy’s production from the Oyo field can be raised to approximately 13,400 bopd by 4Q17, which would be the highest production level from the field in years, albeit still


14

significantly below the Armada Perdana’s oil processing capacity of 40,000 bopd.

In the medium term, Erin Energy plans to develop the Oyo-10 well (start-up 2018F), the Oyo-11 well (start-up 2019F), the Oyo-12 well (start-up 2020F), and the Oyo-13 well (start-up 2021F). However, none of these will materialise if Erin Energy cannot get past restoring production at Oyo-7 and in successfully commencing production from Oyo-9.

For the purposes of our valuation and financial forecasts, we have excluded any contribution from the FPSO Armada Perdana. If the BBC payments resume, we would consider that as a bonus, but even so, no one can be entirely clear if and when Erin Energy can recover its financial footing on a more convincing basis.

Armada TGT1

The Armada TGT1 FPSO is 100%-owned by BAB, and is on charter to the Hoang Long Joint Operating Company (JOC) in Vietnam for a firm period of seven years, with eight annual extension options, for a total of 15 years. We estimate that the firm contract period has a value of US$700m and the option period a value of US$300m. The FPSO is based at the Te Giac Trang field, in Block 16-1, Cuu Long Basin, offshore Vietnam.

The shareholders of the Hoang Long JOC include Petrovietnam with a 41% stake, SOCO Vietnam with a 28.5% stake, OPECO Vietnam with a 2% stake, and Thailand’s PTTEP with a 28.5% stake. UK-based SOCO International Plc, which is BAB’s main contact point for the FPSO charter contract, is an international oil and gas exploration and production company headquartered in London and its shares trade on the London Stock Exchange. In addition to Vietnam, the company has interests in the Republic of Congo (Brazzaville) and Angola.

The charter contract for the FPSO was awarded on 20 November 2009, and the vessel was converted from a 1996-built suezmax tanker at Keppel Singapore in 2011 at a total cost of US$450m. The firm contract period began on 30 November 2011 and will end after seven years on 29 November 2018, about 1½ more years to run from today. BAB is currently negotiating with Hoang Long JOC on the extension of the charter into the option period, and the discussions are going well.

According to Clarksons, the Te Giac Trang field produced 34,032 bopd in 2016, which is within the FPSO Armada TGT1’s processing capacity of 55,000 bopd.

In February 2017, the Hoang Long JOC submitted a plan for full field development to the Vietnamese government which was approved in the same month. Full field development includes 18 additional wells and installing processing equipment on the Te Giac Trang H1 platform to increase fluid processing capacity. As such, we believe the charterer, Hoang Long JOC, would very likely continue the charter of the FPSO into its option period. Also, as more wells are tied into the FPSO, BAB may enjoy a one-off variation order on the work to tie the FPSO to the additional wells.

Armada Sterling 1

The Armada Sterling 1 FPSO, officially known simply as the “Armada Sterling”, is the first of three FPSO assets which BAB owns in a JV structure. For this asset specifically, BAB has a 50% interest, and the remaining 50% interest is held by its Indian partners; Shapoorji Pallonji and Company Private Limited holds a 49% interest, and Clean Environment Investments Co Ltd holds a 1% stake. This JV structure is mandated by regulations in India, where the FPSO is based.

The FPSO is located on the D-1 marginal field, 200km offshore Mumbai, and the field is 100% owned and operated by India’s national oil company, the Oil and Natural Gas Corporation (ONGC).

On 25 June 2011, BAB was notified by ONGC of its intention to award it the contract for the provision of an FPSO (Armada Sterling 1) which will be located


15

at the D-1 field, offshore Mumbai. As a result, BAB proceeded to acquire a 107,000 dwt aframax tanker, the Monte Umbe, as the conversion candidate.

On 10 August 2011, BAB’s JV company Forbes Bumi Armada Offshore Limited, signed a 7-year fixed term time charter with ONGC for the provision of an FPSO. The option period is for a further six annual extensions. The 7-year firm period is worth US$620m, while the 6-year option period is worth US$318m.

The Monte Umbe was converted into an FPSO with 60,000 bopd processing capacity at the Keppel Singapore shipyard, which sailed away in November 2012. The total vessel capex amounted to US$365m.

First oil was achieved by the Armada Sterling 1 FPSO on 7 April 2013, and acceptance was secured on 22 April 2013, upon which the firm period started. The firm period will end on 21 April 2020.

So far, the FPSO has been performing as expected, and there have been no payment issues from charterer ONGC.

The Armada Sterling 1 FPSO receives oil from several fixed wellhead platforms on the proximate N B Prasad field, which started production in 2006. Originally, production on the oilfield was via several wellhead platforms, first brought onstream in February 2006, that were tied-back to an existing jack-up production platform, which was in turn linked to a Floating Storage Offload (FSO) unit via pipeline.

More wells were drilled in Phase 2 of the development in 2008-09, and in order to facilitate further field expansion, the FPSO Armada Sterling 1 was contracted in August 2011. When the Sterling 1 started operations in April 2013, the jack-up production platform and the FSO were decommissioned.

In August 2012, ONGC announced a large new pool of reserves discovered on the field which started up January 2014, and raising production to its peak of 60,000 bopd, matching the FPSO’s processing capacity.

In March 2017, Phase 4 of the development was sanctioned and will include six wells, one new wellhead platform, three well clamp-on structures, associated pipelines and power cables. If these structures come onstream in 2019F, as expected, it will help keep the FPSO Armada Sterling 1 occupied into its option period which will commence from 22 April 2020 for another six years.

Armada Sterling 2

The Armada Sterling 2 FPSO, is the second of three FPSO assets which BAB owns in 50:50 JV with Shapoorji Pallonji and Company Private Limited, and like the Sterling 1, is also located offshore Mumbai, India, at the Cluster-7 (C-7) marginal oil field that is 100% owned and operated by ONGC.

On 18 February 2013, BAB announced that its JV company SP Armada Oil Exploration Private Limited received a Notification of Award from ONGC for the charter hire of a FPSO (Armada Sterling 2) for the C-7 field in India. The contract is for a fixed period of nine years (worth US$740m) and option period of up to seven years (worth US$340m).

BAB purchased the 1999-built aframax tanker, the Eagle Albany, from AET (100% subsidiary of MISC), and sent it to Keppel Singapore for conversion. The total capex cost was US$387m.

The vessel sailed away from the yard on 11 October 2014, and achieved final acceptance on 15 February 2015, a mere ten days after achieving first oil, with its 9-year firm period commencing on 15 February 2015 and will end on 14 February 2024.

The Armada Sterling 2 FPSO receives oil from several fixed wellhead platforms on the proximate B-192 field, which started production in 2014, at a rate of approximately 15,000 bopd, against the FPSO’s processing capacity of 26,500 bopd. At end-2016, there may be some 50 mmbbl left of reserves to be extracted over the remaining 14-year firm and option contract period, or some 10,000 bopd on average.

As with the Armada Sterling 1, the FPSO has been performing as expected, and there have been no payment issues from charterer ONGC.


16

Karapan Armada Sterling 3

The FPSO Karapan Armada Sterling 3 was previously known as the Armada Madura, since it was to be based at the Madura BD field, offshore Indonesia.

The Madura BD field is 40% owned and operated by Canada’s Husky Energy Inc, with China’s CNOOC owning another 40%, and local Indonesian partner Samudra Energy Ltd with a 20% stake. The field has recoverable gas reserves of 515 bcf, and smaller condensate reserves of 23 mmbbl. HCML had signed three 20-year agreements to supply 100 mmscfd of gas to East Java power plants.

The gas output from the Madura MDA field will also be tied into the FPSO, in addition to the gas output from the Madura BD field. The Madura MDA field has recoverable gas reserves of 150 bcf, but is expected to start-up only in 2020F. The FPSO Karapan Armada Sterling 3 is connected via a 16" x 52 km pipeline to an onshore gas metering station near Pasuruan.

BAB has a 49% equity interest in the asset holding company, PT Armada Gema Nusantara, with 51% majority ownership held by its Indonesian JV partner, PT Gema Nusantara.

The FPSO itself was initially owned by Armada Madura EPC Ltd, which is a 50:50 JV between BAB and Shapoorji Pallonji and Company Private Limited. Shapoorji Pallonji had entered as a JV partner to help BAB share the construction and conversion risks of the vessel.

Armada Madura EPC Ltd took ownership of the Rainbow 1 aframax tanker, which BAB had purchased on 27 October 2011 for US$24m. Armada Madura EPC Ltd had contracted with Keppel Singapore for the conversion works in 2014.

After completion of the conversion works on 20 December 2016, the FPSO was then sold to PT Armada Gema Nusantara, which had contracted the vessel’s charter with Husky-CNOOC Madura Limited (HCML), the operator of the Madura BD field. As an Indian company, Shapoorji Pallonji could not be involved in the charter contract due to local Indonesian vessel ownership rules.

The FPSO Karapan Armada Sterling 3 has been contracted to HCML for a firm period of 10 years (worth US$1,180m) with up to five annual option years (worth US$147m). The vessel sailed away from the Keppel Singapore yard on 20 December 2016, and arrived at the Madura BD field before end of 2016. It was then hooked up without issue, and was then ready to receive its first gas molecules before the end of 2016.

However, HCML was not yet ready to produce the gas, as it still needed to hook up the gas pipelines from the FPSO to the onshore gas grid connection, which has not been completed. Hence, the FPSO could not commence first gas immediately, because otherwise it will have to flare all the gas as it would have nowhere to offload it to. Despite the delays caused by the charterer, BAB does not have the contractual right to claim stand-by fees, as this had not been incorporated into the terms of the charter hire agreement.

On 6 May 2017, first gas was achieved, although this was ultimately flared. The certification and acceptance process has not yet begun, although BAB hopes that the process will start before end-June 2017. The latter process is expected to take about three months, so the firm contract period should begin sometime in the 3Q/4Q of FY17F. HCML has guided that it will enter full production ramp-up mode in 2H17. In our financial model, we have assumed that the FPSO’s firm charter period will commence from 1 October 2017. BAB accounts for the FPSO Karapan Armada Sterling 3 charter contract as a finance lease.

Key dates and events

On 19 August 2014, Bumi Armada Offshore Holdings Limited (BAOHL) and its JV company PT Armada Gema Nusantara (PT AGN) was awarded a Letter of Intent by Husky-CNOOC Madura Limited (HCML). This is in relation to the FPSO Karapan Armada Sterling 3, which will be placed at the Madura BD field, offshore Indonesia.


17

On 20 December 2016, the FPSO Karapan Armada Sterling 3 left the Keppel Singapore yard and was moored and all riser lines were connected to the FPSO on 16 January 2017. The FPSO is now waiting for its client, HCML, to provide first gas. HCML expects to complete the full ramp up of production in 2H17.

On 25 February 2017, Calgary-based Husky Energy Inc. said the construction of the liquids-rich BD field project in the Madura Strait block has been completed. The shallow water platform and subsea pipeline installation is complete, and the floating production, storage and offloading (FPSO) vessel is on site, it said. A wellhead platform and pipeline infrastructure were also completed at the BD project. “The project is expected to ramp up to its full sales gas rate during 2H17, with a net daily sales target of 40 mmcf/day of gas and 2,400 bbls/day of liquids,” Husky said.

On 6 May 2017, the FPSO Karapan Armada Sterling 3 achieved first gas.

Armada Kraken

The Armada Kraken is an FPSO that is 100%-owned by BAB and is on charter to EnQuest for a firm period of eight years, with 17 annual extension options, for a total of 25 years. The firm contract period has a value of US$1.4bn and the option period has a value of US$0.8bn.

EnQuest Plc is the largest UK independent oil producer in the UK North Sea and is listed on the London Stock Exchange. It is the 70.5% owner and operator of the Kraken oil field, of which the remaining 29.5% is held by Cairn Energy Plc.

The FPSO Armada Kraken has an oil processing capacity of 80,000 bopd and is located in the Kraken field, 400km northeast of Aberdeen, in Block 9/02b at the UK sector of the North Sea. The Kraken field is a large heavy oil discovery, with reserves of 137 mmbbl, and the field is prone to harsh weather.

The contract for the FPSO Armada Kraken was awarded in December 2013, upon which BAB sent a 2007-built suezmax tanker to Keppel Singapore for conversion. The capex cost of the vessel was US$1bn, with almost all of it spent between 2014 and 2016. The conversion work was finished last year and the FPSO sailed away from the yard in November 2016.

The vessel was at least one year late in delivery for various reasons, such as equipment changes requested by EnQuest, delays in equipment suppliers’ deliveries and some delays by BAB’s internal project team. The vessel is now in the Kraken field and BAB’s guidance is for first oil to be achieved before 30 June 2017.

We estimate the bareboat charter (BBC) at US$445,000/day during the firm period and US$129,000/day during the option period. BAB accounts for the FPSO Armada Kraken contract as a finance lease.


On 15 November 2013, BAB announced that it had secured a Letter of Interim Agreement from EnQuest Heather Limited together with EnQuest ENS Limited, First Oil and Gas Limited, Nautical Petroleum Limited and Nautical Petroleum AG to confirm their intention to award a contract for the supply and operations of an FPSO (later named Armada Kraken) to operate in the Kraken field in the UK sector of the North Sea. First oil was anticipated in 2016/17, and the anticipated production life was up to 25 years.

On 20 December 2013, EnQuest entered into a bareboat charter with Armada Kraken Pte Ltd, which is 100% owned by BAB, for the lease of an FPSO vessel for the Kraken field. The lease will commence on the date of first production, which was originally expected for mid-2016.

On 31 March 2014, Armada Kraken Pte Ltd secured a syndicated bridge loan facility of US$750m for the financing of the construction of the FPSO.

On 7 July 2015, Armada Kraken Pte Ltd secured a syndicated term loan facility at an aggregate amount of US$755m for the FPSO Armada Kraken project.


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On 10 August 2016, EnQuest agreed with Armada Kraken Pte Ltd (wholly-owned by BAB), the company constructing the Kraken FPSO, that BAB would pay the partners in the Kraken development an amount of US$65m. This amount is payable in instalments, with US$38m payable between February 2017 and February 2018, and the balance payable over a two-year period commencing three months after first production. These payments are in addition to the US$20m of liquidated damages due to the oilfield partners, no later than 15 September 2016.

In October 2016, following mechanical completion, shore-based commissioning activities onboard the Kraken FPSO were completed at the quayside in Singapore. The vessel was then moved to deep-water anchorage to undertake further commissioning work. On 23 November 2016, the FPSO sailed away en route to the North Sea.

On 13 February 2017, the Armada Kraken FPSO arrived at the Kraken field in the UK North Sea. The hook up of the Submerged Turret Production buoy mooring system to the FPSO was completed on 15 February, and a full rotation test performed so that the vessel is now on station and securely moored. At the time of the announcement, it was disclosed that commissioning work was continuing on the topsides. Also, that reconstruction of the turret area pipework and connection of the risers and umbilicals to the swivel stack was being undertaken, to be followed by the commissioning of the subsea infrastructure. It was also disclosed that EnQuest PLC expected delivery of first oil to be on track for 2Q17.

On 28 February 2017, BAB announced that it had completed hook-up job for the Armada Kraken FPSO, but could potentially miss the backstop date of 1 April 2017 to hit first oil. As a result of the failure, EnQuest has the contractual right to terminate the contract. At the time of the announcement, BAB said that it was in the midst of renegotiating a new backdrop date and was targeting to hit first oil by 2Q17.

On 27 April 2017, BAB issued its Annual Report 2016, which noted that “at the time of writing, we are in process of finalising the contract amendments and have agreed in principal to redefine the final delivery date from 1 April 2017 to 15 July 2017”.

Financial impact of the delay in delivery and the delay in achieving first oil

As a result of the delay in delivery of more than one year, BAB is obligated under the terms of the contract to pay the maximum liquidated ascertained damages (LAD) of US$20m to EnQuest. This was booked into BAB’s financial accounts during 2Q16.

In addition, BAB agreed to refund US$65m in advance payments to EnQuest to secure a deferment of the first oil date to 1 February 2017, with a backstop date of 1 April 2017. Of the total US$65m, US$38m is payable between February 2017 and February 2018, with US$27m to be paid over two years commencing three months after first production. Over the course of the conversion of the FPSO vessel, EnQuest had paid advances totalling US$100m to BAB, representing 10% of the capex cost of US$1bn, of which US$65m will be refunded.

In 4Q16, BAB estimated that it will likely miss the first oil backstop date of 1 April 2017. Hence, it made US$22.7m in provision for ‘supplementary payments’, representing estimated compensation to be paid to EnQuest up to 15 July 2017.

During BAB’s 1Q17 results conference call with analysts, BAB said that it is “very confident” that it will be able to achieve first oil by the end of June; its internal target is for 15 June. If BAB achieves first oil earlier than 15 July, there is a possibility that it may write back part of this US$22.7m provision for ‘supplementary payments’. For instance, if BAB achieves first oil on 15 June, we estimate that BAB will be able to write back US$7.5m in provisions.

Conversely, the ongoing negotiations with EnQuest have been more complicated, and more multi-faceted, than expected. Hence, in 1Q17, BAB


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made additional unquantified provisions for ‘supplementary payments’, and there is some possibility of even more provisions, depending on the outcome of the currently-ongoing negotiations, even if the Armada Kraken achieves first oil before 15 July.

Nevertheless, we believe that a large portion of the ‘supplementary payments’ has been accounted for. In our financial model, we have assumed that no further provisions are necessary, and that BAB will pay US$22.7m in compensatory ‘supplementary payments’ during FY17F to EnQuest.

As a result of the delays in commencing the contract, and the resultant US$20m LAD, US$65m refund of advances, and US$22.7m provision for ‘supplementary payments’, we estimate that the FPSO Armada Kraken’s IRR during its 8-year firm period will fall from the original target of 11%, to below 8%. This is still likely to be above our 5% estimate of BAB’s WACC, but the BAB’s future financial returns from the FPSO are diminished. The total BBC receipts of US$1,300m over the 8-year firm period are more than enough to cover debt principal repayment and interest costs of slightly more than US$800m. Hence, from a cashflow perspective, BAB remains in a net positive position.

While EnQuest has the contractual right to terminate the charter for the FPSO for missing its first oil backstop date, it is rather unlikely for EnQuest to do so, since the production from the Kraken field is a significant chunk of EnQuest’s market value and is a cornerstone of its future prospects. In our financial model and valuation for BAB, we have assumed that the charter contract will not be terminated by EnQuest.

Contract expected to commence 3-6 months after first oil

After the FPSO Armada Kraken achieves first oil, the vessel will need to undergo acceptance testing by the client, EnQuest. This process typically takes three months to complete, but in the North Sea’s harsh conditions, weather-related factors could push the process to as long as six months.

Upon acceptance, the firm 8-year charter period will commence, and BAB will begin receiving US$445,000/day in BBC hire. In our financial model, we have assumed that the Kraken’s firm period will commence from 1 January 2018.

Armada Olombendo

The Armada Olombendo is an FPSO that is 100%-owned by BAB, and is on charter to Eni Angola for a firm period of 12 years, with eight annual extension options, for a total of 20 years. The firm contract period has a value of US$3bn and the option period has a value of US$0.9bn.

Eni S.p.A. is an Italian multinational oil and gas company headquartered in Rome, and is considered one of the global supermajors. Eni Angola is the 36.84% owner and operator of Block 15/06, East Hub field, offshore Angola, where the Armada Olombendo will be based. Another 36.84% interest in the block is held by Sonangol EP, and 26.32% is held by Sinopec.

According to Clarksons, the East Hub project at Block 15/06 involves the development of the Cabaca North and Cabaca Southeast discoveries. This is the second major development project in Block 15/06, after the West Hub.

The East Hub project was sanctioned in November 2013, and commenced production on 8 February 2017, 3-5 months ahead of schedule. The project comprises a standalone FPSO Armada Olombendo with around 21 subsea wells in four clusters. The FPSO Armada Olombendo has an oil processing capacity of 80,000 bopd. In the first phase, Cabaca Southeast will be developed via nine subsea wells. Oil will be offloaded in tandem to conventional ocean-going oil tankers. Eni reported total capex for both East and West Hubs at US$8.2bn.

The LOI for the FPSO Armada Olombendo was awarded in March 2014, although the contract was only officially signed in August 2014. The vessel was originally a secondhand 1999-built VLCC vessel, MT Osprey, acquired on 28 November 2012 for US$29m. It was later renamed as the Armada Ali, then renamed to Armada Olombendo after securing Eni contract. The VLCC was


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sent to Keppel Singapore for conversion work commencing in 2014, and the conversion work was finished last year, with the FPSO sailing away from the yard in November 2016. The capex cost of the vessel was US$1.4bn, with almost all of it spent between 2014 and 2016.

Unlike the FPSO Armada Kraken, the Olombendo project was smooth sailing and in fact was delivered several months early to the East Hub field offshore Angola. The FPSO achieved first oil on 8 February 2017, upon which BAB began receiving 80% of the full value of the BBC. In this sense, the contract for the FPSO Armada Olombendo was unique, since the BBC for BAB’s other FPSO contracts does not commence until the vessels have achieved final client acceptance. Final client acceptance is expected sometime in 2Q17F or 3Q17F; we have pencilled in a 1 July 2017 firm contract commencement.

BAB accounts for the FPSO Armada Olombendo contract as a finance lease. We estimate BAB’s IRR on the charter contract at around 11%.


On 28 November 2012, BAB announced that it had purchased a VLCC tanker called MT Osprey for US$29m. It was renamed Armada Ali, and then subsequently renamed again as Armada Olombendo. This VLCC tanker was later converted to the Armada Olombendo FPSO.

On 31 March 2014, BAB announced that it had received a Letter of Intent from Eni Angola, stating its intention to award a contract for the chartering, operation and maintenance of an FPSO (later named Armada Olombendo) to a consortium of Bumi Armada Offshore Holdings Limited, and Angoil Bumi JV Limitada, for deployment at Block 15/06, East Hub located offshore Angola. The LOI authorises BAB to start engineering and procurement work on the FPSO immediately with a contract effective date of 28 March 2014. The contract has an indicative value of US$2.9bn. First oil was originally scheduled for end-October 2016 (this may have been rescheduled later). The FPSO will be converted from the VLCC, Armada Ali, and will be delivered in 31 months.

On 20 August 2014, BAB announced that the consortium of Bumi Armada Offshore Holdings Limited (BAOHL) and Angoil Bumi JV, Lda (ABJL) signed a contract with Eni Angola for the chartering, operation and maintenance of a FPSO (Armada Olombendo) tanker facility complete with Mooring System at the Block 15/06 East Hub field, located in deep water offshore Angola, for a firm charter period of 12 years (worth US$3bn), with options of 8 yearly extensions (worth US$0.9bn). Bumi Armada expressed confidence in delivering the vessel on time and on budget in 4Q16.

On 23 December 2015, BAB secured a syndicated term loan facility, a standby letter of credit facility and a bank guarantee facility, of a maximum aggregate principal amount of US$1,119.7m to part-finance the Eni 1506 FPSO project (Olombendo), reimburse all costs and expenses in relation to the acquisition, conversion, refurbishment, mobilisation, transportation, hook-up and mooring and installation related to the project, together with all ancillary and related works. The facility is repayable over the term of the project.

On 11 December 2016, the Armada Olombendo FPSO arrived in Angola after a 40-day voyage from Singapore. The FPSO is moored in the Block 15/06, East Hub field located in deep water offshore Angola, at a water depth of 450 meters.

On 8 February 2017, Armada Olombendo FPSO achieved first oil production in Block 15-06 in Angola, 3-5 months ahead of schedule.


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Armada LNG Mediterrana

The Armada LNG Mediterrana is a Floating Storage Unit (FSU) that is moored at the LNG receiving terminal at Delimara, Malta. It is 100%-owned by BAB.

On 14 April 2015, BAB announced that its wholly-owned subsidiaries, Armada Floating Gas Storage Malta Ltd (AFG Storage) and Armada Floating Gas Services Malta Ltd (AFG Services), both entered into agreements with ElectroGas Malta Limited (EGM) for the conversion, supply and operations and maintenance, respectively, of one FSU for the project relating to the construction and operation of an LNG receiving terminal located at Delimara, Malta.

Both AFG Storage and AFG Services, are wholly-owned subsidiaries of BAB. AFG Storage is principally involved in the business of owning and chartering of ships and vessels among others whilst AFG Services is principally involved in the provision of marine support, among others.

AFG Storage subsequently purchased the 1985-built Wakaba Maru LNG tanker on 21 April 2015 for US$19m, as the conversion candidate for this project.

EGM requires the FSU because EGM had been awarded contracts by Enemalta Corporation for the supply and delivery of natural gas and electricity to Enemalta’s facilities located at Delimara, Malta. Enemalta is the national electricity company of Malta, majority-owned by the government of Malta. EGM is a joint venture company whose shareholders comprise Gasol plc, GEM Holdings Limited, Siemens Project Ventures GmbH and SOCAR Trading SA.

The Armada LNG Mediterrana has the capacity to send out LNG at a rate of 10-150 cu m/hour to an onshore regasification plant, which then feeds natural gas to the 400 MW base load power station.

The FSU was sent to Keppel Singapore for conversion work, which was completed in last year, upon which it sailed away in August 2016 and arrived in Malta on 10 October 2016. The capex cost on the vessel amounted to US$100m. The vessel began its official contract period on 16 January 2017, which will continue for 18 years and two months, ending in March 2035. There is no option period. The contract has a value of US$300m, and is accounted for as a finance lease in BAB’s books. We estimate an IRR of around 11-12%.

Armada Intrepid

BAB purchased the FPSO BP Schiehallion (later renamed Armada Intrepid) on 2 December 2014 from BP, which had decommissioned the vessel from the Schiehallion field in the UK sector of the North Sea. This vessel was purchased as BAB had hoped to offer it to potential charterers as it was bidding for contracts at that time, and the price offered by BP was also more attractive than buying an equivalent-sized suezmax tanker. The owner had earned its return on the vessel and so was willing to offer it for an attractive price.

The FPSO hull was designed for North Sea operations, so the structure is very strong. If BAB secures a contract for the vessel in the future, it will need to remove the existing topside and put in a new topside.

In 4Q16, BAB made an impairment on this vessel and we believe the carrying value of this vessel on BAB’s balance sheet is currently negligible.


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Armada Claire

The FPSO Armada Claire is one of BAB’s headaches, together with the Armada Kraken, Armada Perkasa and Armada Perdana. The 4-year firm and 4-year option period contract was awarded by US-based Apache Corp in September 2011, upon which a tanker vessel was converted in Keppel Singapore, sailed away in April 2014, and achieved first oil on 11 August 2014. In 2015, Woodside acquired Apache's 65% interest in the Balnaves project, located offshore northwest Australia.

By March 2016, the contract was unilaterally and prematurely terminated by Woodside, after running for just 1½ years. The cause of the termination was because the reservoir was not performing. The oil from the Balnaves field was originally extracted at a rate of 30,000 bopd for the first 3-4 months, but then production very quickly fell off to just 6,000-7,000 bopd.

Actually, the Balnaves field was always seen as a small field, with just 18m barrels of oil reserves, which explained why the firm contract was only for a very short 4-year duration. The real resource in that development is the gas, but in order to extract the gas, Woodside had needed to strip out the oil first. The role that the FPSO Armada Claire performed, was to extract the gas, strip out the oil and then re-inject the gas back into the seabed. The idea is to clean up the gas, so that when Woodside develops the gas at a later stage, Woodside can extract the gas with very little oil. The problem for Woodside was that it had overestimated the presence of oil in the field, as it is generally difficult to precisely estimate the proportion of water, gas and oil in any hydrocarbon reserve. In the end, for the Balnaves field, there was a lot of gas, but the quantity of oil was not coming out at the anticipated rate.

In other words, Woodside’s premature termination of the FPSO Armada Claire charter contract was motivated entirely by economic reasons.

The FPSO Armada Claire issue turned out to be a learning experience for BAB. Going forward, BAB will always look at two critical issues before deciding whether to go ahead with any project: 1) whether the client is bankable, especially from a funding perspective, and 2) BAB will always consider if the field is large or not. If the field is large enough, even if the client goes bankrupt, someone else will always step in to take over the ownership of the field, and the contract for the charter of the FPSO may not be at risk.

Before BAB gets into any contract, BAB will always review the Wood Mackenzie data on the reservoirs, In the future, BAB may stress-test the Wood Mackenzie model a bit more to consider what the outcome would be if Wood Mackenzie’s production assumptions about the field turn out to be over-optimistic.

The arbitration for FPSO Claire will be done in Australia. BAB put in a claim for US$283.5m at the Supreme Court of Western Australia on 20 April 2016, while on 2 June 2016, Woodside filed its defence. Due to the complexity of the case, no date for the trial has yet been fixed. The entire court case may take around three years to be completed, in our estimate.

BAB made a RM570m impairment in its 2Q16 against the value of FPSO Armada Claire, to reduce the carrying value from RM1,043m to a value of RM473m. This is to reflect that the asset has been laid-up and opportunities for redeployment may not be forthcoming.

BAB recognises that it may be challenging for the FPSO Armada Claire to be redeployed anywhere, a situation exacerbated by the low oil price environment. This is because the asset was purpose-built for the Balnaves field. As a result, the FPSO cannot be easily moved to a different field as the properties of the other field are unique, e.g. the proportionate mix of oil, gas and water. Although the hull is quite standard, the mooring systems are also catered for the specific conditions of the ocean where the FPSO will be deployed. However, BAB is currently exploring the opportunity to offer the FPSO to small and marginal offshore fields. Any contract win will be a bonus.


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In June 2011, BAB secured a Letter of Award to provide an FPSO to service the Balnaves project for Apache Energy in Australia.

On 30 September 2011, BAB signed a contract with Apache Energy Ltd to supply and operate an FPSO (FPSO Claire) to be located at the WA-49-L block of the Balnaves field, northwest Australia. The 4-year firm contract, together with a further four annual options, was worth RM1.46bn in aggregate. At that stage, BAB had already started work on the refurbishment of an existing FPSO (formerly Armada Prima), with first oil expected for 1Q14.

On 11 April 2013, BAB's wholly-owned subsidiary Armada Balnaves Pte Ltd secured a syndicated term loan facility of US$198m for FPSO Armada Claire.

On 4 March 2016, Woodside Energy gave a notice of termination of the charter contract of FPSO Armada Claire.

On 20 April 2016, Armada Balnaves Pte Ltd (ABPL) served a Statement of Claim in the Supreme Court of Western Australia against Woodside Energy Julimar Pty Ltd in relation to the contract for the charter of the Armada Claire FPSO. ABPL sought damages of US$275.8m, being the amount of the termination payment to which ABPL is entitled had the contract been terminated without breach, plus any additional damages for loss of bargain caused to ABPL as a consequence of Woodside's repudiation of the contract. An additional sum of US$7.7m was sought for work done and materials supplied pursuant to the contract.

On 2 June 2016, Woodside Energy filed its defence against BAB’s claims. No date for the trial has yet been set.

Armada Perkasa

The Armada Perkasa was BAB’s first-ever FPSO, converted at a cost of US$100m back in 2008, and was chartered for five firm years (1 July 2008 to 30 June 2013), and five annual options (1 July 2013 to 30 June 2018).

However, the FPSO was disposed to its charterer in early-2017F. Hence, BAB will no longer be booking any income from this asset in the years ahead. We have included a write-up on the Armada Perkasa here so that readers can fully understand BAB’s recent history.

The Armada Perkasa FPSO was 100%-owned by BAB, and was on charter since July 2008 until its sale in early-2017F. The contract was originally awarded by Afren Energy Resources Limited in April 2007, but Afren went into court administration in July 2015, and since then, Afren’s JV partner in Nigeria took over the oilfield as well as the charter contract for the vessel. Afren’s JV partner in Nigeria is privately-owned Amni International Petroleum Development Company Limited (Amni), which has since exercised its purchase option to buy over the vessel from BAB.

The contract had commenced its 5-year firm period on 1 July 2008, which ended on 30 June 2013. After that, Afren exercised the first option, taking the charter up to 30 June 2014, and then proceeded to exercise the next two options, extending the charter up to 30 June 2016. Subsequent to Afren’s court administration in 2015, Amni took over the charter and exercised another option to extend the charter to 30 June 2017.

The FPSO vessel continues to be based at the Okoro Setu field, offshore Nigeria. The contract was accounted for by BAB as an operating lease prior its disposal to Amni.

Resolution of issues faced by BAB on the Armada Perkasa FPSO

BAB stopped recognising BBC revenue from the Armada Perkasa FSO from 2Q16, due to the outstanding receivables which had accumulated since 1 July 2016. However, BAB continued to recognise the O&M portion of the revenue throughout FY16, as it was still being paid.

Due to the age of the field, the oil production rate from the Okoro Setu field was in decline, and the revenues from the field also dropped due to the low oil price environment. This led to Amni to suspend BBC payments.


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BAB successfully negotiated to sell the FPSO Armada Perkasa to Amni, which was concluded in early-2017F. The selling price was considered fair by BAB, as it covered the residual value of the asset on BAB’s balance sheet (which was very little since the FPSO was already in the second last year of its option period). Although the selling price may not have fully covered the outstanding receivables and the BBC hire that was due to BAB since 2Q16, BAB avoided the costs of demobilisation.


On 23 October 2012, BAB announced that Afren Energy Resources Limited has exercised the first of its five 1-year extensions for the FPSO Armada Perkasa, with effect from 1 Jul 2013 to 30 Jun 2014. The contract extension was valued at approximately RM100m (~US$32.7m). Most of this was the O&M portion.

The FPSO Armada Perkasa had recently underwent a debottlenecking exercise to take the potential production capacity from 27,000 to 35,000 bbl/day of fluids.

On 13 December 2013, BAB secured an extension of contracts for the bareboat charter and the operations and maintenance (O&M) of FPSO Armada Perkasa from Afren Energy Resources Limited for a further two years with effect from 1 July 2014, valued at approximately RM221m in total (~US$34.4m/year), with some inflation factor built into the O&M rate.

In mid-2015, Amni took over the charter and exercised another option to extend the charter to 30 June 2017 at the same contract value of US$33m-34m p.a. However, Amni stopped paying for the BBC since 2Q16.

In early 2017, the Armada Perkasa was sold to its client, Amni.

BAB’s potential tenders for new FPSO contracts

BAB is currently in discussion with multiple smaller oil and gas players operating marginal fields, for the potential relocation of the currently-idle FPSO Armada Claire. This vessel is fairly young and is in good condition, having been converted into an FPSO in April 2014, hence is receiving some interest from potential charters.

BAB recently noted an increased interest from oil majors for large field developments, hence BAB is actively preparing technical bids for several potential future projects, in addition to preparation for possible commercial bids. These include:

Eni NAE’s Zaba Zaba field offshore Nigeria,

ONGC’s Krishna Godavari field offshore India (KG-DWN-98/2),

Hess’s TCTP block offshore Ghana (Deepwater Tano-Cape Three Points), and

Petrobras’ Buzios development, offshore Brazil.

In BAB’s latest 2016 Annual Report, it noted that “at the time of this report, the Company was heavily involved in a handful of potential new projects, of which we hope to secure at least one new FPSO project in 2017.”

However, it also noted that “the FPSOs for these developments are likely to entail capital investments in excess of US$1bn. The scale of these capital commitments will require the Group to provide significant amounts of equity, which will only generate cash flows two to three years after the contracts have been signed. As a result, the Group will need to be selective in the projects that it undertakes in the future or will need to find alternative strategies to take on more new projects in the future. Limitations in the Group’s ability to fund new projects or restrictions in raising sufficient funding in certain situations, may restrict the Group’s ability to grow.”

From BAB’s comments above, we believe that:

1. BAB will have to look for partners to share the capex risk of these potential projects. For ONGC’s KG-DWN-98/2, it has already entered into a JV with its long-time Indian partner, the Shapoorji Pallonji group, with which it has


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joint ownership of the Armada Sterling 1 and Armada Sterling 2 FPSOs, both based in Indian waters. However, we are not aware if BAB has or has not found partners for the other potential FPSO projects.

2. Even with partners, BAB will most likely have to raise new equity to fund the potential new projects. BAB’s currently high net gearing level may make it more difficult for it to secure new projects, as its financial situation would most likely be scrutinised by the oil and gas companies who are also the FPSO charterers. BAB may also struggle to raise the requisite amount of bridging loans and project financing loans if it wins any projects. As such, we believe that BAB may have to raise new equity soon, in preparation for commercial bidding, and even more so if it manages to secure an actual contract award.

Timeline

Of all the potential projects above, ONGC’s KG-DWN-98/2 is the most certain, and is the closest to take-off. ONGC had already approved the field development plan in March 2016. In June 2017, ONGC will undertake the pre-qualification process for the potential FPSO contractors, while the commercial bids for the FPSO charter contract are expected by 31 July 2017. ONGC’s target is for the FPSO to achieve first oil by March 2020, although Clarksons believes that a delay to early-2021F is possible.

Eni NAE’s Zaba Zaba project is mired in legal disputes, since the field owners are being investigated internationally for having purportedly bribed an ex-government official in order to secure their interest in the block. As a result, the field owners have not made a Final Investment Decision on the project, and it is very unlikely that any FPSO player will want to make binding commercial bids until the legal issues are conclusively settled.

Hess’ TCTP block offshore Ghana (Deepwater Tano-Cape Three Points) is subject to a maritime border dispute between Ghana and Ivory Coast. If the International Tribunal for the Law of the Sea resolves the dispute in Ghana’s favour, then the FPSO may come onstream as soon as 2021F. Otherwise, the timeline may be pushed much further out. The International Tribunal is expected to make a decision on the case in 2017F or 2018F.

Finally, Petrobras’ Buzios 5 FPSO is planned for first oil in 2023F. The field is very large, requiring a total of six FPSOs to be based at the field. The Buzios 5 FPSO is the fifth in line.

Size of the potential FPSO projects

All of the FPSO projects above are large-sized in nature. The FPSO required for ONGC’s KG-DWN-98/2 is of a VLCC hull, with oil processing capacity of up to 90,000 bopd. Another VLCC-hull FPSO is envisaged for Eni NAE’s Zaba Zaba field, with oil processing capacity of 150,000 bopd. At this moment, we do not have any indication of the potential size of the Pecan FPSO, but the Buzios 5 FPSO should be very large as it is intended to have oil processing capacity of 180,000 bopd.

As a result, we believe the FPSO capex cost for each of the above projects should be US$1.2bn or higher, similar to BAB’s Armada Kraken FPSO which cost US$1bn, or the Armada Olombendo FPSO which cost US$1.4bn. The Armada Olombendo is BAB’s one and only VLCC-hulled FPSO and its largest-ever project to-date.

However, BAB should be able to share the capex cost with its partner in India for the ONGC project, and it is also looking for partners for the other potential FPSO bids.


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Below is a more detailed discussion on the potential new projects that BAB may be interested to bid for.

A. Eni NAE’s Zaba Zaba field, offshore Nigeria

The Zaba Zaba field is located in block OPL 245, 128km offshore Nigeria, in water depths of 2,000m. It was discovered in 2006, and is estimated to start-up by 2023F, according to Clarksons. The operator is Eni NAE which holds a 50% stake in the field, with the remaining 50% held by Shell. Total field development capex is expected to be approximately US$8bn.

The timeline for the project’s Final Investment Decision (FID) is unclear, although it may be targeted for 2H17F. The FID has been delayed since 2013, due to ongoing legal dispute over the ownership of OPL 245. Unless this dispute is resolved, FPSO contractors, including BAB, will most likely be extremely reluctant to offer binding commercial bids for this contract. This does not, however, preclude FPSO contractors from working with Eni NAE to offer technical bids for the contract.

If the project goes ahead, it will probably need a large VLCC-hull FPSO with oil processing capacity of 150,000 bopd, and storage capacity for 1.7m barrels. At the moment, BAB’s largest FPSO is the Armada Olombendo, which has a VLCC hull, oil processing capacity of 80,000 bopd, and storage capacity for 1.8m barrels. The Zaba Zaba FPSO will most likely be linked to oil production from the Zaba Zaba field (up to 22 subsea wells), as well as connected to the proximate Etan field (up to 10 subsea wells), which may be developed later.

BW Offshore and BAB have been reported by Upstream to be the main contenders for the FPSO vessel, for which charter contract may last as long as 20 years.

However, as legal disputes are hanging over the development, we are unclear when an FID or the award of the FPSO charter contract can be made. FPSO players are unlikely to make binding commercial bids, in our view, unless the legal and political issues surrounding the OPL 245 block can be resolved.

Nigeria’s Economic & Financial Crimes Commission (EFCC) is investigating whether the US$$1.3bn purchase of OPL 245 in 2011 by Eni NAE and Shell involved "acts of conspiracy, bribery, official corruption and money laundering", according to the court papers. Of the US$1.3bn purchase price, US$1.09bn had purportedly been pocketed by former Nigerian oil minister Dan Etete.

In January 2017, a Nigerian court ordered the seizure of the OPL 245 oil block and transfer of operations to Nigeria’s federal government on the request of the EFCC. However, in March 2017, another court overturned the request by the EFCC to seize the oilfield from Shell and Eni NAE. This was welcomed by the latter two companies.

On 17 May 2017, Upstream reported that Nigerian Petroleum Minister Ibe Kachikwu wanted to proceed with the development of the Zaba Zaba field despite ongoing judicial investigations in Italy, Holland and Nigeria over OPL 245. “Huge investments are at stake and I will not shut that down,” he said. “Issues of criminality are outside my realm, which is to ensure returns on investment by our joint venture partners and to secure the return of some billion dollars for the federal government." However, he said that “while we continue to superintend the country’s interest in our commercial relationship with upstream partners, the government will not refrain from enforcing our laws”.

This suggests that the technical preparations will continue, although we are unclear if the FPSO contractors will be willing to make binding commercial bids while the legal situation is still unresolved.


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B. ONGC’s Krishna Godavari field (KG-DWN-98/2), offshore India

On 28 March 2016, ONGC approved the field development plan for the Cluster 2 fields at Block KG-DWN-98/2, offshore the east coast of India. This development would incur capex of more than US$5bn, is split into Cluster 2A and Cluster 2B. ONGC’s plan is for first gas by June 2019 and first oil by March 2020, with overall completion of the project by June 2020. The oil fields are identified as A2, P1, M3, M1 and G-2-2, whereas the gas fields are named R1, U3, U1, and A1.

Cluster 2A has estimated in-place reserves of 691 mmbbl of crude oil and 21.75 bcm of associated gas. Cluster 2A will be developed via an FPSO with oil processing capacity of 80,000-90,000 bopd (since the peak oil rate is expected to be 77,305 bopd), as well as capacity to handle the peak associated gas production rate of 3.81 mmscfd. The FPSO is expected to be based on a VLCC hull, and should be able to store 1.3 mmbbl of crude oil. The FPSO’s mooring system is likely to be technically challenging, as ocean conditions are harsh with strong winds and waves, even though it is to be moored in relatively shallow waters of about 460m only.

Upstream reported on 10 May 2017 that ONGC has launched the long-awaited pre-qualification process for the FPSO tender, with the submission of pre-qualification documents required by 6 June 2017, and technical and commercial bids required by 31 July. BAB is expected to tender for the FPSO together with its Indian partner Shapoorji Pallonji. Other potential bidders include MODEC, SBM Offshore, India’s Sun Oil & Gas, Yinson Holdings, and a consortium grouping together with MISC and M3nergy.

The FPSO charter contract is likely to be for a fixed lease term of nine years, along with an option to extend that by a further six years. The operator is targeting an FPSO with a design life of at least 20 years, and is thought to be in the market for either a conversion or relocation of an existing vessel, according to Upstream.

The FPSO is expected to start operations around mid-2020, based on ONGC’s target to achieve first oil by March 2020, but could be delayed to early-2021, according to Clarkson’s estimates.

The FPSO capex was estimated by Energy Maritime Associates (EMA) to amount to US$1bn, although BAB is planning for a 20% contingency that could take the cost up to US$1.2bn.

Separately, Cluster 2B has estimated in-place reserves of unassociated, free gas of 51.98 bcm. Cluster 2B will be developed via a giant central gas processing platform that may weigh more than 40,000 tonnes and cost more than US$600m, with gas handling capacity of 12.75 mmscfd, which the peak gas production rate from Cluster 2B.

Total recoverable reserves from both Cluster 2A and Cluster 2B is estimated at 172 mmbbl of crude oil and 50.71 bcm of gas.


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C. Hess’s TCTP block (Deepwater Tano-Cape Three Points, offshore Ghana

Hess Corporation is the operator of the TCTP field, with a 40% equity interest. Other shareholders include Russia’s LukOil at 50% and Ghana National Petroleum Corporation (GNPC) with 10% interest.

The TCTP field was discovered in 2012, in very deep waters of 2,513m and is located 99km offshore. Start-up is planned for 2021F, if the maritime dispute is resolved in Ghana’s favour. The total capex of the project is estimated at US$9bn.

Hess made seven ultra-deepwater oil discoveries in the TCTP licence block, i.e. at the Almond, Beech, Cob, Hickory North, Paradise, Pecan and Pecan North fields. The field development plan was supposed to be submitted to the Ghanaian authorities by September 2016, but was delayed due to an on-going maritime boundary dispute between Ghana and Ivory Coast.

Ivory Coast claims that its boundary runs through the middle of the TCTP block, with the Pecan, Pecan North, Almond and Cob fields on the Ivory Coast side of the border, and the Beech, Hickory North, and the Paradise fields on the Ghanaian side of the border.

The International Tribunal for the Law of the Sea will decide on the dispute, and is expected to be settled either in 2017F or in 2018F.

The ongoing maritime border dispute is a problem for Hess, since it cannot perform any development work on the TCTP block until the case is legally resolved. Also, the FPSO was intended by Hess to be located on the Pecan field, as it has the greatest reserves, with subsea tiebacks to the wells at the surrounding fields. If the Pecan field is awarded to Ivory Coast, Hess will have to renegotiate the financial terms of the block with the Ivory Coast government, which may take some time.

Hence, the commercial bidding for the FPSO is not likely to happen in the near term until the border dispute is settled. If the International Tribunal for the Law of the Sea settles the dispute in favour of Ghana, the FPSO may start up in 2021F. Otherwise, the start-up of the FPSO may take much longer.

D. Petrobras’ Buzios 5

The Santos Basin offshore Brazil is a gigantic collection of pre-salt reservoirs, consisting of multiple fields owned by Brazil’s national oil company, Petrobras. The Santos Basin includes the following fields: Buzios (oil), Lula (oil/gas), Sapinhoa (oil/gas), Berbigao (oil/gas), Sururu (oil), and Sapinhoa Norte (oil).

The Santos Basin’s reserves are to be mined via several FPSOs. There are currently five active FPSOs at the Lula field, with two more coming online in 2017F and 2018F. There is one active FPSO in each of the following fields: Sapinhoa, Sapinhoa Norte, Berbigao, and Sururu.

The oil reserves at the Buzios field are currently being extracted via an early-production system using the ‘Dynamic Producer’, which is a semi-submersible structure. A permanent solution envisions production from up to six FPSOs.

At the Buzios field, three FPSOs – the Petrobras 74, Petrobras 75 and Petrobras 76 FPSOs – are expected to be commissioned in 2018F while Petrobras 77 FPSO is expected to begin operations in 2019F. Meanwhile, the Buzios 5 FPSO, which BAB is planning to bid for, is targeted for 2023F first oil, and the Buzios 6 FPSO is targeted for 2026F start-up.

The Buzios field has reserves of 10,000 mmbbl, and produced 7,811 bopd of oil in 2016 from its early-production system.

The key issue with Petrobras FPSO charters, is that Petrobras does not offer compensation for premature termination of the charter contracts, does not give firm-period guarantees, and FPSO owners do not have the right to claim for compensation for early termination. As such, BAB had been very reluctant to put in binding commercial bids for Petrobras’ FPSO projects in the past.

Recently, BAB underwent the technical qualification in order to prove to Petrobras that it is able to execute the Sepia FPSO project, and to encourage Petrobras to change its stance on the ‘no guarantee’ clause. As the latter did


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not materialise, BAB did not put in a commercial bid for the 13-year Sepia FPSO charter, intended to commence operations in 2020F. The Sepia FPSO is to be a huge vessel, with oil processing capacity of 180,000 bopd and gas processing capacity of five mmscfd.

For the Buzios 5 FPSO, Petrobras invited BAB to put in a technical bid for the vessel, probably because it did not want to over-rely on SBM Offshore or MODEC as its primary FPSO contractors, in our view. However, we believe that BAB will not put in a binding commercial bid unless Petrobras agrees to change the terms of its FPSO charter contracts to incorporate compensation for premature termination, and to guarantee a firm contract period.


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BUMI ARMADA’S OMS BUSINESS

Background

BAB’s Offshore Marine Services (OMS) business is made up of two separate businesses, i.e. the Offshore Service Vessels (OSV) arm and the Subsea Construction (SC) arm. The SC arm was previously known as the Transportation and Installation (T&I) segment.

In the past, BAB disclosed the OSV and T&I financials separately but, since 2016, both divisions have been merged for the purposes of disclosure under the OMS segment.

Offshore Service Vessels

BAB’s OSV vessels are made up primarily of Anchor Handling Tug Supply (AHTS) vessels, with a smaller number of Accommodation Work Barges (AWB). AHTS are vessels that provide support for offshore drilling rigs and offshore production platforms by towing them to the required offshore location as well as to place and retrieve their anchors. AHTS also have a large under-deck space that can store drilling muds, diesel fuel, fresh water and other cargoes that are needed at the drilling rigs and production platforms. Meanwhile, Platform Supply Vessels (PSV) specialise in the supply functions, and AWBs function primarily as floating hotels for offshore workers.

Currently, BAB has 22 AHTS and seven AWBs in its fleet. It also has 10 more PSVs. It has four vessels on order from Nam Cheong Dockyard, for which delivery has been deferred indefinitely.

Prior to BAB’s relisting in 2011, BAB embarked on a fleet renewal programme for its OSVs by ordering and taking delivery of 20 newbuildings by 2010. In the period after BAB’s relisting, BAB also added and renewed its OSV fleet.

For instance, on 14 May 2011, BAB took delivery of two secondhand, 2009-built 12,000 bhp AHTS, the Armada Tuah 107 and the Armada Tuah 108.

More significantly, on 20 June 2012, BAB kicked off its newbuilding programme, called ‘Steel on Water 2’, by issuing four Letters of Intent to Nam Cheong Dockyard for four Multi-Purpose PSVs (MPSV) and options for four more. This contract was signed in February 2013. The firm contracts were worth US$130m. None of the vessels have been delivered to BAB, as BAB had asked the yard to delay delivery in the midst of the oil and gas downturn.

On 6 March 2013, BAB entered into resale contracts with Sentinel Offshore (L) Limited to buy over its four PSVs that were earlier ordered by Sentinel from Xiamen Shipyard. All four of the PSV orders were delivered in 2013, i.e. the Armada Tuah 303, 304, 305 and 306. BAB also took delivery of an additional three PSVs in 2014.

Since the downturn began in mid-2014, BAB disposed of between five and ten of its ‘Class B’ OSVs, which are defined as vessels that are more than 12 years old or less than 8,000 bhp and accommodation work barges with less than 200-bed capacity. BAB continues to be aggressively moving to dispose of its older vessels, with the latest disposal being the Armada Aman, which was sold in April 2017. BAB noted earlier this month at its 1Q17 results analyst briefing that interest to buy its secondhand OSV vessels had picked up recently.

In addition to the commonplace OSVs, BAB has three ice-class OSVs, which are on long-term charter to OOO Lukoil-Nizhnevolzhskneft (LukOil). On 3 December 2013, BAB announced that it had been awarded charterparty contracts by LukOil for the provision of three newbuild ice-class vessels to service offshore platforms in the Filanovsky field in the Russian sector of the Caspian Sea.

Each of the ice-class contracts is for a firm period of 10 years, with the possibility of further extensions of up to another 20 years (four options of five years each). The 10-year firm period has an aggregate contract value of US$262m and the 20-year option period has an estimated aggregate value of US$483m, if the extension options are fully exercised.

At the time of BAB’s original announcement of the contract win on 3 December 2013, BAB stated that employment was expected to start in November 2015.


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However, the three ice-class vessels were finally accepted for hire by LukOil in June 2016.

Figure 7: Bumi Armada's Offshore Marine Services fleet


Subsea Construction Vessels

BAB currently has a fleet of four SC vessels, i.e. Armada Installer, Armada Constructor, Armada KP1 and Armada Condor.

The Armada Installer is a derrick-lay barge positioned in the land-locked Caspian Sea while the Armada Constructor digs trenches on the seabed in preparation for pipelay work by the Armada Installer.

The Armada KP1 is a shallow-water pipelay barge, which is positioned in Southeast Asia for conventional pipelay work.

The Armada Condor is a multi-purpose Platform Supply Vessel and is equipped with cranes for offshore construction work. BAB had been looking to sell this vessel since 2015, and recently managed to secure a buyer, with the disposal expected to be completed later this year. BAB had previously owned the Armada Hawk, a DP2 subsea installation vessel, but it was disposed of by BAB in late-2016.

Severely impacted by the oil price downturn

Like many other companies in the same industry, BAB’s OMS division was significantly hit by the oil and gas companies’ capex cutbacks in the aftermath of the mid-2014 oil price rout.

BAB earned approximately RM250m in operating profit annually in FY11-13 but this collapsed to just RM117m in FY14. The company reported operating losses for two consecutive years in FY15 (RM55m loss) and in FY16 (RM84m loss). These figures are core EBIT numbers, excluding asset impairments and provision for doubtful debts.

In FY14, BAB provided RM66m against trade receivables from its OMS customers and another RM22m in FY15. Asset impairment charges for the OMS division amounted to RM354m in FY15 and a staggering RM733m in FY16.

Type Of Vessel No of Vessels

Anchor Handling Tug Supply (AHTS) 22

- AHTS 4,000 - 5,000 bhp 9

- AHTS 8,000 - 9,000 bhp 8

- AHTS 1,000+ bhp 5

Accommodation Work Boat / Barge (AWB) 7

Platform Supply Vessel (PSV) 10

-PSV up to 3,000 dwt 8

-PSV more than 3,000 dwt 2

Ice Class Vessels (ICV) 3

Other Offshore Support Vessels (OOSV) 7

Subsea Construction Vessels 4

Total 53


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Figure 8: Offshore Marine Services (OMS) revenue and core EBIT trends (RM m)


In terms of quarterly earnings, BAB’s OMS division posted an RM8m core EBIT profit for 1Q17, which was a sharp improvement from the immediately preceding 4Q16. This was mainly because BAB had impaired its OMS assets by RM733m in FY16 (of which RM711m was booked into 4Q16's accounts), resulting in a much lower level of depreciation from 1Q17 onwards. From an operational perspective, the OMS division continued to see more weakness, on account of sequentially-lower OSV utilisation rates, and sequentially-lower volume of LukOil pipelay work for the Armada Installer.

On average, only 50% of BAB’s OSV fleet was working during FY16, with 4Q16 average utilisation at only 48% due to the seasonal monsoon. In 1Q17, the average utilisation declined further to just 44%, also due to the seasonal monsoon. Prior to the oil price downturn, BAB regularly achieved OSV utilisation rates of circa 80%. The OSV utilisation for the rest of 2017F should improve from the 44% utilisation rate achieved during 1Q17, since the 1Q is seasonally the weakest quarter of any year.

Among BAB’s SC fleet, only the Armada Installer and the Armada Constructor were working at the end of FY16 and during 1Q17. The Armada KP1 was stacked, as was the Armada Condor. The Armada Hawk was, in fact, cold-stacked from 4Q15 until the point of sale while the Armada Condor was cold-stacked since 1Q16.

Figure 9: Offshore Marine Services (OMS) core EBIT trends (RM m) and OSV utilisation rates (%)


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Outlook for OSVs weak

We have analysed the OSV segments in detail in Appendix 2, which readers can refer to for a more detailed write-up.

In summary, we are projecting modest growth in the global OSV fleet of 1.5% p.a. at the maximum (due to modest newbuilding additions but also limited demolitions). Meanwhile, Clarkson’s forecast is for 5-8% p.a. demand growth over FY17F and FY18F, although this is highly dependent on the outlook for drilling rig utilisation (for both exploration and production drilling), capex plans of oil majors, and the outlook for oil prices.

Putting these two factors together:

The global utilisation rate for AHTS vessels of 8,000+ bhp is expected to rise from 40.8% in 2016 to 46% in 2018F, and

The global utilisation rate for PSVs of 2,000+ dwt is expected to rise from 41.4% in 2016 to 44.3% in 2018F.

Even with 5-8% annual demand growth in FY17F and FY18F, utilisation rates are still a long way down from peak utilisation rates prior to 2014 of around 90%. Fierce competition is likely to persist, with owners having limited pricing power.

As a result, we believe that OSV charter rates will not budge from the already-low levels currently. In fact, in the first four months of this year, charter rates mostly trended lower sequentially, suggesting that the OSV sector is in the midst of a very long winter.

Figure 10: AHTS 8,000+ bhp – global demand and supply (units) and utilisation rate (%)

Figure 11: PSV 2,000+ dwt – global demand and supply (units) and utilisation rate (%)

SOURCES: CIMB, CLARKSONS SOURCES: CIMB, CLARKSONS

For BAB, we have pencilled in continued small annual EBIT losses of RM7m for the OMS business in the FY17F-19F forecast period, based on an average OSV utilisation rate of 50%. We have assumed that the average OSV utilisation rate will not improve from FY16’s 50%, and neither will there be any improvement in average charter rates.

During BAB’s 1Q17 results briefing, it said it had won several OSV charter contracts in 1Q17 although these are fairly short contracts, ranging from just four days to a maximum of seven months. This is very typical for the industry now. As such, there is very little visibility for the OSV sector.

The main reason for the reduced level of losses against FY16 is the reduction in depreciation expense as a result of the asset impairments passed into the books last year.

The only long-term contracts that BAB has for its OSV fleet are for the three ice-class vessels built specifically for LukOil’s use in the Caspian Sea. The 10-year firm + (4 x 5-year options) contracts were secured on 3 December 2013, with employment commencing in June 2016.

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Figure 12: Offshore Marine Services (OMS) EBIT (RM m) and EBIT margin (%)


Outlook for the SC segment

Out of BAB’s four vessels in the SC segment, only two are working consistently, i.e. the Armada Installer and the Armada Constructor. Both are working in the Caspian Sea under long-term contracts with Petronas Carigali (Turkmenistan) – or “PCT” in short – and for Russia’s LukOil.

In addition to the contract with PCT, which guarantees a minimum 60% utilisation, the Armada Installer has been performing pipelay work for LukOil in the Filanovsky and Korchagin fields in the Russian sector of the Caspian Sea. The first phase of the LukOil contract was awarded in 2012 and work was completed in late-2014.

In mid-2013, the second phase of the LukOil contract was awarded for pipelay work in the same fields and was supposed to be completed in 2015 but work has been extended into 2016-2017F. BAB is confident that the LukOil work will peak in 3Q17F and has a confirmed backlog that will continue into 4Q17F, after which the LukOil work will be more-or-less completed.

The Armada Condor, which is a subsea construction vessel with multi-purpose supply capabilities, and the pipelay barge Armada KP1, are currently both stacked. BAB has found a buyer for the Armada Condor, which will soon be sold, just as it had sold the Armada Hawk in late-FY16.

As for the Armada KP1, it recently secured a contract to lay pipes offshore Indonesia, and will be employed during 2H17F. However, at this moment, we have no details of this upcoming contract, and we do not know over how long the Armada KP1 will be employed for.

Based on the expected continued employment for the Armada Installer and the Armada Constructor in FY17F, the impending exit of Armada Condor from BAB’s SC fleet, and the expected return-to-employment for the Armada KP1 in 2H17F, we believe BAB’s SC assets should do better in FY17F compared to FY16 on the utilisation and revenue fronts.

The outlook for FY18F is less clear. The Armada Installer’s work for LukOil will be completed by end-FY17F. Meanwhile, the Armada Installer’s lucrative contract with PCT will end in May 2018, after eight years. Petronas is not likely to renew the contract beyond May 2018 as the work in the Turkmenistan sector of the Caspian Sea will most probably be completed.

However, there is more work in the Caspian Sea from other oil and gas companies that BAB hopes to be able to secure for the Armada Installer. BAB is fairly confident that the Armada Installer will be able to find employment post its contract with Petronas. This is because the Caspian Sea has a huge network of pipes, which require replacement, as well as new pipelay work too in the Iranian sector. So far, the Armada Installer has done work only in the Turkmenistan and Russian sectors of the Caspian Sea.

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As such, by FY18F, BAB will have to secure new contracts for the Armada Installer and the Armada Constructor in order to keep both of them occupied. For our financial forecasts, we have assumed that BAB will be able to secure replacement contracts for both vessels.

Nevertheless, we highlight that the high charter rates that had been offered by PCT until May 2018 will not likely to repeated for the Armada Installer’s replacement charterer contracts. This is because BAB has already fully-repaid its project financing on the Armada Installer, and already more than recovered the capex cost of the derrick lay barge. As such, even though the Armada Installer may be occupied beyond May 2018, it is unlikely to book in revenue at the same day rates.


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FINANCIALS

History of key capital market transactions

BAB was first listed on 25 June 1997. It was subsequently privatised by Usaha Tegas on 18 April 2003, and relisted on 21 July 2011.

BAB’s relisting involved the issuance of 644.4m new shares and the offer for sale of 234.3m existing shares, at an IPO price of RM3.03. The IPO was valued at RM2,663m, and raised RM1,953m in new capital for the company. At the IPO price, BAB’s market capitalisation was RM8,872m.

Adjusting for the bonus and rights issues on 13 October 2014, the adjusted IPO price is RM1.85. Hence, at the current BAB share price, investors at the IPO would have made a substantial capital loss.

On 6 August 2013, BAB announced that it had established a Multi-Currency Euro Medium Term Notes programme to raise debt of up to US$1.5bn, or its equivalent in other currencies. No debt has been issued under this programme to date, due to the subsequent deterioration in funding rates.

On 4 September 2014, BAB issued RM1.5bn in 10-year ringgit-denominated sukuk bonds, carrying an interest rate of 6.35%.

On 13 October 2014, BAB completed its 1-for-2 rights issue (resulting in the issuance of 1,466.6m new shares at RM1.35 each) and 1-for-2 bonus issue (also involving the issuance of 1,466.6m new shares). This capital-raising exercise was first announced on 23 May 2014. The rights issue raised gross proceeds of RM1,980m, for the purposes of funding BAB’s new FPSO projects, i.e. the Armada Kraken and Armada Sterling 2, as well as to fund future capex on the Armada Olombendo for which LOI was secured in March 2014.

Another equity-raising exercise may be necessary

BAB is not under immediate pressure to execute an equity-raising exercise, because it is still within its required debt-covenant ratios. It is required to maintain a net debt-to-adjusted-EBITDA ratio of less than 7.5x, as well as an interest coverage ratio of 2-3x at the maximum.

BAB did not disclose to analysts how it calculates the ratios for the above two covenants. However, according to BAB, it was in compliance with these covenants as at 31 March 2017. Our own estimates corroborate this assertion.

BAB also noted that it has sufficient cash resources to pay its debts as they fall due. As at 31 March 2017, it had RM2,426m in gross cash, which is more than its short-term debt obligations of RM1,087m (excluding RM1,561m in revolving credit which we assume can be rolled over indefinitely).

However, we think BAB may still do a preemptive rights issue in FY17F, to capitalise on the improving sentiment surrounding BAB’s stock, in contrast with the ever-worsening sentiment since the oil price rout began in mid-2014, in our view. This is because two of its projects – the Olombendo and LNG Mediterrana – are already up and running, while two others – the Kraken and Karapan Armada Sterling 3 – should commence their firm charter periods before end-FY17F.

BAB also has very little room for error, and very little room to take on additional borrowings. At an expected net debt-to-adjusted-EBITDA ratio of 5.7x for FY17F, BAB’s net debt can only increase by US$500m (+30%), or its adjusted EBITDA decline by RM294m (-24%), before it gets close to breaching the 7.5x limit.

Hence, it appears to be very difficult for BAB to take on even a single extra project, even though it is preparing to bid for up to four prospects. It may be too late for BAB to wait until it secures a project before seeking to raise new equity, because its inability to take on additional debt may be one of the considerations for the charterers to decide whether or not to award it the FPSO charter.

Also, stock market conditions may not always be favourable if BAB delays its equity raising exercise too long. As such, we believe it is better for BAB to take advantage of its currently-improving financial performance, and improving perception surrounding its stock, to undertake a preemptive rights issue for the


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purposes of solidifying its balance sheet and to prepare to secure potential new projects.

Furthermore, its net gearing level is presently quite high. Based on a gross debt balance of RM12,814m, and a gross cash balance of RM2,426m, BAB has a net debt balance of RM10,388m as at 31 March 2017. This compares against its equity balance of RM5,648m, representing net gearing of 1.84x.

This is much higher than the 0.43x net gearing at end-FY14 immediately after its 1:2 rights issue of 1,466,567,350 new shares at an issue price of RM1.35 per share, which raised proceeds of RM1,980m on 13 October 2014.

It is also much higher than the 0.5x net gearing at end-FY11 after BAB completed its IPO on 21 July 2011 which raised cash proceeds of RM1,953m. However, the current net gearing of 1.84x is lower than its net gearing prior to its IPO, i.e. 3.59x at end-FY10.

At both points – in late-FY11 and in late-FY14 – BAB reduced its net gearing level to about 0.4-0.5x in preparation for growth. In late-FY11, BAB was completing the conversion of the Armada TGT1, and had secured contracts for the Armada Claire and Armada Sterling 1 FPSOs. In late-FY14, BAB needed the extra equity to fund the Armada Sterling 2 and Armada Kraken projects secured in FY13, as well as to fund the Armada Olombendo and Karapan Armada Sterling 3 projects secured in FY14.

BAB is once again looking for growth, since its four conversion projects have been completed – with two assets online and two more at their final stages of commissioning.

For FY17F, we are forecasting net debt of RM10,081m. Assuming that BAB intends to reduce its net gearing ratio back to 0.5x by end-FY17F, it will need to top up its equity base from our forecast of RM6,032m to RM10,767m, or an additional RM4,735m.

However, an equity issue of this size is extremely unlikely, in our view, as BAB currently has a market capitalisation of just RM4.5bn.

We believe that a more reasonable equity raising target will be approximately RM1bn. This is because ONGC’s KG-DWN-98/2 project is the closest at hand. Assuming a capex of US$1.2bn, split 50:50 with its JV partner the Shapoorji Pallonji group, BAB will need to fund US$600m in capex, or around RM2.6bn. Out of the RM2.6bn, which is BAB’s portion of the potential capex, we estimate RM1.8bn will likely be funded via debt (70%), while the remaining RM0.8bn will be funded via equity (30%). We believe that BAB will have to raise new equity to cover the equity portion of the potential capex.

In our SOP-based valuation for BAB, we have assumed that BAB will raise RM1bn in new equity via a rights issue priced at RM0.50/share, involving the issuance of 2,000m new shares. We have also assumed that BAB will undertake this rights issue, with or without new contract wins.

BAB expected to remain within its debt covenants

Below, we set out the mechanics by which we have calculated BAB’s debt covenant ratios.

FY16: Net debt-to-adjusted-EBITDA ratio estimated to be 5.3x

At end-FY16, BAB had gross debt of RM13,046m, and cash balance of RM3,016m, or a net debt balance of RM10,030m. However, we estimate that RM7.5bn of this debt is attributable to the Armada Kraken and Armada Olombendo FPSOs, which have yet to commence their official charter periods. Removing this, the adjusted net debt will be RM2,530m.

We estimate BAB’s FY16 EBITDA at RM476m, excluding RM1.7bn in asset impairments, RM91m in allowance for doubtful debts, but including RM141m in management fees (booked at the ‘other income’ line) charged to its 49%-owned associate PT Armada Gema Nusantara for management services related to the conversion of the FPSO Karapan Armada Sterling 3.

Hence, we estimate BAB’s net debt-to-adjusted-EBITDA ratio at 5.3x, less than the maximum permitted of 7.5x. We emphasise, however, that BAB did not


38

disclose exactly how it calculates the ratio underlying this covenant, so our calculation above is our best guess only.

FY16: Interest coverage ratio estimated at 4.8x

Interest coverage ratio for FY16 is the EBITDA of RM476m divided by the interest expense of RM99m, or 4.8x, which is more than the required 2-3x. We note that the cash interest paid for FY16 was RM379m, but a significant portion was capitalised as part of FPSO/FSU construction costs.

FY17F: Net debt-to-adjusted-EBITDA ratio estimated to be 5.8x

For FY17F, we are forecasting BAB’s net debt to be at RM10,104m, or RM7,094m if we remove the estimated US$700m of project financing debt at FPSO Armada Kraken, which we assume will only start its firm charter period on 1 January 2018.

We are forecasting BAB to earn an EBITDA of RM1,115m for FY17F, based on finance lease accounting for FPSO Armada Olombendo and FSU Armada LNG Mediterrana, and including RM16.6m in management fees charted against an associate (booked at the ‘other income’ line). The adjusted EBITDA formula requires that we assume that the latter two assets are accounted for as operating leases, hence our adjusted EBITDA estimate for BAB will be RM1,231m. This means that, in our estimate, its net debt-to-adjusted-EBITDA ratio will be at 5.8x, within the permitted maximum of 7.5x.

FY17F: Interest coverage ratio estimated at 2.8x

We estimate BAB’s interest coverage ratio for FY17F at 2.8x, calculated as the adjusted EBITDA of RM1,231m divided by the estimated interest expense of RM436m. This should be approximately within the required interest coverage ratio of 2-3x.

FY18F: Net debt-to-adjusted-EBITDA ratio estimated to be 4.3x

For FY18F, we are forecasting BAB’s net debt to be at RM8,735m. We are forecasting BAB to earn an EBITDA of RM1,548m for FY18F, based on finance lease accounting for FPSO Armada Olombendo, FPSO Armada Kraken, and FSU Armada LNG Mediterrana. The adjusted EBITDA formula requires that we assume that these three assets are accounted for as operating leases, hence our adjusted EBITDA estimate for BAB will be RM2,025m. This means that in our estimate, its net debt-to-adjusted-EBITDA ratio will be at 4.3x, within the permitted maximum of 7.5x.

FY18F: Interest coverage ratio estimated at 4.9x

We estimate BAB’s interest coverage ratio for FY18F at 4.9x, calculated as the adjusted EBITDA of RM2,025m divided by the estimated interest expense of RM414m. This is above the required interest coverage ratio of 2-3x.


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Accounting for FPSOs

BAB accounts for its FPSOs using a mix of operating lease (OL) and finance lease (FL) methods.

The older FPSOs are/were accounted for as OLs:

Armada Perkasa (100% subsidiary)

Armada Perdana (100% subsidiary)

Armada TGT1 (100% subsidiary)

Armada Claire (100% subsidiary)

Armada Sterling 1 (50% JV)

The newer FPSOs are/will be accounted for as FLs:


Armada Kraken (100% subsidiary)

Armada Olombendo (100% subsidiary)

Karapan Armada Sterling 3 (49% JV)

Armada LNG Mediterrana (100% subsidiary)

BAB’s revenue line comprises of these assets:

Armada Perkasa (100% subsidiary)

Armada Perdana (100% subsidiary)

Armada TGT1 (100% subsidiary)

Armada Claire (100% subsidiary)

Armada Kraken (100% subsidiary)

Armada Olombendo (100% subsidiary)

Armada LNG Mediterrana (100% subsidiary)

While the JV line comprises BAB’s share of profits from these assets:



Karapan Armada Sterling 3 (49% JV)

For OL-accounted FPSOs:

1. The revenue line is simply the BBC rate multiplied by the number of operating days, plus whatever operations and maintenance (O&M) that is charged-back to the charterer.

2. As the BBC rate is fixed over the duration of the firm period, the revenue booking is relatively steady over the duration of the firm period. The BBC steps down during the option period, but is also fixed for the duration of the option period, hence the revenue booking is also relatively stable over the option period.

3. The FPSO asset remains on the balance sheet as a fixed asset, and is depreciated on a straight line basis to the P&L. The useful life is typically the combined firm and option periods.

For FL-accounted FPSOs:

1. In the financial statements, the FPSO asset is treated as having been sold to the charterer, even though the legal title remains with BAB. As a result, there is no explicit depreciation charge.

2. At the point of the commencement of the firm charter period, the fixed asset balance is swapped into what is known as ‘finance lease receivable’ (FLR), which is the discounted present value of the future BBC hire cash


40

receipts. BAB is treated as the financier for the charterer’s implied purchase of the asset.

3. For every financial period, the FLR is restated upwards by the implied discount rate, representing the finance lease income, which booked as revenue in the P&L.

4. The BBC hire, when received, will be credited against the FLR to reduce its balance.

5. As the FLR balance is whittled down over time, the finance lease income also becomes correspondingly smaller, hence the booking of revenue in the P&L is reduced over time. As such, the difference in revenue under OL accounting (stable revenue) and FL accounting (revenue booked at a decreasing rate), becomes larger with time.

Comments on 1Q17 results

BAB delivered a 1Q17 core net profit of RM81m, substantially better than in the immediately preceding four quarters, and likely ahead of market expectations.

BAB enjoyed maiden revenue contributions from two new FPSO/FSU assets in 1Q17, as well as lower depreciation charges after 4Q16’s asset impairments.

Operating risks are likely to dissipate in future quarters once two more new assets are commissioned, in our view. BAB is also bidding for four potential contracts.

BAB will unlikely be able to fund additional capex without an equity raising exercise, but this should not be negative if paired with a contract win.

Highlights of 1Q17 results

BAB’s 1Q17 core net profit of RM81m was more than double the year prior’s, due to the maiden contributions from the FPSO Armada Olombendo from 8 February 2017, as well as the FSU Armada LNG Mediterrana from 16 January 2017. At the same time, depreciation expense had declined by almost one-third as a consequence of the significant asset impairments made in 4Q16 on selected FPSO and OMS assets.

Outlook for FPSO segment likely to improve in future quarters…

The 100%-owned Olombendo is earning charter hire at 80% of its full rate, since it has already achieved first oil, but its systems are still undergoing various testing. Once testing is completed and the Olombendo has achieved final acceptance, probably sometime during 3Q17, BAB will be able to bill for 100% of its contracted charter hire. Meanwhile, the 49%-owned FPSO Karapan Armada Sterling 3 achieved first gas on 6 May 2017,and we expect the official contract to begin sometime during 2H17.

…as new assets begin to contribute

Meanwhile, BAB is “very confident” that the much-delayed FPSO Kraken will finally achieve first oil prior to 30 June, after which final acceptance of the vessel by the client (and hence the commencement of the firm charter period) will take place 3-6 months later. In 4Q16, BAB made provisions for ‘supplementary payments’ to its client EnQuest as compensation for the delay of the first oil backstop date from 1 April to 15 July. Hence, if BAB achieves first oil prior to 15 July, it may not have to make additional provisions.

Outlook for OMS segment also likely to improve…

The OMS segment delivered a surprise profit of RM8m in 1Q17, vs. a RM4m loss in 1Q16. This came on the back of lower depreciation charges since large impairments on its OMS assets were made in 4Q16. Operationally, the OSVs saw lower utilisation, and likely no improvement in charter rates, while there was also less work by LukOil for the Armada Installer in the Caspian Sea. Still, 1Q is a seasonally low quarter, and utilisation and earnings will pick up and peak in 3Q of every year.

…as older assets are sold and the KP1 has found employment

More noteworthy is that the stacked Armada Condor has found a buyer, and its sale will reduce operating costs for BAB. The Armada Hawk was sold in late-


41

2016, and BAB will soon successfully complete the sale of these two DP2 offshore construction vessels. Also, the stacked Armada KP1 pipelay barge is likely to be employed in Indonesia in 2H17, in our view.

Key risks for BAB

The negotiations with EnQuest are still continuing for a settlement of the compensation owing to the delay in first oil from 1 April to 15 July. BAB indicated that the negotiations are more complex than expected, and made an additional provision in 1Q17 of an undisclosed amount. More provisions might have to be made.

BAB’s net gearing is currently at 184%, against a low of 43% immediately after its FY14 rights issue. While BAB is still in compliance with its debt covenants, another rights issue will be necessary to fund the equity portion of capex if it wins new FPSO contracts.

Meanwhile, BAB’s charter contract for the Armada Perdana may be terminated prematurely if Erin Energy cannot resolve its funding woes.

Additional upside for BAB

BAB’s share price may see upside momentum if it succeeds in redeploying the Armada Claire to one of the several marginal offshore oilfields that it is offering the asset to. BAB is also planning to bid for ONGC’s KG-DWN-98/2 FPSO requirement, and a win here will be positive for investor optimism.

Figure 13: Results comparison


Figure 14: Bumi Armada's quarterly core net profit/(loss) (RM m)


FYE Dec (RM m) 1QFY17 1QFY16 yoy % 4QFY16 qoq %

chg chg Comments

Revenue 404.2 430.8 (6.2) 205.5 96.7 Revenue fell yoy because of lower OMS revenue, partly

Operating costs (202.5) (249.3) (18.8) (320.2) (36.8) offset by higher FPSO revenue.

EBITDA 201.6 181.5 11.1 (114.8) (275.7) EBITDA rose 11% yoy because of the maiden contribution

EBITDA margin (%) 49.9 42.1 (55.9) from the FPSO Armada Olombendo and FSU Armada LNG

Depn & amort. (111.2) (155.3) (28.4) (140.8) (21.0) Mediterrana.

EBIT 90.4 26.2 245.3 (255.6) (135.4) EBIT rose because of the higher EBITDA, as well as the fall

Interest expense (64.8) (21.4) 203.3 (33.8) 91.8 in depreciation expense, as selected FPSO and OMS

Interest & invt inc 28.9 26.6 8.6 164.2 (82.4) assets were impaired in 4Q16.

Associates' contrib 49.1 38.1 28.9 (34.2) (243.5) Interest expense rose, as interest capitalisation on project

Exceptionals (30.0) (13.6) 120.8 (1,133.0) (97.4) financing taken on the Olombendo and LNG Mediterrana

Pretax profit 73.6 55.9 31.6 (1,292.3) (105.7) ceased once the assets began contributing to revenue.

Tax (17.2) (34.8) (50.5) (14.9) 15.1 Associates comprise the FPSO Armada Sterling 1 and

Tax rate (%) 23.4 62.2 (1.2) Sterling 2. Associate earnings rose due to a lower

Minority interests (8.3) 2.3 (466.9) 11.7 (171.1) management fee charged by BAB to the associates.

Net profit 48.1 23.4 105.3 (1,295.6) (103.7) Exceptionals in 1Q17 are mainly unrealised forex loss.

Core net profit 81.0 37.1 118.1 (148.6) (154.5) Core net profit more than doubled yoy on the back of the

EPS (sen) 0.8 0.4 105.3 (22.1) (103.7) additional FPSO contribution, and reduced depreciation

Core EPS (sen) 1.4 0.6 118.1 (2.5) (154.5) expense.

Title:

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Figure 15: Segmental breakdown


Figure 16: FPSO revenue and core EBIT trends (RM m)


Figure 17: Offshore Marine Services (OMS) revenue and core EBIT trends (RM m)


1QFY17 1QFY16 yoy % 4QFY16 qoq %

chg chg Comments

Revenue (RM m) 404.2 430.8 (6.2) 205.5 96.7 Group revenue fell as a result of a decline in OMS segment revenue

- FPSO 239.7 216.6 10.7 5.2 nm due to lower volume of LukOil work, and lower OSV utilisation.

- OMS (OSV + T&I) 164.5 214.2 (23.2) 200.3 (17.9) FPSO revenue rose as the Armada Olombendo and Armada LNG

- Others - - - Mediterrana began contributing to revenue in 1Q17.

EBIT (RM m) 90.4 26.2 245.3 (255.6) (135.4) EBIT rose partly because of a RM44m yoy decline in depreciation

- FPSO 69.4 21.0 230.8 (150.2) (146.2) expense, as several FPSO and OMS assets were impaired in

- OMS (OSV + T&I) 8.0 (4.3) (287.4) (75.4) (110.6) 4Q16. FPSO EBIT rose due to the contributions from the

- Exceptionals & others 13.0 9.5 37.3 (29.9) (143.4) Olombendo and LNG Mediterrana.

EBIT margin (%) 22.4% 6.1% -124.4%

- FPSO 29.0% 9.7% -2900.9%

- OMS (OSV + T&I) 4.9% -2.0% -37.7% OMS turned around from a loss to a profit, despite a fall in OSV

utilisation rates, due to the drop in depreciation expense.

OSV utilisation (%) 42.0% 45.0% 48.0%

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OMS (OSV + T&I) revenue (RM m) - RHS


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Figure 18: Offshore Marine Services (OMS) core EBIT trends (RM m) and OSV utilisation rates (%)


Figure 19: Results comparison


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OMS (OSV + T&I) core EBIT (RM m)

OSV utilisation rate (%)

FYE Dec (RM m) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Revenue 572.2 459.1 559.5 589.0 430.8 402.9 377.5 205.5 404.2

Operating costs (298.7) (243.8) (331.5) (296.2) (249.3) (267.4) (244.9) (320.2) (202.5)

EBITDA 273.5 215.3 228.0 292.9 181.5 135.5 132.6 (114.8) 201.6

EBITDA margin (%) 47.8 46.9 40.8 49.7 42.1 33.6 35.1 (55.9) 49.9

Depn & amort. (141.4) (143.5) (158.9) (162.9) (155.3) (136.6) (138.0) (140.8) (111.2)

EBIT 132.1 71.7 69.1 130.0 26.2 (1.1) (5.4) (255.6) 90.4

Interest expense (37.0) (37.7) (27.2) (21.3) (21.4) (12.0) (32.0) (33.8) (64.8)

Interest & invt inc 19.7 41.4 (1.2) 13.9 26.6 4.2 9.6 164.2 28.9

Associates' contrib 1.1 16.2 25.9 8.3 38.1 53.0 20.8 (34.2) 49.1

Exceptionals (10.6) (365.9) 35.1 (235.0) (13.6) (569.7) (76.0) (1,133.0) (30.0)

Pretax profit 105.2 (274.3) 101.7 (104.0) 55.9 (525.7) (83.0) (1,292.3) 73.6

Tax (32.2) (24.6) (30.8) 17.1 (34.8) 9.5 (20.5) (14.9) (17.2)

Tax rate (%) 30.6 (9.0) 30.2 16.5 62.2 1.8 (24.7) (1.2) 23.4

Minority interests (1.0) 7.4 (1.0) 1.8 2.3 (2.1) 6.8 11.7 (8.3)

Net profit 72.0 (291.5) 70.0 (85.1) 23.4 (518.3) (96.7) (1,295.6) 48.1

Core net profit 91.4 61.3 27.0 106.6 37.1 38.9 (20.0) (148.6) 81.0

EPS (sen) 1.2 (5.0) 1.2 (1.5) 0.4 (8.8) (1.6) (22.1) 0.8

Core EPS (sen) 1.6 1.0 0.5 1.8 0.6 0.7 (0.3) (2.5) 1.4

Breakdown of exceptionals (10.6) (365.9) 35.1 (235.0) (13.6) (569.7) (76.0) (1,133.0) (30.0)

- Unrealised exchange gain/(loss) 94.4 (75.7) 42.0 (7.5) (6.1) 7.3 5.9 3.0 (39.8)

- Disposal gains/(losses) - (4.8) 20.6 1.0 - - 4.3 (0.4) -

- Impairments (2.1) (363.2) (12.2) (45.5) (17.9) (575.5) (4.2) (1,145.6) -

- Allowance on doubtful debts 15.3 - - (183.3) 3.8 (0.1) (79.6) (15.5) 8.7

- Derivative FV gains/(losses) (97.5) 93.0 (10.9) 0.3 6.6 2.6 (0.9) (1.1) 1.3

- Others (20.6) (15.3) (4.4) - - (4.0) (1.4) 26.5 (0.1)


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Figure 20: Segmental breakdown


Detailed P&L forecasts

BAB reported a base core net profit of slightly over RM400m in FY11, which rose to approximately RM470m p.a. for both FY12 and FY13. In the latter two years, BAB benefitted from the commencement of the charter for Armada TGT1 from late-2011, and the Armada Sterling 1 from April 2013.

In FY14, BAB’s core net profit decreased to RM278m. The FPSO business itself reported higher operating profits as the Armada Claire contract commenced from August 2014, and with a full-year contribution from Armada Sterling 1. However, the OMS business reported sharply lower profits as OSV utilisation and charter rates fell as a result of the mid-2014 fall in oil prices. BAB also provided for RM66m in doubtful debts on its OMS trade receivables in FY14, as it could not collect from several small, non-asset owning Petronas licence holders which had chartered vessels from BAB. We have classified these doubtful debt provisions as exceptional in nature.

In FY15, BAB’s core net profit held relatively steady at RM288m, with a jump in FPSO core operating profit offset by losses at its OMS division. The strong FPSO performance was underwritten by the full-year contribution of the Armada Claire, and the start of the Armada Sterling 2’s firm charter period from February 2015. The OMS losses were caused by a further drop in OSV and SC (T&I) utilisation rates, on top of the decline in charter rates. During FY15, BAB also made additional impairments on its OMS vessels, and made doubtful debt provisions on the Armada Perdana charter contract of RM161m, which we classified as exceptional charges.

In FY16, BAB reported a core net loss of RM93m, with operating losses at both the FPSO and OMS divisions. As the charterers for the Armada Perkasa and Armada Perdana were facing difficulties in paying the BBC hire, BAB ceased recognising the BBC hire on the revenue line for both FPSOs from 2Q16 onwards. Woodside prematurely terminated the charter for the Armada Claire from March 2016, resulting in no revenue recognition from this asset from 2Q16 onwards. Furthermore, due to the delay in the delivery of the Armada Kraken, BAB netted off US$20m in liquidated ascertained damages and US$22.7m in ‘supplementary payments’ against its revenue line. The OMS division also performed poorly, due to a further decline in charter and utilisation rates. The Armada Hawk was cold-stacked in 4Q15 and the Armada Condor in 1Q16, while the Armada KP1 pipelay barge was also not working, leaving only the Armada Installer and Armada Constructor working in the Caspian Sea.

Last year, BAB also took the opportunity to perform a massive asset impairment exercise, amounting to RM1.7bn. Several FPSO assets were written down by RM1bn. The Armada Claire, Armada Perdana, and two non-operating vessels (Armada Intrepid and the Armada Gema) were written down to very low values. The OMS unit also saw RM0.7bn in asset impairments, primarily related to the Armada Hawk, Armada Condor and Armada KP1.

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Revenue (RM m) 572.2 459.1 559.5 589.0 430.8 402.9 377.5 205.5 404.2

- FPSO 291.1 271.1 365.2 378.2 216.6 155.7 116.0 5.2 239.7

- OMS (OSV + T&I) 281.1 187.9 194.3 210.8 214.2 247.2 261.5 200.3 164.5

- Others - - - - - - - - -

EBIT (RM m) 132.1 71.7 69.1 130.0 26.2 (1.1) (5.4) (255.6) 90.4

- FPSO 84.2 99.5 146.3 140.5 21.0 20.1 2.9 (150.2) 69.4

- OMS (OSV + T&I) 25.3 (29.0) (49.2) (17.4) (4.3) (15.1) (5.9) (75.4) 8.0

- Exceptionals & others 22.6 1.2 (28.0) 6.9 9.5 (6.1) (2.4) (29.9) 13.0

EBIT margin (%) 23.1% 15.6% 12.4% 22.1% 6.1% -0.3% -1.4% -124.4% 22.4%

- FPSO 28.9% 36.7% 40.1% 37.1% 9.7% 12.9% 2.5% -2900.9% 29.0%

- OMS (OSV + T&I) 9.0% -15.4% -25.3% -8.3% -2.0% -6.1% -2.3% -37.7% 4.9%

OSV utilisation (%) 71.0% 54.0% 54.0% 46.0% 45.0% 55.0% 55.0% 48.0% 42.0%


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A further RM91m in trade receivables were provided for in FY16, mostly arising from unpaid BBC hire from the Armada Perdana, and also the Armada Perkasa.

Moving into FY17F, we forecast that core net profit will improve materially to RM347m, as the Armada Olombendo has been earning 80% of its BBC rate from first oil on 8 February 2017, while the Armada LNG Mediterrana has been earning its full BBC since 16 January 2017. We forecast the Armada Olombendo to earn 100% of its BBC from mid-2017F, and for the Karapan Armada Sterling 3 to begin contributing from 4Q17F. The asset impairments made in FY16 and prior to that will also reduce the annual depreciation charge by RM126m yoy. As a result, we expect the operating losses suffered by the OMS division to decline substantially.

For FY18F, we forecast BAB’s core net profit to rise to RM899m, as we have assumed that the Armada Kraken FPSO will begin contributing to revenue from 1 January 2018, and BAB will also benefit from the full-year impact from the Armada Olombendo and the Karapan Armada Sterling 3 FPSOs.

However, we expect FY19F core net profit to decline to RM750m, as the Armada TGT1 is slated to enter into its option period from November 2018F.


46

Figure 21: Bumi Armada Profit and Loss Statement (YE December)


2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

Revenue 1,543.9 1,659.2 2,073.0 2,397.3 2,179.7 1,416.6 1,905.0 2,357.9 2,060.4

- FPSO 609.2 716.0 787.6 949.1 1,305.6 493.4 1,028.8 1,481.7 1,184.1

- Offshore Marine Svs (OSV + T&I) 724.2 939.5 1,285.4 1,448.3 874.1 923.2 876.2 876.2 876.2

- Oilfield services (OFS) 210.5 3.7 0.0 0.0 0.0

Direct cost -699.7 -793.9 -1,119.6 -1,568.9 -1,170.2 -1,081.8 -806.8 -810.4 -810.4

EBITDA 844.2 865.3 953.4 828.4 1,009.6 334.8 1,098.2 1,547.6 1,250.0

EBITDA margin (%) 54.7% 52.2% 46.0% 34.6% 46.3% 23.6% 57.7% 65.6% 60.7%

Depreciation -326.8 -356.0 -416.8 -476.1 -606.7 -570.8 -444.5 -434.0 -318.4

EBIT (operating profit) 517.4 509.3 536.6 352.4 402.9 -235.9 653.7 1,113.6 931.7

- FPSO 214.9 244.0 266.7 282.2 470.6 -106.2 719.6 1,179.5 997.5

- Offshore Marine Svs (OSV + T&I) 240.9 251.3 251.7 116.7 -55.0 -100.7 -13.5 -13.5 -13.5

- Oilfield services (OFS) 30.8 4.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Corporate and others 30.8 9.6 18.2 -46.5 -12.6 -29.0 -52.4 -52.4 -52.4

EBIT Margin (%) 33.5% 30.7% 25.9% 14.7% 18.5% -16.7% 34.3% 47.2% 45.2%

- FPSO 35.3% 34.1% 33.9% 29.7% 36.0% -21.5% 69.9% 79.6% 84.2%

- Offshore Marine Svs (OSV + T&I) 33.3% 26.7% 19.6% 8.1% -6.3% -10.9% -1.5% -1.5% -1.5%

Other income 17.5 41.7 11.8 12.9 21.0 46.2 15.0 15.0 15.0

Management fees charged to JVs 0.0 0.0 0.0 0.0 0.0 141.1 16.6 0.0 0.0

Interest revenue 11.2 10.2 4.2 28.6 52.8 17.4 30.4 20.6 32.2

Interest expense -105.4 -124.6 -106.6 -101.6 -123.2 -99.2 -435.7 -413.6 -386.5

Profit before associates 440.7 436.7 446.0 292.2 353.5 -130.5 263.5 735.6 592.4

Margin (%) 29% 26% 22% 12% 16% -9.2% 13.8% 31.2% 28.8%

Associates / JVs 26.8 40.3 33.5 35.9 51.5 77.7 136.8 228.4 222.5

- FPSO 51.1 76.6 135.8 227.4 221.5

- Offshore Marine Svs (OSV + T&I) 0.4 1.1 1.0 1.0 1.0

Exceptionals -31.6 -8.4 0.5 -19.0 -576.4 -1,792.3 0.0 0.0 0.0

PBT 435.9 468.6 480.0 309.2 -171.4 -1,845.1 400.3 964.0 814.8

PBT margin (%) 28.2% 28.2% 23.2% 12.9% -7.9% -130.2% 21.0% 40.9% 39.5%

PBT ex-exceptionals 467.5 477.0 479.4 328.1 405.0 -52.8 400.3 964.0 814.8

Tax -70.6 -80.6 -44.9 -84.8 -70.4 -60.8 -65.2 -77.1 -77.1

- Current tax -54.8 -48.1 -99.4 -44.7 -124.1 -58.5 -65.2 -77.1 -77.1

- Deferred tax -15.7 -32.5 54.5 -40.1 53.7 -2.3 0.0 0.0 0.0

Effective tax rate (%) -15.1% -16.9% -9.4% -25.8% -17.4% 115.2% -16.3% -8.0% -9.5%

Profit before MI 365.3 388.0 435.1 224.4 -241.8 -1,905.8 335.1 886.9 737.7

MI -5.7 -2.2 -3.9 -5.7 7.2 18.6 5.0 5.0 5.0

Attributable profit 359.7 385.8 431.2 218.7 -234.6 -1,887.2 340.1 891.9 742.7


47

Figure 22: Bumi Armada Profit and Loss Statement (YE December) - continued


Figure 23: Bumi Armada's annual core net profit/(loss) (RM m)


2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

Breakdown of exceptionals -31.6 -8.4 0.5 -19.0 -576.4 -1,792.3 0.0 0.0 0.0

- Unrealised exchange gain/(loss) -1.5 -8.6 18.0 59.0 53.3 10.1 0.0 0.0 0.0

- Impairments 0.0 -6.8 0.0 -32.5 -423.1 -1,743.2 0.0 0.0 0.0

- Allowance for doubtful debts -3.5 -3.1 -26.5 -66.0 -168.0 -91.4 0.0 0.0 0.0

- FV gain/(loss) on derivatives -14.1 3.3 -0.5 -2.4 -15.2 7.2 0.0 0.0 0.0

- Staff retrenchment 0.0 0.0 0.0 0.0 -26.2 -6.2 0.0 0.0 0.0

- Others -12.6 6.8 9.6 22.9 2.8 31.2 0.0 0.0 0.0

Reconciliation to core net profit

Attributable profit 359.7 431.2 431.2 218.7 -234.6 -1,887.2 340.1 891.9 742.7

Remove: Exceptionals 31.6 8.4 -0.5 19.0 576.4 1,792.3 0.0 0.0 0.0

+/- Tax effect on excep 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Deferred tax provisions 15.7 32.5 32.5 40.1 -53.7 2.3 0.0 0.0 0.0

Core net profit 407.0 472.0 463.1 277.7 288.1 -92.6 340.1 891.9 742.7

From subsidiaries 380.2 431.8 429.7 241.8 236.6 -170.3 203.3 663.5 520.2

From associates 26.8 40.3 33.5 35.9 51.5 77.7 136.8 228.4 222.5

Core net profit margin (%) - subsidiaries 24.6% 26.0% 20.7% 10.1% 10.9% -12.0% 10.7% 28.1% 25.2%

Basic no of O/Shares 4,784.1 4,785.2 4,789.2 5,866.3 5,866.3 5,866.3 5,866.3 5,866.3 5,866.3

Weighted no of ordinary shares 4,015.5 4,784.5 4,787.3 5,058.6 5,866.3 5,866.3 5,866.3 5,866.3 5,866.3

Basic EPS (sen) 8.96 8.06 9.01 4.32 -4.00 -32.17 5.80 15.20 12.66

Core EPS (sen) 10.14 9.87 9.67 5.49 4.91 -1.58 5.80 15.20 12.66

Title:

Source:


-15%

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-400

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600

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2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

Core net profit - subsidiaries (RM m)

Core net profit - associates (RM m)

Core net profit margin (%) - subs only


48

Figure 24: FPSO EBIT (RM m) and EBIT margin (%)


Figure 25: Offshore Marine Services (OMS) EBIT (RM m) and EBIT margin (%)


Figure 26: OMS EBIT (RM m) and OSV utilisation rates (%)


Title:

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EBIT margin (%) - FPSO subs

Title:

Source:


-15%

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2011 2012 2013 2014 2015 2016 2017F 2018F 2019F


EBIT margin (%) - OMS subs only

Title:

Source:


0%

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OSV utilisation rates (%)


49

RISKS

BAB may do an equity-raising exercise

In our opinion, BAB will have to raise approximately RM1bn in new equity, most likely via a rights issue, in order to prepare for new contract awards, specifically ONGC’s KG-DWN-98/2 FPSO, which may cost some US$1.2bn in capex. If BAB wins this contract with its 50:50 JV partner, the Shapoorji Pallonji group, we estimate its portion of the capex to be US$600m, or RM2.6bn.

Assuming debt financing of 70%, BAB will still need to inject equity of RM0.8bn into the project, hence our view that BAB will need to issue RM1bn worth of rights shares. BAB had a gross cash balance of RM2.4bn as at 31 March 2017, and it would be unwise for BAB to run down its gross cash balance too low given its enlarged business portfolio of eight FPSO/FSU assets.

Also, BAB’s cash balance is insufficient to cover its short-term debt obligations of RM2.6bn. Out of this short-term debt obligations of RM2.6bn, RM1.6bn comprise revolving credits which do not need to be immediately repaid. Still, it would be unwise for BAB to fund long-term capex projects using short-term debt, hence its current cash balance of RM2.4bn should not be used for any kind of capex funding.

In our earnings forecasts, we have not yet imputed a potential rights issue. However, in our SOP valuation of BAB, we have taken this risk into account.

Compensation negotiations for FPSO Armada Kraken still ongoing

BAB is currently still in negotiations with EnQuest, the charterer for the Armada Kraken FPSO, for compensation in return for pushing the first oil backstop date from 1 April 2017 to 15 July 2017. BAB already made US$22.7m in provision for ‘supplementary payments’ in its 4Q16 results.

However, during its 1Q17 results conference call with analysts, BAB said the ongoing negotiations with EnQuest have been more complicated, and more multi-faceted, than expected. Hence, in 1Q17, it made additional unquantified provisions for ‘supplementary payments’, and there is some possibility of more provisions, depending on the outcome of the currently-ongoing negotiations, even if the Armada Kraken achieves first oil before 15 July.

In our financial model, we have assumed that no further provisions are necessary, and that BAB will pay US$22.7m in compensatory ‘supplementary payments’ during FY17F to EnQuest. However, the risk remains that it may have to pay more than US$22.7m.

The charterer for the Armada Perdana may not survive

Erin Energy, which is the charterer for the Armada Perdana FPSO, is under significant financial pressure and will need the full support of its bankers to undertake capex spending to improve production rates from its Oyo field wells, offshore Nigeria. There is some evidence of banker support, since Erin Energy has contracted a drillship at a rate of US$195,000/day to drill a development well at the Oyo-9 well from June 2017. According to Riglogix, this Oyo-9 drilling campaign will take 2½ months, implying a cost of US$15.2m in drillship charter hire alone, although the actual drilling cost will be much higher when the cost of materials are included. With a free cash balance of only US$8.5m as at 31 March 2017, Erin Energy had most probably secured financial support from its bankers to spend on development drilling.

However, there is no guarantee that the development drilling will be successful. If the bankers decline to extend further support, Erin Energy’s days could be numbered.

Also, the Oyo-7 field has been shut-in since July 2016 due to high water production from the well. Erin Energy is planning to relocate an existing gaslift line to the Oyo-7 field to enable continuous gaslift operation to assist in restoring lost production volumes. Again, there is no guarantee that this will be successful.


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If Erin Energy folds, its charter for the Armada Perdana, which has another four more firm charter years to run until 31 December 2020, will most probably be terminated early.

On the bright side, the market appears to have already priced out the value of the Armada Perdana charter from BAB’s share price. Hence, in the event of a premature termination of the Armada Perdana’s charter contract, that may not have a fundamental impact on our valuation of BAB, although the sentiment surrounding its stock price may be impacted.

Commencement of the charter contract for the FPSO Karapan Armada Sterling 3 could be delayed

The Karapan Armada Sterling 3 arrived at the Madura BD field before the end of 2016, but achieved first gas only on 6 May 2017. The gas was flared, as the onshore gas receiving terminal has only just been completed by the operators of the gas field, Husky-CNOOC Madura Limited. Until this is completed, the FPSO will not earn any revenue, since there is no provision in the charter contract for standby rates. We have assumed in our financial forecasts and valuation that the FPSO will commence its firm charter period on 1 October 2017. A delay beyond this date will impact our earnings forecasts and valuation of BAB negatively, albeit unlikely by very much.


51

VALUATION AND RECOMMENDATION

Resuming coverage with an Add, target price of 92 sen

We are resuming coverage of BAB with an Add recommendation and an SOP-based target price of 92 sen. Our forecasts and our valuation method have been comprehensively revised.

BAB is finally recovering from a difficult period since mid-2014. Despite having long-term FPSO charter contracts, BAB has been hit by the oil and gas downturn nevertheless. The OMS division was the first to be affected, as utilisation rates and charter rates for OSVs and SC vessels took a dive as oil majors’ capex dried up, drilling rig utilisation weakened, and with fewer opportunities to deploy subsea construction vessels and pipelay barges for offshore development work.

In the first 1½ years of the downturn to end-FY15, BAB’s FPSO division held up well, with additional contribution from the commissioning of the Armada Claire and Armada Sterling 2 helping BAB deliver rising operating profit from its FPSO division in both FY14 and FY15.

However, FY16 was an extremely poor year for BAB’s FPSO business, with the premature termination of the Armada Claire charter in March 2016, the cessation of revenue accrual from Armada Perkasa and Armada Perdana as both their charterers based in West Africa faced financial and operating issues, and with the more than US$100m compensation that had to be paid to EnQuest for delays in delivering the Armada Kraken and failure to achieve first oil in time.

This caused BAB’s share price to hit an all-time low of 55 sen on 25 November 2016, from an average of RM2.30 to RM2.40 prior to mid-2014. BAB’s share price has since recovered from the low, reflecting the anticipated earnings recovery from FY17F onwards, and reacting favourably to the good set of 1Q17 results.

We believe there is still more upside to the share price, based on our bottom-up valuation exercise, and the market will gain more confidence in future quarters when we expect BAB to continue delivering a stream of progressively-better results and positive newsflow in relation to the Armada Olombendo, Armada Kraken, and Karapan Armada Sterling 3.


There is even more upside if BAB succeeds in securing the charter contract for the FPSO for ONGC’s KG-DWN-98/2 development, for which the technical and commercial tenders are due by 31 July 2017.

Although a rights issue is very likely in the event that BAB wins a new FPSO contract, we believe that the share price will not react negatively if the rights issue is paired with a new contract win. Even if the rights issue comes ahead of a contract win, we think that the current share price is low enough to account for the dilution risk.

Finally, even if Erin Energy does not continue with the remaining 4-year firm charter period for the Armada Perdana, we calculate that the value of the charter contract has already been excluded from the market capitalisation of BAB at today’s share price. Hence, a premature termination of this charter contract is not likely to impact the share price from a fundamental viewpoint, although there could be a temporary negative knee-jerk reaction.

Our target price of 92 sen excludes the potential accretion from new contract wins (neither for the Armada Claire, nor for the ONGC’s KG-DWN-98/2 project), but has already taken into account the potential rights dilution, on the assumption of a rights issue of 2,000m new shares at RM0.50 each, to raise RM1bn. Our target price also does not include the distant possibility of recovering the claim for damages on the premature termination of the Armada Claire, and neither does it take into account the slim chance of continuing with Armada Perdana’s charter contract.


52

What can we look forward to? With the Armada Olombendo already achieving first oil on 8 February 2017 and earning 80% of its BBC hire since that date, investors can look forward to the full acceptance of the vessel and the commencement of full BBC hire. We believe this should take place by mid-FY17F.

Similarly, the Karapan Armada Sterling 3 achieved first gas on board on 6 May 2017, and the firm contract period should begin sometime in 2H17 (we have assumed 1 October 2017).

Even the Armada Kraken is now closer than ever to achieving first oil; BAB had said recently that it was “very confident” of achieving first oil by 30 June 2017. If BAB achieves this, the risks of additional compensation to EnQuest will be greatly reduced.

Meanwhile, the Armada Perkasa was sold to its charterer, Amni, in early-FY17, helping BAB avoid decommissioning costs.

On the OMS side, the Armada Hawk was sold in late-FY16, and a buyer for the Armada Condor offshore construction vessel has been identified. The sale of idle vessels will help BAB reduce operating costs. Meanwhile, the Armada KP1 pipelay barge is expected to find employment during 2H17F in Indonesian waters.

What could surprise on the upside?

BAB is currently bidding for four new potential FPSO projects. Most of these projects are not expected to materialise anytime soon, since each of the projects have to go through multiple regulatory, technical, commercial, and political hurdles. The only exception to this is ONGC’s requirement for a VLCC-hull FPSO with oil processing capacity of 90,000 bopd, to be located at Cluster 2A of the KG-DWN-98/2 block, offshore India. ONGC is targeting first oil from this FPSO in March 2020, with technical and commercial bids due by 31 July 2017.


Under blue-skies conditions, we believe that BAB may be able to benefit from several other valuation upsides, although these look unlikely to materialise in the near- to medium-term.

BAB has filed for US$283.5m in claims at the Supreme Court of Western Australia against Woodside for the premature termination of Armada Claire charter contract. This compensation has not been factored into BAB’s share price. No date for the trial has been set even after more than a year after the claims were lodged.

BAB is looking to recoup the bareboat charters that have not been collected for the Armada Perdana for the past year, and to resolve issues surrounding the continuation of the bareboat charter hire for Armada Perdana for the rest of the firm contract period. However, investors should not be overly hopeful given how precarious Erin Energy’s financial position is.

What are the risks from this point onwards?

The charter contract for the Armada Perdana, which still has four more years of its firm charter period to run until 31 December 2020, is at risk of a potential collapse of its charterer, Erin Energy, which is in deep financial distress. Based on our calculations, the remaining value from the Armada Perdana charter contract is no longer included in BAB’s current market capitalisation. However, the potential collapse of the charter contract may still negatively impact BAB’s share price, albeit as a temporary knee-jerk reaction.

The negotiations on additional compensation, or ‘supplementary payments’, to EnQuest for the delays surrounding the Armada Kraken FPSO are still ongoing and are apparently more complex than earlier anticipated, according to BAB. There remains potential that BAB may have to make even more provisions for ‘supplementary payments’, which could be incorporated into the


53

2Q17F results. However, we suspect that the majority of the provisions have already been made.

While the Karapan Armada Sterling 3 arrived at the Madura BD field, offshore Indonesia, before the end of 2016, and achieved first gas on board on 6 May 2017, it has not been able to commence its official firm period due to certain delays over the commissioning of Husky-CNOOC’s onshore gas terminal. Under the terms of the FPSO charter, BAB does not have the right to collect standby payments from the charterer unless gas is being produced. Husky-CNOOC’s onshore gas terminal is now ready, and it has guided for the ramping up of its production from 2H17F, but we are unclear as to when exactly the full contractual firm period can officially begin. We think that 1 October 2017 would be a reasonable estimate.

The Armada Installer and Armada Constructor are expected to be working for LukOil until end-FY17F, and will continue with its Petronas Carigali (Turkmenistan) contract until May 2018. Beyond this, both vessels will have to find other charterers, which is likely, although there could be a time gap, and the charter rates for the replacement charters are also expected to be lower than the rates which had been offered by PCT to entice BAB to take the initial construction risk on the vessel prior to 2010. As such, even though the Armada Installer may be occupied beyond May 2018, it is unlikely to book in revenue at the same day rates.

We believe that BAB will probably have to undertake a rights issue once it secures, or as it prepares to bid for, the c.US$1.2bn FPSO contract for the development of ONGC’s KG-DWN-98/2 field. If BAB secures this contract together with its Indian partner, we believe that BAB will have to raise up to RM1bn in additional equity, most probably via a dilutive rights issue.

Sum of parts valuation

We have valued BAB on an SOP basis, with DCF used to value the FPSO business, and asset liquidation values for its OMS fleet.

We have valued each FPSO separately using the DCF method, and attributed to our valuation of BAB, only the 49% to 50% equity portion belonging to BAB for the three JV vessels. We have used a real cost of equity of 8% to discount the geared cashflows of each FPSO asset.

We have backed out an expected inflation rate of 3% from our nominal cost of equity of 11.2% to obtain our real cost of equity of 8%, since we have not assumed any cost inflation into our future cashflow estimates.

We have used geared cashflows so that we can explicitly factor in the expected repayment schedule of each FPSO’s project finance debt.

To calculate our cost of equity, we have used a beta of 1.2x, which is consistent with BAB’s long-term beta. BAB’s beta had hit a high of 1.65x over the past two years when it encountered rough seas, but we believe that its share price in the future should revert back to its long-term correlation multiple of 1.2x to the FBM KLCI.

We have excluded the valuation of FPSO Armada Perdana’s charter, since we are unclear if it can continue with Erin Energy still under duress.

For the OMS business, we have applied Clarkson’s secondhand market valuation of the OSV fleet to obtain a rough indicative liquidation value of BAB’s OMS fleet. We have also included the DCF value of the long-term charter contracts with LukOil for three ice-class OSVs, which each carry a 10-year firm period until June 2026, followed by options that extend for a maximum of 20 more years for each vessel (four options of five years each).

Finally, we deduct other net borrowings (cash balance, minus other non-project financing debt) to obtain our final valuation.

This works out to be an SOP of RM1.05/share, comprising 63 sen for the firm period only, and 41 sen for the full option period.


54

Figure 27: SOP valuation - as at end-FY17F


Figure 28: Cost of equity calculation

SOURCES: CIMB, BLOOMBERG

The next step in our valuation process is to establish several probability scenarios for the exercise of the option period.

In Scenario 1, we assume that the entire option period for each FPSO is fully exercised, together with the firm period. The SOP valuation for BAB in this case, would be RM1.05/share.

In Scenario 2, where only 25% of the option periods are ultimately exercised, the SOP valuation would decline to RM0.74/share.

Scenario 3 assumes that 50% of the option periods are exercised, leading to an SOP valuation of RM0.84/share.

Finally, in our base case scenario, we assume that 75% of the option periods will be exercised, which yields an SOP valuation of RM0.94/share.

A 75% rate of option-period exercise would be consistent with past global historical trends, according to BAB. During the option period, the BBC rate steps down materially, which would help to make the continued employment of

BAB's equity stake (%) Full firm + option period Firm period only Option period only

RM m RM m RM m

VALUATION OF FPSO BUSINESS

a DCF value to equity 7,596.8 5,225.2 2,371.5

- Armada TGT1 100% 478.0 47.4 430.6

- Armada Kraken 100% 1,959.2 1,176.2 783.0

- Armada Olombendo 100% 3,323.0 2,652.6 670.4

- Armada LNG Mediterrana 100% 243.4 243.4 0.0

- Armada Sterling 1 50% 381.0 131.8 249.2

- Armada Sterling 2 50% 474.8 259.4 215.4

- Armada Sterling 3 49% 737.5 714.5 23.0

Excluded from the valuation

- Value of Armada Perdana's charter 100% 534.4 437.9 96.5

Exchange rate (RM:US$1) 4.30 4.30 4.30

VALUATION OF OMS BUSINESS

m Estimated secondhand market value of vessels 1,072.8 1,072.8

n PV of 3 x ice-class charter contracts with Lukoil 121.0 67.6 53.5

o = m + n Total OMS valuation 1,193.9 1,140.4 53.5

VALUATION OF BUMI ARMADA GROUP

Group valuation 6,147.8 3,722.8 -217.8

a - FPSO 7,596.8 5,225.2 2,371.5

o - OMS 1,193.9 1,140.4 53.5

- Other net borrowings -2,642.8 -2,642.8 -2,642.8

No of shares (m) 5,866.3 5,866.3 5,866.3

Group valuation (RM/share) 1.05 0.63 0.41

- FPSO 1.29 0.89 0.40

- OMS 0.20 0.19 0.01

- Other net borrowings -0.45 -0.45

Attributable to BAB's equity stake

Risk-free rate 4.0%

Equity risk premium 6.0%

Beta 1.20

Cost of equity (nominal) 11.2%

Inflation rate (%) 3.0%

Cost of equity (real) 8.0%


55

the FPSO economical, since the rate of oilfield production is likely being depleted.

Figure 29: SOP valuation per share (as at end-FY17F) - based on varying levels of contractual exercise of option periods


We now consider some of the potential upsides to BAB’s valuation. First, debt recovery from Erin Energy from the Armada Perdana charter contract may amount to a maximum of 5 sen/share, while the remaining duration of the charter until the end of its firm charter period is worth between 8 sen and 9 sen/share. Meanwhile, the value of BAB’s claim with respect to the premature termination of the Armada Claire charter contract is worth 21 sen/share. In a very blue-skies scenario, BAB may be able to enhance its value by a total of between 33 sen and 35 sen/share. If we assume that BAB can capture half of this value, that will be worth 17 sen, which we can add to our base case target price of 94 sen, to derive a total value of RM1.12/share.

However, there are many obstacles in BAB’s way, arising from the stressed financial situation of Erin Energy, and the likely-lengthy period of time that it would take for the Armada Claire case to weave its way through the Australian court system. As such, we do not think investors should factor any of these potential upsides into the valuation.

Conversely, we think investors should probably factor in a potential rights issue into the valuation of BAB. There is a chance that BAB may seek to strengthen its balance sheet in preparation for the potential bidding for new projects, or wait for the new projects to be actually secured first. In the latter case, a rights issue is almost certain to materialise.

We are making the assumption that BAB will issue 2,000m new rights shares priced at RM0.50 each to raise proceeds of RM1bn. On this basis, our original target price of RM0.94 will decline to an ex-rights target of RM0.83. We gross


Full firm + option

period

Full firm + 25% of

option

Full firm + 50% of

option

Full firm + 75% of

option

VALUATION OF FPSO BUSINESS

a Firm period value (RM/share) 0.89 0.89 0.89 0.89

b Option period value (RM/share) 0.40 0.10 0.20 0.30

c = a + b Total FPSO value (RM/share) 1.29 0.99 1.09 1.19

VALUATION OF OMS BUSINESS

m Est secondhand market value of vessels (RM/share) 0.18 0.18 0.18 0.18

n = o + p PV of 3 x ice-class charter contracts with Lukoil 0.02 0.01 0.02 0.02

o - Firm period value (RM/share) 0.01 0.01 0.01 0.01

p - Option period value (RM/share) 0.01 0.00 0.00 0.01

q = m + n Total OMS value (RM/share) 0.20 0.20 0.20 0.20

r Other net borrowings (RM/share) -0.45 -0.45 -0.45 -0.45

VALUATION OF BUMI ARMADA GROUP

s = c + q + r Total (RM/share) - 'as is' operations 1.05 0.74 0.84 0.94

t Add: Half the value of potential upsides 0.17 0.17 0.17 0.17

s + t Total (RM/share) - inclusive of half of potential upsides 1.22 0.90 1.01 1.12

Potential upsides

RM m RM m RM m RM m

Debt recovery from Armada Perdana (RM m) 278.3 278.3 278.3 278.3

Remaining DCF value from Armada Perdana contract 534.4 462.0 486.1 510.2

Armada Claire's court claim 1,219.1 1,219.1 1,219.1 1,219.1

Total (RM m) 2,031.7 1,959.4 1,983.5 2,007.6

RM/share RM/share RM/share RM/share

Debt recovery from Armada Perdana (RM m) 0.05 0.05 0.05 0.05

Remaining DCF value from Armada Perdana contract 0.09 0.08 0.08 0.09

Armada Claire's court claim 0.21 0.21 0.21 0.21

Total (RM/share) 0.35 0.33 0.34 0.34


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this up by an implied bonus element in the rights of 0.91, in order to derive our target price of RM0.92/share on a cum-rights basis. The implied bonus element of 0.91 is calculated as the theoretical ex-rights price of RM0.71 divided by the share price of RM0.78 at the time of writing.

We highlight that our target price of RM0.92 assumes that BAB will be able to derive full value from the firm charter period of all its existing FPSO assets, but that only 75% of the option periods will be ultimately exercised.

Based on Scenario 1, which assumes that BAB will be able to obtain quiet enjoyment of the full firm charter period, as well as for the full optional charter periods, for all its existing FPSO assets, BAB is worth a maximum of RM1/share, after incorporating the dilutive impact of the rights. This declines to RM0.83/share assuming that charterers will exercise 50% of the option periods (Scenario 3), and declines further to RM0.75/share assuming only 25% of the option periods are exercised (Scenario 2).

Although we are not able determine in advance what proportion of the option periods will ultimately be exercised, we have used the assumption of 75% option exercise rate as our base case, as this is backed up by long-term historical trends seen in the FPSO market.

Figure 30: Impact of potential rights issue on our target price


In Scenarios 1, 2 and 3, as well as in our Base Case scenario, we have not assumed any incremental contribution from potential contract wins. As mentioned previously, ONGC’s KG-DWN-98/2 field development plan calls for an FPSO solution, with the pre-qualification process having commenced on 6 June 2017, and with the technical and commercial bids due to be submitted by 31 July 2017. If BAB wins this FPSO charter contract, which could be for 9-firm and up to 6-option years, BAB and its 50:50 JV partner may have to put up capex of around US$1.2bn, with the firm charter period commencing as early as March 2020.

Potential rights issue?

Assumed amount to be raised (RM m) 1,000

Rights issue price (RM/share) 0.50

Number of rights shares to be issued (m) 2,000

Impact of potential rights issue on our target price


Full firm + option

period

Full firm + 25% of

option

Full firm + 50% of

option

Full firm + 75% of

option

RM m RM m RM m RM m

Pre-rights



Valuation of BAB's existing business (RM/share) 1.05 0.74 0.84 0.94

Post-rights


Add: Value of rights issue 1,000.0 1,000.0 1,000.0 1,000.0

x Total value (RM m) 7,147.8 5,329.1 5,935.3 6,541.6


Add: New rights shares 2,000.0 2,000.0 2,000.0 2,000.0

y Enlarged share base (m) 7,866.3 7,866.3 7,866.3 7,866.3

z = x / y Valuation on ex-rights basis (RM/share) 0.91 0.68 0.75 0.83

Gross up for implied bonus element in rights 0.91 0.91 0.91 0.91

Cum-rights equivalent (RM/share) 1.00 0.75 0.83 0.92


57

Figure 31: Calculation of the theoretical ex-rights price (TERP) and implied bonus adjustment factor


P/BV and P/E valuation charts

BAB is currently trading at a very low historical P/BV multiple of 0.8x, which is at its trough of 1 standard deviation below the mean since its relisting in mid-2011.

Its one-year forward P/E multiple is also at 1 standard deviation below the mean, or 10.6x based on Bloomberg consensus for FY18F earnings. Our FY18F core EPS forecasts are slightly more than double that of consensus, hence we are forecasting BAB’s FY18F P/E at only 5x, which would be an all-time bargain.

Figure 32: Bumi Armada Bhd's historical P/BV chart


Figure 33: Bumi Armada Bhd's 1-year forward P/E chart (based on Bloomberg consensus)


No of shares Price (RM) Mkt cap (RM m)

Current 5,866.3 0.78 4,575.7

Rights 2,000.0 0.50 1,000.0

Total 7,866.3 0.71 5,575.7

Implied bonus adjustment factor (B / A) 0.91

A

B - TERP

Title:

Source:


+1 std dev

+2 std dev

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Average since 2011

+1 std dev

+2 std dev

-1 std dev

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


Title:

Source:


Average since 2011

+1 std dev

+2 std dev

-1 std dev

-2 std dev

0

5

10

15

20

25


OOil & Gas - Equipment & Svs│Malaysia│Bumi Armada│June 7, 2017

58

Sector comparison table

Figure 34: Sector comparisons


Price Target PriceDividend

Yield (%)

(local curr) (local curr) CY17F CY18F CY17F CY18F CY17F CY18F CY17F CY18F CY17F

Sapura Energy Bhd SAPE MK Hold RM1.82 RM1.83 2,556 105.7 46.1 -14.8% 0.8 0.8 0.8% 1.8% 12.6 10.5 0.5%

UMW Oil & Gas UMWOG MK Reduce RM0.52 RM0.47 263 na na na 1.1 1.2 -9.0% -7.2% 45.5 41.9 0.0%

Perisai Petroleum PPT MK Reduce RM0.05 RM0.00 15 na na na 0.2 0.9 -39.8% -53.6% 24.6 991.7 0.0%

Petronas Dagangan Bhd PETD MK Hold RM24.24 RM24.14 5,644 23.4 22.7 4.4% 4.3 4.1 18.8% 18.4% 15.9 15.3 3.2%

Selected Malaysia O&G players 51.1 46.6 -2.4% 1.7 1.7 3.3% 3.6% 14.7 13.2 2.1%

Bumi Armada BAB MK Add RM0.75 RM0.92 1,024 12.9 4.9 na 0.7 0.6 5.8% 13.8% 13.2 8.5 0.0%

SBM Offshore SBMO NA Not Rated €13.50 - 3,249 22.4 15.2 8.5% 1.3 1.2 5.1% 8.4% 10.9 10.1 1.5%

BW Offshore BWO NO Not Rated Nok20.70 - 452 11.2 na na 0.5 0.5 4.4% -1.6% 4.9 6.9 0.0%

MODEC Inc 6269 JT Not Rated ¥2,422 - 1,248 6.2 7.5 -12.7% 1.2 0.9 18.0% 14.3% 11.7 5.8 1.6%

Yinson Holdings YNS MK Not Rated RM3.38 - 862 17.8 15.5 0.2% 1.6 1.6 8.7% 10.2% 21.7 12.4 0.6%

MISC Bhd MISC MK Reduce RM7.48 RM6.52 7,825 15.1 19.0 -5.2% 0.9 0.9 6.0% 4.6% 9.1 9.6 2.0%

FPSO group 14.3 14.1 9.7% 1.0 0.9 6.6% 6.7% 9.8 9.2 1.6%

Bumi Armada BAB MK Add RM0.75 RM0.92 1,024 12.9 4.9 na 0.7 0.6 5.8% 13.8% 13.2 8.5 0.0%

Perisai Petroleum PPT MK Reduce RM0.05 RM0.00 15 na na na 0.2 0.9 -39.8% -53.6% 24.6 991.7 0.0%

Bourbon Corp GBB FP Not Rated €9.65 - 831 na na na 0.7 0.9 -22.4% -28.8% 19.4 24.0 2.5%

Tidewater TDW US Not Rated US$0.78 - 37 na na na 0.0 0.0 -9.1% -14.0% 17.9 na 0.0%

Seacor Holdings CKH US Not Rated US$36.23 - 636 na na na 0.6 0.6 -8.8% -4.1% na 11.9 0.0%

Hornbeck Offshore Services HOS US Not Rated US$1.91 - 70 na na na 0.0 0.1 -4.5% -8.4% 14.9 na 0.0%

Farstad Shipping FAR NO Not Rated Nok0.28 - 156 na 1.3 na 0.0 0.5 -7.6% 4.7% 23.2 3.7 0.0%

Ezra Holdings EZRA SP Not Rated S$0.01 - 23 na na na 0.1 1.0 -77.9% -150.8% na na 0.0%

Ezion Holdings EZI SP Reduce S$0.25 S$0.26 376 39.4 15.5 na 0.3 0.3 0.7% 1.9% 9.0 8.1 0.0%

Vallianz Holdings Limited VALZ SP Add S$0.02 S$0.07 49 1.9 1.8 na 0.2 0.2 9.6% 9.4% 2.1 1.6 4.1%

Pacific Radiance PACRA SP Reduce S$0.11 S$0.11 58 na na na 0.2 0.3 -17.1% -9.6% na 41.1 0.0%

PACC Offshore POSH SP Not Rated S$0.30 - 394 na na na 0.57 0.60 -53.9% -6.7% 53.4 26.6 0.0%

OSV group na na na 0.3 0.4 -10.9% -4.9% 27.8 13.7 0.6%

Average (all) na 40.9 na 0.6 0.7 -1.2% 1.6% 13.2 10.6 1.4%

P/BV (x) Recurring ROE (%) EV/EBITDA (x)Company Bloomberg Ticker Recom.

Market Cap (US$

m)

Core P/E (x) 3-year EPS

CAGR (%)

Offshore & Marine│Malaysia│Bumi Armada│June 7, 2017

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APPENDIX 1: THE FPSO INDUSTRY

BAB is a medium-sized player

The FPSO ownership landscape is fairly evenly split between the independent leasing companies and the oil companies.

According to Energy Maritime Associates (EMA), independent leasing companies have a total capacity of some 88 units, comprising 65 units in operation, seven units on order, 15 units idled but available for charter, and one unit under repair. These units are owned and operated by the independent leasing companies, for the purpose of chartering out to oil companies.

By comparison, oil companies have a total capacity of 78 units, comprising 61 units in operation, 15 units on order, and 2 units idled. These units are specifically for the oil companies’ own use.

The oil company with the largest number of owned FPSOs is Petrobras, with a total of 26 units, comprising 14 units in operation and 12 more on order. This is followed by CNOOC with a total of 14 units, comprising 12 units in operation and two units available. Total is in third place, with a total of nine units, six in operation and three more on order.

Among the independent leasing companies, SBM Offshore and BW Offshore are tied in first place in terms of number of FPSOs, although SBM has 13 units in operation, more than BW Offshore’s 10 units. MODEC is in third place, with a total of 14 units, of which 12 are in operation. Teekay is the fourth-largest independent leasing company, with a total of 11 units, of which eight are in operation, one idled, and two are on order. This is followed by BAB in fifth place, with 10 units, of which eight are in operation, and two are idled.

Figure 35: Top FPSO owners as at January 2017

SOURCES: ENERGY MARITIME ASSOCIATES


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In terms of individual FPSO size, MODEC and SBM Offshore lead the pack as these two market leaders are typically engaged in large FPSO conversions which have a capacity to process between 80,000 bopd and 150,000 bopd.

Other independent leasing companies like BW Offshore, Teekay, Bluewater and BAB have traditionally been involved in the conversion of relatively small FPSOs of below 60,000 bopd processing capacity, and have gradually migrated to the 80,000 bopd medium-sized FPSO range.

Based on BAB’s experience, FPSOs with suezmax-sized hulls and with processing capacity of 40,000 bopd–55,000 bopd, like the Armada Perdana and Armada TGT1, cost around US$450m in capex. Suezmax or VLCC-sized hulls with processing capacity of 80,000 bopd, like the Armada Kraken or Armada Olombendo, cost between US$1bn and US$1.4bn in capex.

Figure 36: FPSO contractors’ positioning in terms of size

SOURCES: SBM OFFSHORE

FPSO awards likely to pick up from FY17F

According to EMA, the number of new FPSO contract awards has declined considerably together with the oil price collapse. Between 2011 and 2014, between 11 and 14 FPSO contracts were awarded annually, but the number of awards declined to a mere four in 2015, and only three in 2016.

However, EMA expects a turnaround from 2017F onwards. In a mid-case scenario assuming oil prices trade in the US$50-70/bbl range, EMA expects a total of 50 FPSO awards in the five years between 2017F and 2021F, with eight FPSO awards in 2017F, followed by between 10 and 11 annually from 2018F to 2021F. Petrobras is expected to award 2-3 FPSOs annually, which is already included in the numbers above.

Out of these 50 FPSO awards in the next five years, tanker-to-FPSO conversions are expected to account for only 15 units, with 21 expected newbuildings, and 14 redeployment of existing idled FPSOs. Also, only 15 leased units are expected to be in the production capacity range of between 50,000 bopd and 100,000 bopd. BAB’s comfort zone is in tanker-to-FPSO conversions and in units with processing capacity of less than 100,000 bopd, so BAB’s addressable market is for 15 units over the next five years.


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The number of FPSO awards would be lower in the low-case scenario if oil prices are in the US$30-50/bbl range, while the high-case scenario will materialise if oil prices rise to the US$70-90/bbl range.

Figure 37: The number of new Floating Production System contract awards have declined with the oil price


Figure 38: Number of FPSO awards expected for 2017F to 2021F



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Timelines for FPSO deployment

FPSO contracting and deployment typically follow the sequence below.

1. Technical front-end engineering design

2. Bidding and agreement on the commercial terms

3. Construction/conversion at the yard, followed by sail-away to location

4. Hook-up of the FPSO at the field

5. First oil/gas – First oil/gas is achieved once the FPSO has power generation and the systems on-board can be started

6. Testing of the systems onboard the FPSO

7. Acceptance by client, which officially starts the firm contract period *

* Acceptance is granted once all the systems are in place and running – both the subsea systems as well as the topside systems – and the oil extraction, processing and water injection carries on uninterrupted for 72 straight hours without incident. Once this is achieved, the FPSO asset is accepted by the charterer and the firm contract period begins.

Notes on the commercial management of the FPSO assets

Bareboat charter (BBC) and Operations and Maintenance (O&M) rates

BAB only bareboat charters its FPSOs, and does not contract for time charters. The bareboat charter (BBC) rate covers the funding and interest costs and debt repayment obligations, while a separate Operations and Maintenance (O&M) rate will be contracted with the client to cover the operating costs.

The O&M rate covers the reimbursable costs of operations and maintenance, hence O&M rates are not always fixed rates. O&M costs are reimbursable because clients may have specific requirements that can change (e.g. to add additional crew, or to perform additional repairs, etc.).

There can be a lot of variation in O&M costs, and hence the O&M chargeback can fluctuate from period to period. However, all O&M costs are reimbursable, hence even if crew or engineering costs exceed initial expectations, the client will reimburse the extra costs.

This is the reason why BAB does not contract for time charters, because fixed time charter rates lump together both the BBC portion and the O&M portion. If the O&M costs, over time, exceed what had been agreed upon initially and what had been embedded in the fixed time charter rate, the FPSO operator may make a loss on the escalating O&M costs in the latter years of the contract, which would eat up its BBC hire and destroy the economics of the FPSO charter contract.

The only rate that is completely fixed is the BBC rate. The bareboat charter rate is fixed for the entire duration of the firm period, then steps down for the entire option period. Even if the option period is expressed in terms of 5 x 1-year contracts, the bareboat charter rate for the option period is fixed for the entire five-year duration. The BBC rates for both the firm and option periods are pre-agreed and fixed at the initial contract signing (i.e. during the initial contract award).

Once the firm contract is finished, there is always a reduction in the BBC rate as the charter is extended into the option period. Typically, the level of production at the field will decline naturally, so the client will always need the BBC rate to be reduced for it to make economic sense to continue chartering the FPSO. Also, BAB will not have any debt on the asset during the option period, so BAB is well-positioned to accept a lower BBC rate.

As long as the field continues to produce, the client will usually renew the charter into the option periods, as long as the production of the field is sufficient to make economic sense and enough to pay for the reduced cost of the FPSO charter.

BAB bids for FPSO contracts to achieve 11-12% IRR on the BBC rate only (excluding O&M), over the firm period only (excluding the option period), and on the assumption of an accelerated depreciation of the asset over the firm charter period, leaving a very low asset residual value at the end of the firm charter. As


63

a result of the accelerated depreciation during the firm charter period, if the asset charter is extended into the option period, the IRR rate during the option period will typically be much higher that the IRR rate during the firm charter period, even if the BBC rate is reduced for the option period.

Managing the vessel conversion process

A converted FPSO is certified to last the total number of years of the contract, including both the firm contract period and the subsequent option years. For instance, BAB’s FPSO Armada Kraken is certified to last for 25 years, comprising eight firm years and 17 option years. During this entire period of 25 years, the FPSO Armada Kraken does not need to be dry docked and can remain moored at the Kraken field.

The exercise of the option period is entirely at the client's discretion, and it will not be possible to remove the FPSO from the field at the end of the firm period, and sail it to the dry dock to extend the useful life of the vessel for the purposes of serving the option period.

Therefore, each conversion has to be designed to withstand the entire contract term. Even if there is a risk that the client will not extend the charter beyond the firm period, BAB will still have to get the asset ready to last the entire option period.

The biggest mistake that a vessel owner can suffer is cost overrun on the vessel capex and conversion cost, leading to the inability of BBC to cover the capex cost and financing costs, forcing some operators in extreme cases to use the O&M rate to subsidise the shortfall. At the very least, cost overrun on vessel conversion or construction can cause the operator to miss its IRR target on the FPSO charter contract.

To prevent such an eventuality, BAB has an in-house engineering, project management and execution team, and an in-house procurement team. This minimises the opportunity for third-party suppliers to levy charges that contribute to the ballooning of capex costs. Without an integrated in-house design, engineering and project management team, operators may have to use an external design team that may or may not be well integrated with the yard, which could lead to rework, redesign, re-fabrication, shipyard delays and extra procurement costs.

BAB procures all the major equipment packages in-house and hands it over Keppel Singapore for installation on the FPSO. Sometimes, BAB sends equipment to Dyna-Mac for fabrication of certain modules and then the completed module is handed over to Keppel for installation.

BAB’s in-house project management team will exercise supervision over Keppel at the yard itself, always monitoring Keppel so as to ensure it is keeping to the work schedule and to the technical specifications of the FPSOs.

Due to the technical complexity of FPSO vessels, the delivery may be delayed due to various reasons, including client requests for equipment changes or specification changes, or engineering design issues most likely involving the topside or mooring systems. Typically, charter contracts specify the maximum liquidated ascertained damages (LAD) that the operator has to bear in relation to delays. For the Armada Kraken, the LAD is limited to US$20m.

BAB will always insist on a minimum upfront payment of 10% of the total capex from the client, to be paid during the conversion period following the achievement of certain project milestones. During the conversion period, 10% of the capex spent will be recognised as construction profit in the revenue line, mirroring what will be received in cash from the client as upfront payments.

Asset owner vs. local bidding company

The asset-owning company of the FPSO vessel may be different from the local company that bids for the FPSO charter contracts.

In the case of the Armada Sterling 1, the asset owner is Armada D1 Pte Ltd which is based in Singapore. Because this company is 50% owned by BAB, it is prohibited from bidding for ONGC’s FPSO charter contract in India.

http://www.dyna-mac.com/


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The company that ultimately bid for the ONGC contract was Forbes Bumi Armada Offshore Limited (FBAOL), which is 49.998% owned by BAB, with the remaining stake owned by BAB’s Indian partner, and which is considered as a local Indian company. Majority local asset ownership requirements need to be fulfilled in India.

FBAOL charters in the FPSO Armada Sterling 1 from Armada D1 Pte Ltd, and charters out the same ship to ONGC at the D-1 field. The asset-owning company is a Singapore-incorporated entity, because Singapore does not charge income taxes for vessel-owning companies.

The arrangement in Indonesia is similar, as local asset ownership requirements also need to be fulfilled in that country.

In Nigeria, there are no local asset ownership requirements, hence the entity owning the two FPSOs (Armada Perdana and Armada Perkasa) are 100% owned by BAB, and the entity holding the Nigerian charter contracts is Bumi Armada (Singapore) Pte Ltd, which is also 100% owned by BAB.

While Singapore exempts shipping companies from income taxes, the Singapore-incorporated asset owning company only receives its BBC net of withholding taxes applicable in the country where the FPSO is operating. As such, BAB’s international FPSO operations are still subject to taxes.

Keeping uptime up

FPSO charterers typically require operators to maintain a minimum asset operating uptime of at least 95% or 97%. If the operator is not maintaining the unit or not operating the unit properly, the uptime will fall, and the operator will be penalised by its client via a BBC rate discount.

Figure 39: BAB’s FPSO uptime performance has generally been very good

SOURCES: BAB


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The role of project financing and bridging debt

The project financing arranged for FPSO conversion projects typically covers 70% of the capex cost. However, during the initial phases of the conversion process, before project financing has been arranged, BAB tends to use more of its own equity, such that the equity portion of the capex may reach as high as 50%, with the remainder covered by bridging finance. Once the project financing kicks in, BAB will recover the 20% excess equity invested in the project from the incoming project financing. The reason for the greater use of equity capital in the initial phase of the conversion process is because bridging finance is typically more expensive.

In order to manage the risks arising from the uncertainty over whether the client will extend into the option period or not, BAB will structure the project financing such that the entire debt taken to fund the purchase and conversion of the FPSO will be fully repaid at the end of the firm period. Therefore, during the option period, BAB's FPSOs will be debt-free.

Project financing is usually denominated in US$, and are all floating rate term loans. Interest rate swaps are used to hedge floating-rate US$ loans against rising interest rates. We estimate that 47% of the BAB’s floating-rate US$ loans have been swapped into fixed rates as at end-FY16.

The project finance term loans are secured debt, secured against the actual FPSO asset and against the asset-owning company. The banks also typically seek a corporate guarantee from the charterer of the vessel. However, the banks typically have no recourse to the parent company Bumi Armada Berhad (BAB) itself, except during the conversion/construction process and up to six months after the commencement of the FPSO’s operations, upon which the guarantees provided by BAB will end.

For instance, when Woodside prematurely terminated the charter contract for the Armada Claire FPSO, the banks funding the project finance debt have a lien over the vessel itself, and have a right to claim against Armada Balnaves Pte Ltd, the asset-owning company. The banks also have a right to claim against the guarantee provided by Woodside, but no right to claim against BAB, even though the latter is the direct holding company of Armada Balnaves Pte Ltd.

As it turned out, Armada Balnaves Pte Ltd did not have sufficient cash to settle the US$85m in outstanding project financing debt, and the banks would not be able to easily liquidate the FPSO Armada Claire. This means that the banks would have to pursue recovery from Woodside, which will clearly be a very difficult legal process since Woodside itself had unilaterally and prematurely terminated the charter contract.

The US$85m residual project financing debt was ultimately settled by BAB itself, even though the banks technically did not have the legal right to pursue BAB for restitution and repayment. But from a commercial perspective, and to ensure cordial relations with its banks, BAB would not allow an event of default at any of its subsidiaries, so BAB opted to settle the outstanding debt first, and then sue for restitution from Woodside.


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FPSO redeployment to smaller fields

The Armada Claire is a reasonably-good redeployment candidate because she has removable turret mooring, and the vessel is designed to connect and disconnect easily. As long as the number of risers, and gas receivable and export lines are similar at the new field compared to the previous Balnaves field, then the work to relocate and redeploy the FPSO to the new field will be made easier.

If the FPSO Armada Claire gets a new charter contract, the topside may or may not need to be replaced, depending on the specifics of the new field. Redeployment to an equivalent same-sized field will very likely require topside equipment changes.

In order to eliminate the need to replace the topside, and to avoid additional capex, BAB can redeploy the Armada Claire to smaller or more marginal fields, which will require less processing capacity than what the FPSO is able to handle. This is so that BAB does not have to re-engineer or make extensive equipment changes to cater to the requirements of the new field, and is able to simply reuse what the vessel already has onboard.

Trading down to a smaller field means there will be fewer issues related to the adequacy of gas processing, water injection, and oil processing capabilities of the FPSO. BAB does not mind trading down because it has already written down the value of the Armada Claire, so its profitability will not be affected by redeployment to a smaller field with a lower BBC rate. The key for BAB, first and foremost, is to find alternative work for the Armada Claire, and secondly, to avoid having to spend capex to replace the topside equipment.


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APPENDIX 2: THE OSV INDUSTRY

Brief introduction

Offshore Service Vessels (OSV) are comprised of Anchor Handling Vessels and Platform Supply Vessels (PSV).

The primary purpose of Anchor Handling Vessels is to tow offshore drilling rigs and production platforms from one location to another as well as to place and recover the anchors of those rigs and platforms. To perform these tasks, the vessels are equipped with powerful on-board thrusters, winches for towing platforms and rigs, and a large open deck space for storing the anchors during transit.

The main role of the PSVs, on the other hand, is to bring supplies of various materials, such as drilling fluids, diesel, food, water, etc., from onshore bases to the offshore locations of the rigs and platforms.

Eighty-percent of BAB’s Anchor Handling Vessel fleet is made up of AHTS vessels, or Anchor Handling Tug and Supply vessels, with the remaining 20% comprised of Accommodation Work Barges (AWB) vessels.

In Southeast Asia, AHTS vessels have traditionally performed the role of the PSVs in addition to their primary tug-and-anchor handling duties. Nevertheless, over the past half-decade, PSVs have gradually infiltrated this market for supply duties.

AHTS are categorised according to their brake horse power (bhp) or their bollard pull (bp). Bhp represents the strength of the engine while bp represents the towing or pulling power of the vessel. Both bhp and bp are closely intertwined.

Very-large AHTS: 20,000 bhp, 240 tonnes bp

Large AHTS: 16,000 bhp, 200 tonnes bp

Medium-sized AHTS: 10,000 bhp, 120 tonnes bp

Small AHTS: 6,000 bhp, 80 tonnes bp

PSVs are categorised according to their capacity to carry supplies and provisions, which is measured in deadweight tonnes (dwt) or the area of their deck area.

Very-large PSVs: 5,000 dwt, 1,000 sq m of deck space

Large PSVs: 4,000 dwt, 800 sq m of deck space

Medium-sized PSVs: 3,200 dwt, 700 sq m of deck space

Small PSVs: <2,000 dwt, ~300 sq m of deck space

The largest AHTS and PSVs are typically used in harsh environments like the North Sea, whereas the smaller vessels are used in shallow-water, benign environments like in the Middle East and Southeast Asia.

The ownership of the OSV sector is very fragmented. The largest player in the OSV market – Tidewater Marine (TDW US) – owns just 5% of the global AHTS fleet and 6% of the global PSV fleet, or a total 5.5% of the total OSV fleet.

The second-largest player is Bourbon Corp (GBB FP), which owns 3.5% of the OSV and 4.9% of the PSV fleet, or an overall 4.2% of the OSV fleet.

The third-largest player is ECO, which has a small 1.1% share of the OSV fleet but a leading 6.6% share of the PSV fleet, for an overall 3.7% share.

The top 10 players only own 23% of the overall OSV market, with approximately 1,400 owners in total, each owning an average of just four vessels.

As a result of the market fragmentation, owners do not have the ability to control or materially influence supply in the market. Hence, competition is always going to be intense and, in periods of oversupply, rates will collapse as they have in the present oil and gas downcycle.


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Figure 40: Top AHTS owners Figure 41: Top PSV owners

SOURCES: CLARKSONS SOURCES: CLARKSONS

Charter rates continue to decline

The absolute demand for AHTS and PSV units and their utilisation rates have stabilised since the start of 2017. However, their charter rates have mostly continued on their downslide in recent months.

This was most likely due to competition among desperate owners since the utiilisation rates for both the OSV and PSV sectors were at only 42% at the end of April 2017, leaving many owners short of cash to service their debt obligations and other commitments.

We do not expect this situation to change materially in the short-to-medium term due the presence of large numbers of warm- and cold-stacked vessels as well as the extant orderbook. Much of the orderbook is likely already completed by the yard but not delivered due to owner default. As such, when the charter rates for AHTS and PSVs recover, these completed vessels may find an alternative buyer and begin competing with existing vessels.

Figure 42: AHTS 8,000+ bhp demand and supply (units) and utilisation rate (%)

Figure 43: PSV 2,000+ dwt demand and supply (units) and utilisation rate (%)


Title:

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2010 2012 2014 Jan2016

Mar May Jul Sep Nov Jan2017

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2010 2012 2014 Jan2016

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69

Figure 44: AHTS Term Charter Rates, South East Asia, 5,000 bhp (US$/day)

SOURCES: CIMB, CLARKSONS





Title:

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Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Change (yoy %)

SEA AHTS term charter rates, 5,000 bhp (US$/day)

Title:

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70

Figure 47: PSV Spot Charter Rates, South East Asia, 500-749m²


Figure 48: PSV Spot Charter Rates, South East Asia, 750-999m²


Title:

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SEA PSV spot charter rates, 500-749m² (US$/day)

Title:

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71

Figure 49: OSV term charter rates (US$/day) - AHTS and PSV


SEA

5,000 bhp

SEA

8,000 bhp

SEA

10,000 bhp

SEA

12,000 bhp

Mid East

5,000 bhp

W. Africa

5,000 bhp

SEA

500-749m²

SEA

750-999m²

Mid East

500-750m²

W. Africa

500-749m²

US$/day US$/day US$/day US$/day US$/day US$/day US$/day US$/day US$/day US$/day

1Q 12 8,498 13,483 15,083 18,087 N/A 11,500 19,763 21,763 N/A 25,667

2Q 8,279 14,160 15,750 18,913 N/A 11,583 20,908 22,500 N/A 25,667

3Q 8,411 14,743 16,000 20,023 N/A 11,417 21,300 23,146 N/A 26,167

4Q 8,618 14,744 16,500 19,300 N/A 11,000 21,363 24,017 N/A 23,000

1Q 13 8,520 13,703 18,000 18,784 N/A 12,167 19,796 24,158 N/A 22,167

2Q 8,714 13,612 19,667 19,170 N/A 11,583 19,733 23,521 N/A 23,000

3Q 9,225 14,184 19,833 20,700 N/A 11,833 20,229 23,617 N/A 23,667

4Q 9,098 15,256 19,500 22,032 11,500 12,500 20,250 23,583 18,000 23,833

1Q 14 8,785 14,960 20,500 20,920 11,333 12,833 19,667 22,167 18,000 22,833

2Q 8,610 14,667 20,500 21,267 11,917 12,750 19,063 21,750 19,500 23,167

3Q 7,812 14,072 19,500 21,469 10,667 13,000 17,583 21,400 16,767 22,000

4Q 7,935 13,687 17,333 22,032 10,333 12,333 17,450 22,000 16,333 20,000

1Q 15 7,062 13,153 15,773 19,829 9,000 10,350 16,227 20,500 13,000 16,333

2Q 6,151 11,897 12,996 15,963 8,667 10,233 14,083 15,333 13,583 12,167

3Q 5,189 11,540 12,105 15,014 7,667 9,500 11,533 13,033 12,500 11,000

4Q 5,150 11,040 12,510 13,862 6,917 9,333 11,458 12,792 12,083 9,333

1Q 16 4,880 8,448 10,224 11,383 5,167 8,667 8,900 9,583 9,833 8,500

2Q 4,602 7,395 9,520 11,128 5,167 8,500 8,025 9,167 10,667 8,500

3Q 4,326 6,848 8,626 10,069 5,250 8,000 6,840 8,060 9,333 8,000

4Q 3,584 6,552 7,693 9,070 4,833 7,667 6,278 7,147 8,500 8,000

1Q 17 3,296 6,131 6,620 8,103 4,333 7,500 6,167 6,813 7,917 7,500

2Q to date 3,154 5,520 5,940 8,537 4,000 7,250 6,000 6,200 7,500 7,500

Change yoy (%)

1Q 13 0.3% 1.6% 19.3% 3.9% 5.8% 0.2% 11.0% -13.6%

2Q 5.3% -3.9% 24.9% 1.4% 0.0% -5.6% 4.5% -10.4%

3Q 9.7% -3.8% 24.0% 3.4% 3.6% -5.0% 2.0% -9.6%

4Q 5.6% 3.5% 18.2% 14.2% 13.6% -5.2% -1.8% 3.6%

1Q 14 3.1% 9.2% 13.9% 11.4% 5.5% -0.7% -8.2% 3.0%

2Q -1.2% 7.7% 4.2% 10.9% 10.1% -3.4% -7.5% 0.7%

3Q -15.3% -0.8% -1.7% 3.7% 9.9% -13.1% -9.4% -7.0%

4Q -12.8% -10.3% -11.1% 0.0% -10.1% -1.3% -13.8% -6.7% -9.3% -16.1%

1Q 15 -19.6% -12.1% -23.1% -5.2% -20.6% -19.4% -17.5% -7.5% -27.8% -28.5%

2Q -28.6% -18.9% -36.6% -24.9% -27.3% -19.7% -26.1% -29.5% -30.3% -47.5%

3Q -33.6% -18.0% -37.9% -30.1% -28.1% -26.9% -34.4% -39.1% -25.4% -50.0%

4Q -35.1% -19.3% -27.8% -37.1% -33.1% -24.3% -34.3% -41.9% -26.0% -53.3%

1Q 16 -30.9% -35.8% -35.2% -42.6% -42.6% -16.3% -45.2% -53.3% -24.4% -48.0%

2Q -25.2% -37.8% -26.7% -30.3% -40.4% -16.9% -43.0% -40.2% -21.5% -30.1%

3Q -16.6% -40.7% -28.7% -32.9% -31.5% -15.8% -40.7% -38.2% -25.3% -27.3%

4Q -30.4% -40.7% -38.5% -34.6% -30.1% -17.9% -45.2% -44.1% -29.7% -14.3%

1Q 17 -32.5% -27.4% -35.2% -28.8% -16.1% -13.5% -30.7% -28.9% -19.5% -11.8%

2Q to date -31.4% -25.4% -37.6% -23.3% -22.6% -14.7% -25.2% -32.4% -29.7% -11.8%

AHTS PSV


72

Figure 50: South East Asian OSV term charter rates (US$/day) - AHTS and PSV


Secondhand vessel prices are still declining

Reflecting the pessimism in the market, AHTS secondhand vessel prices have continued to fall, even though newbuilding prices have not budged for some time. As a result, the discount between the 5-year-old vessel prices and the newbuilding prices has widened, a clear indication of the negative sentiment surrounding the OSV sector presently. Back in 2011-13 when the OSV utilisation and charter rates were doing much better, 5-year-old vessel prices were at a much smaller discount to, or even at a premium over, newbuilding prices.

Figure 51: AHTS 5,000 bhp vessel prices (US$ m) Figure 52: AHTS 8,000 bhp vessel prices (US$ m)


1Q 2Q 3Q 4Q Full year 1Q 2Q 3Q 4Q Full year 1Q 2Q 3Q 4Q Full year

2009 11,940 11,500 11,000 9,467 10,977 27,955 24,967 23,000 20,133 24,014 N/A N/A N/A N/A N/A

2010 7,267 9,000 8,580 7,944 8,198 16,667 15,833 17,035 18,733 17,067 N/A N/A 12,000 12,000 12,000

2011 7,880 7,871 8,075 8,480 8,076 16,024 16,891 17,813 17,291 17,005 11,667 13,750 17,500 18,667 15,396

2012 8,498 8,279 8,411 8,618 8,451 18,087 18,913 20,023 19,300 19,081 19,763 20,908 21,300 21,363 20,834

2013 8,520 8,714 9,225 9,098 8,889 18,784 19,170 20,700 22,032 20,172 19,796 19,733 20,229 20,250 20,002

2014 8,785 8,610 7,812 7,935 8,285 20,920 21,267 21,469 22,032 21,422 19,667 19,063 17,583 17,450 18,441

2015 7,062 6,151 5,189 5,150 5,888 19,829 15,963 15,014 13,862 16,167 16,227 14,083 11,533 11,458 13,325

2016 4,880 4,602 4,326 3,584 4,348 11,383 11,128 10,069 9,070 10,413 8,900 8,025 6,840 6,278 7,511

2017 3,296 8,103 6,167

Change yoy (%)

2010 -39.1% -21.7% -22.0% -16.1% -25.3% -40.4% -36.6% -25.9% -7.0% -28.9%

2011 8.4% -12.5% -5.9% 6.8% -1.5% -3.9% 6.7% 4.6% -7.7% -0.4% 45.8% 55.6% 28.3%

2012 7.8% 5.2% 4.2% 1.6% 4.6% 12.9% 12.0% 12.4% 11.6% 12.2% 69.4% 52.1% 21.7% 14.4% 35.3%

2013 0.3% 5.3% 9.7% 5.6% 5.2% 3.9% 1.4% 3.4% 14.2% 5.7% 0.2% -5.6% -5.0% -5.2% -4.0%

2014 3.1% -1.2% -15.3% -12.8% -6.8% 11.4% 10.9% 3.7% 0.0% 6.2% -0.7% -3.4% -13.1% -13.8% -7.8%

2015 -19.6% -28.6% -33.6% -35.1% -28.9% -5.2% -24.9% -30.1% -37.1% -24.5% -17.5% -26.1% -34.4% -34.3% -27.7%

2016 -30.9% -25.2% -16.6% -30.4% -26.2% -42.6% -30.3% -32.9% -34.6% -35.6% -45.2% -43.0% -40.7% -45.2% -43.6%

2017 -32.5% -28.8% -30.7%

AHTS; SEA; 5,000 bhp (US$/day) AHTS; SEA; 12,000 bhp (US$/day) PSV; SEA; 500-749m² (US$/day)

Title:

Source:


0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

J 09 J 10 J 11 J 12 J 13 J 14 J 15 J 16 J 17

Premium/(Discount) %

AHTS 5,000 bhp 5-year old

AHTS 5,000 bhp newbuild

Title:

Source:


0.00

5.00

10.00

15.00

20.00

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-60%

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20%

J 09 J 10 J 11 J 12 J 13 J 14 J 15 J 16 J 17

Premium/(Discount) %

AHTS 8,000 bhp 5-year

AHTS 8,000 bhp newbuild


73

Fleet development

After a period of mid- to high-single-digit percentage growth between 2008 and 2014, we do not expect the global fleet of AHTS and PSV vessels to grow faster than 1.5% p.a. in the next three forecast years.

The annual growth rate is theoretically higher, based on the delivery dates stated in Clarkson’s orderbook database. However, we strongly believe that the delivery dates are ‘flexible’ since owners have deferred delivery in the past and will not hesitate to do so again in the current weak market.

Hence, we have assumed in our fleet development model that today’s outstanding orderbook, which is supposed to be fully delivered by 2018F, will see deliveries extended all the way into 2022F.

We have also assumed that no additional newbuilding orders are made. Conversely, we do not anticipate many demolitions, for reasons we shall explain later.

Figure 53: AHTS fleet development (units) and growth (%)


Figure 54: PSV fleet development (units) and growth (%)


Title:

Source:


0%

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

AHTS <4,000 bhp fleet (units) AHTS 4,000-7,999 bhpAHTS 8,000-11,999 bhp AHTS 12,000-15,999 bhpAHTS 16,000+ bhp Growth (%)

Title:

Source:


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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

PSV <2,000 dwt fleet (units) PSV 2,000-2,999 dwt PSV 3,000-3,999 dwt

PSV 4,000+ dwt Growth (%)


74

The charts below show the historical development of deliveries and newbuilding orders. Fleet deliveries have declined significantly from 2016 onwards as owners have cancelled or rescheduled the delivery dates in view of the weak charter markets. Meanwhile, newbuilding orders have virtually disappeared from 2015-2016 onwards.

Figure 55: AHTS fleet deliveries (units) Figure 56: PSV fleet deliveries (units)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Figure 57: AHTS fleet newbuilding contracts (units) Figure 58: PSV fleet newbuilding contracts (units)


Title:

Source:


0

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

AHTS <4,000 bhp deliveries (units) AHTS 4,000-7,999 bhp

AHTS 8,000-11,999 bhp AHTS 12,000-15,999 bhp

AHTS 16,000+ bhp

Title:

Source:


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180

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

PSV <2,000 dwt deliveries (units) PSV 2,000-2,999 dwt

PSV 3,000-3,999 dwt PSV 4,000+ dwt

Title:

Source:


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180

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

AHTS <4,000 bhp orders (units) AHTS 4,000-7,999 bhp

AHTS 8,000-11,999 bhp AHTS 12,000-15,999 bhp

AHTS 16,000+ bhp

Title:

Source:


0

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

PSV <2,000 dwt orders (units) PSV 2,000-2,999 dwt

PSV 3,000-3,999 bhp PSV 4,000+ dwt


75

Fleet demolition picked up in 2016 for the AHTS fleet and has remained reasonably robust during 4M17 by historical standards. However, demolition rates for the PSV fleet have been lacklustre, considering how weak the charter markets have been.

The age profile of the AHTS and PSV fleet suggests that there is plenty of demolition potential, with around 30% of each fleet made up of aged units of more than 25 years old. If all of these vessels are scrapped, the utilisation rates of both fleets would rise significantly from over 40% currently to more than 70%, albeit still not enough to return the AHTS and PSV markets to their heydays between 2010 and 2014, when they enjoyed utilisation rates of around 90% or higher.

In reality, the demolition rates so far into the downcycle have been extremely disappointing. Consider that in 2016, less than 40 AHTS were scrapped out of a pool of almost 800 units that were more than 25 years old and out of a pool of around 1,000 cold-stacked units.

The reason for this is AHTS and PSV units have very little steel in them so they are worth very little to the demolition yards. The cost of sailing them to India, Pakistan or Bangladesh for scrapping may consume a significant part of their demolition value, leaving very little incentive for owners to scrap their vessels.

As such, we are not expecting demolition to play a major role in righting the excess supply in the global AHTS and PSV fleets.

Figure 59: AHTS fleet demolition (units) Figure 60: PSV fleet demolition (units)


Figure 61: AHTS fleet age profile Figure 62: PSV fleet age profile


Title:

Source:


0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

AHTS <4,000 bhp demolition (units) AHTS 4,000-7,999 bhp

AHTS 8,000-11,999 bhp AHTS 12,000-15,999 bhp

AHTS 16,000+ bhp

Title:

Source:


0

2

4

6

8

10

12

14

16

18

20

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

PSV <2,000 dwt demolition (units)

PSV 2,000-3,000 dwt

Title:

Source:


16.3%

34.3%

12.0%

4.9%

0.8%

31.7%

0% 5% 10% 15% 20% 25% 30% 35% 40%

<5 yrs

6-10 yrs

11-15 yrs

16-20 yrs

21-25 yrs

>25 yrs

Age profile of AHTS fleet (% of total)

Title:

Source:


27.8%

21.5%

13.4%

8.3%

1.6%

27.5%

0% 5% 10% 15% 20% 25% 30%

<5 yrs

6-10 yrs

11-15 yrs

16-20 yrs

21-25 yrs

>25 yrs

Age profile of PSV fleet (% of total)


76

The orderbook is now relatively light compared to the past, with the AHTS orderbook comprising just 6.7% of the outstanding fleet in April 2017, compared to a peak of 43% in mid-2008. Similarly, the PSV segment orderbook is now 8% of the outstanding fleet vs. 26% in early-2013.

Around 70% of the orderbook is scheduled for delivery in 2017F while the rest is intended for delivery in 2018F; these delivery dates were already postponed by the owners after negotiations with the yards.

In reality, the orderbook is likely to be postponed further into the future, with some owners refusing to take delivery of already-completed units or unable to secure bank financing to accept delivery. As such, we have assumed that the deliveries will extend all the way into 2022F. We have also assumed that no additional newbuilding orders are made.

Figure 63: AHTS orderbook (units) as a percentage of the outstanding fleet (%)


Figure 64: PSV orderbook (units) as a percentage of the outstanding fleet (%)


Title:

Source:


0%

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15%

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45%

0

100

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700

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

AHTS orderbook 8,000+ bhp (units)

AHTS orderbook <8,000 bhp (units)

Percentage of fleet (%)

Title:

Source:


0%

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50

100

150

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Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

PSV 2,000+ dwt (units)

PSV <2,000 dwt (units)



77

Significant rise in stacking since the 2014 crisis

Since the oil price crash that began in mid-2014, the OSV fleet has seen a significant rise in stacked units.

Cold-stacking means that the OSV unit’s machineries are totally shut down and there are no crew present on board. The vessel is moored in a safe harbour, usually tied together with other cold-stacked units, and one or two security personnel will keep guard over the set of stacked vessels. Cold-stacked units are not actively marketed for future employment.

Warm-stacked OSVs keep their basic machineries running with a skeletal crew on board to do regular maintenance work. These units are actively marketed to potential charterers and can be redeployed much faster than cold-stacked units.

Note that the two charts below show only the cold-stacked AHTS and PSV vessels (warm-stacked vessels excluded). Cold-stacked units for both fleets have risen to more than 30% of the total outstanding fleet. Since the start of 2017, the number of cold-stacked units has declined sequentially, partly due to scrapping, but mainly due to improved demand for OSVs in the North Sea region. Other regions, including Southeast Asia, continue to suffer from poor demand conditions.

Figure 65: Cold-stacked AHTS fleet (units) as a percentage of the outstanding fleet (%)


Figure 66: Cold-stacked PSV fleet (units) as a percentage of the outstanding fleet (%)


Title:

Source:


0%

5%

10%

15%

20%

25%

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35%

40%

0

200

400

600

800

1,000

1,200

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Cold-stacked AHTS 8,000+ bhp (units)

Cold-stacked AHTS <8,000 bhp (units)


Title:

Source:


0%

5%

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15%

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35%

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45%

0

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Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Cold-stacked PSV 3,000+ dwt (units)

Cold-stacked PSV <3,000 dwt (units)



78

The two charts below show both cold- and warm-stacked units but only for AHTS of more than 8,000 bhp and for PSVs of more than 2,000 dwt.

For both types of OSVs, the cold-stacked units comprise around 30% of the outstanding fleet, with the warm-stacked units comprising another 30% or so. Hence, the utilisation rate for both fleets stand at just around 40%.

The huge numbers of stacked OSVs mean that, even though the newbuilding orderbook is small as a percentage of the fleet, the market could suffer from low utilisation rates and low charter rates for years to come unless demand picks up significantly and in a sustained multi-year basis. The problem of rebalancing the market is augmented by OSV owners’ lack of incentive to scrap them.

Figure 67: Total cold- and warm-stacked AHTS 8,000+ bhp fleet (units) as a percentage of the total fleet (%)


Figure 68: Total cold- and warm-stacked PSV 2,000+ dwt fleet (units) as a percentage of the total fleet (%)


Title:

Source:


0%

10%

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30%

40%

50%

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70%

0

50

100

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250

300

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Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Cold-stacked AHTS 8,000+ bhp (units)

Warm-stacked AHTS 8,000+ bhp (units)


Title:

Source:


0%

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50%

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70%

0

100

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300

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500

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800

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Cold-stacked PSV 2,000+ dwt (units)

Warm-stacked PSV 2,000+ dwt (units)



79

Of course, some of these cold-stacked units may never come back into the market, depending on how old they are and how long they have been stacked.

In the two tables below, the columns highlighted in green are the older units, which we suspect may never make it back into the market and hence may be excluded from the effective supply.

For AHTS units of >8,000 bhp, we count a total of 82 cold-stacked units that are at risk of never returning to the market. However, this is less than half of the pool of 204 cold-stacked units and, if excluded from the total supply, can lift the utilisation rates from 42% in April 2017 to nothing more than 47%. This is not enough of an improvement in utilisation rates to help owners lift charter rates materially.

Figure 69: Matrix of cold lay-up date and age of AHTS vessels of 8,000+ bhp


For PSV units of >2,000 dwt, we count a total of 78 cold-stacked units that are at risk of never returning to the market, a mere 25% of the pool of 310 cold-stacked units, and, if excluded from the total supply, can lift the utilisation rates from 42% in April 2017 to slightly less than 45%. As with the AHTS fleet, we do not believe that charter rates can see material improvement at this still-low utilisation rate.

Figure 70: Matrix of cold lay-up date and age of PSV vessels of 2,000+ dwt


> 25 years 20-25 years 15-20 years 10-15 years 5-10 years < 5 years Total

2009 5 0 0 0 0 0 5

2010 3 0 0 0 0 0 3

2011 4 0 0 0 0 0 4

2012 2 0 0 0 0 0 2

2013 4 0 1 0 0 0 5

2014 9 2 1 1 2 0 15

2015 20 0 9 9 19 7 64

2016 11 3 6 19 39 18 96

2017 0 0 2 1 7 0 10

Total 58 5 19 30 67 25 204

Laid-up DateAge (years)

> 25 years 20-25 years 15-20 years 10-15 years 5-10 years < 5 years Total

2009 0 0 1 0 0 0 1

2010 0 0 0 0 0 0 0

2011 0 0 0 0 0 0 0

2012 1 0 0 0 0 0 1

2013 5 0 2 0 0 0 7

2014 4 0 1 0 1 1 7

2015 9 2 29 23 43 34 140

2016 5 5 11 28 51 37 137

2017 0 0 3 1 10 3 17

Total 24 7 47 52 105 75 310

Laid-up DateAge (years)


80

Demand-supply balance

Based on modest fleet growth of 1.5% p.a. at the maximum (due to modest newbuilding additions and limited demolitions) and Clarkson’s forecast of 5-8% p.a. demand growth over FY17F and FY18F:

The utilisation rate for AHTS vessels of 8,000+ bhp is expected to rise from 40.8% in 2016 to 46% in 2018F, and

The utilisation rate for PSVs of 2,000+ dwt is expected to rise from 41.4% in 2016 to 44.3% in 2018F.

Clarkson’s forecast of demand growth for OSVs is highly dependent on the outlook for drilling rig utilisation (for both exploration and production drilling), which hinges on the capex plans of oil majors and the outlook for oil prices. None of these are easily forecast so we view Clarkson’s OSV demand forecasts as something that may need constant monitoring.

Even with 5-8% annual demand growth in FY17F and FY18F, utilisation rates are still a long way down from peak utilisation rates prior to 2014. Fierce competition is likely to persist, with owners having limited pricing power.

As a result, we believe that OSV charter rates are not expected to budge from the already-low levels currently. In fact, in the first four months of this year, charter rates have mostly trended lower sequentially, suggesting that the OSV sector is in the midst of a very long winter.

Figure 71: AHTS 8,000+ bhp demand and supply (units) and utilisation rate (%)

Figure 72: PSV 2,000+ dwt demand and supply (units) and utilisation rate (%)


Title:

Source:


0

100

200

300

400

500

600

700

800

900

0%

10%

20%

30%

40%

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90%

100%

2010 2011 2012 2013 2014 2015 2016 2017F 2018F

Utilisation %



Title:

Source:


0

200

400

600

800

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1,200

1,400

0%

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2010 2011 2012 2013 2014 2015 2016 2017F 2018F

Utilisation %




81

APPENDIX 3: BAB’S SUBSEA CONSTRUCTION BUSINESS

Brief introduction

The Subsea Construction (SC) business is what BAB used to call Transportation & Installation (T&I). Vessels in this business are responsible for various offshore construction works, such as, for instance, the laying of pipes on the seabed by derrick lay barges, the digging of trenches on the seabed to facilitate the pipelay work, and the installation of Subsea Umbilicals Risers and Flowlines (SURF) for FPSO offshore production solutions.

BAB had up to five vessels in the SC segment, i.e. Armada Installer, Armada Constructor, Armada KP1, Armada Condor, and Armada Hawk. In late-2016, the Armada Hawk was sold while BAB has recently just found a buyer for the Armada Condor.

The Armada Installer is a purpose-built derrick-lay barge, built in 2010 at KeppelFELS and transported to the land-locked Caspian Sea via the narrow Volga-Don River Canal System, which connects the Black Sea to the Caspian Sea via the Volga and Don Rivers. The barge was built in two separate longitudinal hull strips measuring 16 metres wide each because that was the maximum width of the Volga-Don Canal. Once at the Caspian Sea, the barge was then rejoined at the Caspian Shipyard Company in Azerbaijan.

The Armada Constructor is a shallow-water barge that was purchased in 2014 and delivered to BAB in 2015 for work in the Caspian Sea. It is equipped with post-trenching and backfilling equipment in order to dig trenches on the seabed for Armada Installer’s pipe installation works.

The Armada KP1 is a shallow-water pipelay barge, which is positioned in Southeast Asia for conventional pipelay work. The vessel is intended to target pipelay jobs in Southeast Asia, with a special focus on the Indonesian market. It was formerly a McDermott barge sold at book value to BAB in March 2014.

The Armada Condor is a multi-purpose Platform Supply Vessel and was purchased by BAB secondhand in 2013 for US$15.8m. This vessel will be sold soon.

The Armada Hawk (previously known as Acergy Hawk) is a DP2 subsea installation vessel that was purchased by BAB on 30 June 2011. This vessel was disposed of by BAB in late-2016.

The Armada Installer

In May 2010, the Armada Installer commenced operations in the Turkmenistan part of the Caspian Sea, under an 8-year contract with Petronas Carigali (Turkmenistan) – which we shall call “PCT” – that will end in May 2018.

In return for building a vessel for dedicated use in the land-locked Caspian Sea, Petronas Carigali guaranteed utilisation of 70% in the first three years of the contract and guaranteed 60% utilisation in the next five years. Petronas does in fact use the vessel more than 60% of the time typically, except perhaps in the seasonal 4Q lull.

Charter rates have been fixed for the entire 8-year contract duration from May 2010 to May 2018. BAB negotiated a lucrative rate with Petronas since the Armada Installer was purpose-built for a single client, which is why BAB agreed to share 50% of its profit with Petronas on the remaining non-guaranteed time spent serving other customers in the Caspian Sea.

Petronas is not likely to renew the contract beyond May 2018 as the work in the Turkmenistan sector of the Caspian Sea will most probably be completed. However, there is more work in the Caspian Sea that BAB hopes to be able to secure for the Armada Installer. BAB is fairly confident that the Armada Installer will be able to find employment post its contract with Petronas. This is because the Caspian Sea has a huge network of pipes, which require replacement, as well as new pipelay work in the Iranian sector. So far, the Armada Installer has done work only in the Turkmenistan and Russian sectors of the Caspian Sea.

BAB structured the debt financing for the Armada Installer such that all the project financing will be fully repaid within the 8-year firm period, based on the


82

minimum guaranteed utilisation of 60%. As such, there is little risk to BAB even if Petronas does not renew the contract beyond May 2018 and even if BAB fails to get other work.

There is a limited pool of competitor vessels in the Caspian Sea:

BAB’s 2010-built Armada Installer has a Safe Working Load (SWL) of 825 lbf units (pound-force).

Azerbaijan Caspian Shipping Company’s 1990-built Israfil Huseynov has a SWL of 250 lbf units.

Finally, Saipem’s 2006-built Castoro-12 does not have heavy-lift capability as it has a SWL of only 35 lbf units.

As such, the Armada Installer is the youngest derrick-lay barge in the Caspian Sea and also has the highest technical capabilities.

Background to Petronas operations in Turkmenistan

Petronas Carigali (Turkmenistan) – or “PCT” – signed a 28-year Production Sharing Agreement with the Turkmenistan government in July 1996, covering the whole of the 1,467 sq km Block-1 and incorporating the offshore fields of Magtymguly, Diyarbekir and Garagol Deniz. PCT has 100% economic interest in all the above fields. Exploration drilling began the same year.

Experimental oil production from Diyarbekir commenced in mid-2006 and it currently has two fixed offshore platforms that were installed in 2014 in Western and Central Diyarbekir. Production from the fixed platforms is linked via subsea pipelines to the FSO Oguzhan, which is permanently moored in the Diyarbekir field. Future development may include three more fixed offshore platforms and more pipelines for the export of gas to an onshore plant.

Oil production from the Diyarbekir field in 2006 was followed by initial gas production from the Magtymguly field, also in 2006, via a Mobile Offshore Production Unit (MOPU) named Saparmyrat Turkmenbasy. The MOPU is linked via subsea pipes to FSO Oguzhan, where shuttle tankers uplift the oil. The Magtymguly field also has two fixed platforms, installed in 2008 and 2011, respectively, and the gas produced is exported via a 70km pipeline to an onshore gas treatment plant at Kiyanly that was commissioned in 2011.

PCT is also producing from the Garagol Deniz field, with one offshore production platform that was installed in 2014.

PCT is currently developing the Garagol Deniz West field that was discovered in 2011, approved for development in 2014, and it is expected to commence production in 2017F via a fixed wellhead platform, with gas exported via a 75km pipeline to the onshore gas terminal at Kiyanly. The gas will be co-mingled with existing gas produced from the Magtymguly field.

The LukOil project in the Caspian Sea

On 16 April 2012, BAB secured a US$200m LukOil Engineering, Procurement, Installation, and Commissioning (EPIC) contract for the Armada Installer to work in the Filanovsky field in Russian sector of the Caspian Sea. This involved the EPIC of line pipes in nine infield/inter-field lines (90km) over 32 months with majority of work to be completed by end-2014. This was additional work for the Armada Installer, over and above the existing service contract for PCT. This was Phase 1 of BAB’s contract with LukOil and was completed on 12 November 2014.

On 22 Jul 2013, BAB secured a US$178.5m LukOil EPIC contract for Armada Installer to work in the Filanovsky and Korchagin fields in the Russian sector of the Caspian Sea. This is the ongoing Phase 2 of BAB’s contract with LukOil and involves the EPIC of line pipes in six infield/inter-field lines (40km), with the majority of work originally expected to be carried out and completed in 2015. However, the project was ultimately extended and is now expected to be completed over a series of campaigns in 2016-2017F.

The LukOil contract has low margins because the value of the contract includes the procurement of the pipes.


83

Figure 73: The Caspian Sea – oil and gas blocks

SOURCES: CLARKSONS

Petronas Carigali (Turkmenistan)’s Magtymguly, Diyarbekir, Garagol Deniz, and Garagol Deniz fields

are located here.

LukOil’s Filanovsky and Korchagin fields are located in the Russian sector of the Caspian Sea.


84

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

-10.0%

-6.3%

-2.5%

1.3%

5.0%

8.8%

12.5%

16.3%

20.0%

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-2,300%

825%

3,950%

7,075%

10,200%

13,325%

16,450%

19,575%

22,700%

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-13A

Jan-14A

Jan-15A

Jan-16A

Jan-17FJan-18F

12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

12-mth Fwd Rolling FD Normalised P/E (x) (lhs)

Diluted Normalised EPS Growth (rhs)

Profit & Loss

(RMm) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Total Net Revenues 2,180 1,417 1,905 2,358 2,060

Gross Profit 1,010 335 1,098 1,548 1,250

Operating EBITDA 1,010 335 1,098 1,548 1,250

Depreciation And Amortisation (607) (571) (444) (434) (318)

Operating EBIT 403 (236) 654 1,114 932

Financial Income/(Expense) (49) (36) (390) (378) (339)

Pretax Income/(Loss) from Assoc. 52 78 137 228 222

Non-Operating Income/(Expense) 0 0 0 0 0

Profit Before Tax (pre-EI) 405 (194) 400 964 815

Exceptional Items (576) (1,792) 0 0 0

Pre-tax Profit (171) (1,986) 400 964 815

Taxation (70) (61) (65) (77) (77)

Exceptional Income - post-tax

Profit After Tax (242) (2,047) 335 887 738

Minority Interests 7 19 5 5 5

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Preference Dividends (Australia)

Net Profit (235) (2,028) 340 892 743

Normalised Net Profit 335 (255) 335 887 738

Fully Diluted Normalised Profit 342 (236) 340 892 743

Cash Flow


EBITDA 1,010 335 1,098 1,548 1,250

Cash Flow from Invt. & Assoc.

Change In Working Capital (126) 980 (390) 277 659

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow (5) 42 45 36 47

Net Interest (Paid)/Received (233) (379) (436) (414) (386)

Tax Paid (110) (39) (65) (77) (77)

Cashflow From Operations 535 939 253 1,369 1,493

Capex (3,568) (4,419) (327) 0 0

Disposals Of FAs/subsidiaries (7) 8 0 0 0

Acq. Of Subsidiaries/investments

Other Investing Cashflow 57 39 0 0 0

Cash Flow From Investing (3,519) (4,372) (327) 0 0

Debt Raised/(repaid) 975 4,786 (1,901) (704) (614)

Proceeds From Issue Of Shares 0 0 0 0 0

Shares Repurchased

Dividends Paid (96) (48) 0 0 0

Preferred Dividends

Other Financing Cashflow 1 0 0 0 0

Cash Flow From Financing 880 4,738 (1,901) (704) (614)

Total Cash Generated (2,103) 1,305 (1,975) 665 879

Free Cashflow To Equity (2,008) 1,353 (1,975) 665 879

Free Cashflow To Firm (2,750) (3,054) 362 1,783 1,879

We forecast BAB’s core net profit to recover materially in FY17F and FY18F, from the commencement of the firm charter periods for the FPSO Armada Olombendo, FSU Armada LNG Mediterrana, FPSO Karapan Armada Sterling 3, and FPSO Armada Kraken.

Operating cashflows should rise together with the commissioning of four new assets in FY17F and FY18F. We have excluded any contribution from the FPSO Armada Perdana due to the issues being faced by its charterer, Erin Energy.


85

BY THE NUMBERS… cont’d

SOURCE: CIMB RESEARCH, COMPANY DATA

Balance Sheet


Total Cash And Equivalents 1,526 3,016 1,041 1,706 2,586

Total Debtors 870 968 1,186 1,389 1,256

Inventories 6 6 6 6 6

Total Other Current Assets 755 632 632 632 632

Total Current Assets 3,157 4,622 2,865 3,733 4,480

Fixed Assets 14,144 16,603 16,344 15,435 14,590

Total Investments 598 671 808 1,036 1,259

Intangible Assets 0 0 0 0 0

Total Other Non-Current Assets 174 195 195 195 195

Total Non-current Assets 14,916 17,468 17,346 16,666 16,043

Short-term Debt 1,770 2,517 1,130 1,330 1,430

Current Portion of Long-Term Debt

Total Creditors 1,299 1,227 915 919 919

Other Current Liabilities 300 1,225 1,225 1,225 1,225

Total Current Liabilities 3,369 4,969 3,271 3,475 3,575

Total Long-term Debt 6,259 10,529 10,014 9,110 8,397

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 1,148 902 902 902 902

Total Non-current Liabilities 7,408 11,431 10,916 10,012 9,299

Total Provisions 0 0 0 0 0

Total Liabilities 10,777 16,400 14,187 13,487 12,873

Shareholders' Equity 7,257 5,668 6,008 6,900 7,643

Minority Interests 38 22 17 12 7

Total Equity 7,296 5,690 6,025 6,912 7,649

Key Ratios

Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Revenue Growth (9.1%) (35.0%) 34.5% 23.8% (12.6%)

Operating EBITDA Growth 22% (67%) 228% 41% (19%)

Operating EBITDA Margin 46.3% 23.6% 57.7% 65.6% 60.7%

Net Cash Per Share (RM) (1.11) (1.71) (1.72) (1.49) (1.23)

BVPS (RM) 1.24 0.97 1.02 1.18 1.30

Gross Interest Cover 3.27 (2.38) 1.50 2.69 2.41

Effective Tax Rate 0.0% 0.0% 16.3% 8.0% 9.5%

Net Dividend Payout Ratio 14.1% NA NA NA NA

Accounts Receivables Days 102.0 148.1 142.2 147.4 174.9

Inventory Days 1.70 2.10 2.88 2.86 2.86

Accounts Payables Days 311.7 427.3 484.6 413.1 414.0

ROIC (%) 4.29% (1.64%) 4.10% 6.86% 6.01%

ROCE (%) 3.23% (1.28%) 3.81% 6.57% 5.53%

Return On Average Assets 2.36% (1.09%) 3.43% 6.23% 5.26%

Key Drivers

Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Outstanding Orderbook (RMm) N/A N/A N/A N/A N/A

Order Book Wins (RMm) N/A N/A N/A N/A N/A

Order Book Depletion (RMm) N/A N/A N/A N/A N/A

Average Day Rate Per Ship (US$) N/A N/A N/A N/A N/A

No. Of Ships (unit) 53 53 52 52 52

Average Utilisation Rate (%) 55.3% 50.7% 51.0% 51.0% 51.0%

Oil Price (US$/bbl) N/A N/A N/A N/A N/A

Energy Production Volume (mmboe) N/A N/A N/A N/A N/A

Average Day Rate - Drilling Rigs (US$) N/A N/A N/A N/A N/A

Average Util. Rate - Drilling Rigs (%) N/A N/A N/A N/A N/A

Average Day Rate - FPUs (US$) 160,776.1 118,110.3 195,432.4 230,350.8 212,748.5

Average Util. Rate - FPUs (%) 100.0% 86.1% 85.2% 88.9% 88.9%

We forecast revenue to decline in FY19F as the FPSO Armada TGT1 will enter into its option period, which carries a lower bareboat charter rate.

The capex cost of the FPSO Armada Olombendo, FSU Armada LNG Mediterrana, and FPSO Armada Kraken are accounted for as finance leases, hence their capex costs are reclassified from Fixed Assets to Finance Lease Receivables. However, for reasons of simplicity, we have lumped both together under ‘Fixed Assets’.

Average FPSO day rates expected to rise, due to the commissioning of larger assets such as the FPSO Armada Kraken and FPSO Armada Olombendo.


86

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87

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and does not deal with prohibitions on investment due to law/jurisdiction issues etc. which may exist for certain persons/entities. Recipients should rely on their own investigations and take their own professional advice before investment.

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Section 27 of the FAA.

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AAV, ADVANC, AMATA, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BIG, BLA, BLAND, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, KAMART, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PSH, PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SCN, SGP, SIRI, SPALI, SPCG, SPRC, STEC, STPI, SUPER, TASCO, TCAP, THAI, THANI, THCOM, TISCO, TKN, TMB, TOP, TPIPL, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VIBHA, VNG, WHA.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

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United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited


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(“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK. Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

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Spitzer Chart for stock being researched ( 2 year data )

Bumi Armada (BAB MK)

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016.

AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared,

Rating Distribution (%) Investment Banking clients (%)

Add 55.9% 5.2%

Hold 30.0% 1.6%

Reduce 10.4% 0.3%

Distribution of stock ratings and investment banking clients for quarter ended on 31 March 2017

1244 companies under coverage for quarter ended on 31 March 2017

0.30

0.80

1.30

1.80

2.30

2.80

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Price Close

4.5

6

2.5

6

2.3

5 1.8

1

1.5

0

1.1

6

1.1

6

1.0

2

Recommendations & Target Price

Add Hold Reduce Not Rated


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AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BLA – Very Good, Certified, BPP – not available, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, INTUCH - Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH – Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

bumi armada malaysia add (previously hold) consensus...

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