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Can This Customer Of Keppel Corporation Limited Survive The Oil & Gas Downturn?

Bumi Armada Bhd (KLSE: 5210.KL) is a global offshore oilfield services provider and one of the largest FPSO (Floating Production, Storage and Offloading) operators in the world. The Malaysia-based company is also one of the key customers of Singapore’s oil rig and vessels builder Keppel Corporation Limited (SGX: BN4).

Despite Bumi Armada’s size, things are not looking all that well for the company. Since reaching a peak of RM3.00, Bumi Armada’s shares have fallen to a price of just RM0.80 apiece currently. The company’s business is also suffering: It clocked its first annual loss in 2015 since 2008 and its leverage had also reached dangerous levels.

To the latter point, Bumi Armada’s net debt to equity ratio stood at 98% at the end of 2015. That is much higher than Keppel Corporation’s net debt to equity ratio of 52%, but closer to Sembcorp Marine Ltd’s (SGX: S51) self-same ratio of 103%. Sembcorp Marine is also a Singapore-based builder of oil rigs and related vessels, just like Keppel Corporation.

To make things worse for Bumi Armada, news broke just last week that one of the company’s FPSO contracts – with Woodside Energy Julimar Pty Ltd for the Balnaves field in Australia – had been terminated.

The contract, which is a 4+4 year charter, is worth US$593 million (around RM2.4 billion) and only started active operations in 2014. Given that Bumi Armada had generated RM2.2 billion in revenue in 2015, the loss of the contract is a significant development for the company.

Moreover, the FPSO unit deployed for the contract was custom-built for the Balnaves field and might thus be difficult for Bumi Armada to redeploy elsewhere without any modifications being made.

All told, the situation does not look bright for Bumi Armada. Not only does it have to contend with the aforementioned issues of high leverage, an annual loss, and the termination of a big contract, there’s also a slowing economy and a tightening of loan facilities and credit control by Malaysian banks to worry about.

Repayments ahead

At the end of 2015, Bumi Armada had close to RM1.8 billion in short-term debts (meaning borrowings that are due within a year of 31 December 2015) while having only RM1.5 billion in cash. On top of that, the company had recorded an interest expense of more than RM120 million for 2015; that’s an amount which should be higher in 2016.

If the company is not able to find a way to refinance its short-term loans, it might have to face an extremely uncomfortable situation this year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Keppel Corporation.