Wednesday, September 19, 2007

Ezra – S$162.4 Million Order for a Multi-Functional Support Vessel

On September 17, 2007, Ezra announced the order of a 27,000 bhp multi-functional support vessel (“MFSV”) at a contract cost of S$162.4 million (US$106.8 million) to be delivered in 2H FY 2010. The contract was offered to Karmsund Maritime Service AS of Norway, and will include the cost of sophisticated equipment and integrated features such as an ROV hangar and foundations for a heave-compensated offshore crane and A-Frame (very technical leh !) which can allow the vessel to provide subsea support services. In addition, the vessel will meet the stringent requirements of the “Environmental Protection” and “Clean Design” requirements for operation in the North Sea, including Norway.

The key point is that Ezra is aggressively building up its fleet for the future by ordering larger vessels capable of handling jobs in the North Sea, South America and West Africa. This will broaden their possible customer base and open up more opportunities for the Group to tap into more distant markets; but which also opens them up to competition from the big players who are already entrenched in these territories. The contract value is pretty large by Ezra’s standards (i.e. S$162 million) for a single vessel. Compare this to May 2007’s announcement of 2 newbuild Rolls-Royce 30,000 bhp AHTS (due in FY 2009 and FY 2010) which cost a combined S$98 million, as well as a second pipelay and accommodation barge costing only US$25.6 million (about S$38.9 million). The combined capex for these 3 previous vessel orders came up to only S$136.9 million; while this one MFSV order alone already costs S$162.4 million. It is debatable on why this new vessel costs so much more than the other previous 3 and I will be bringing this issue up to the Management by way of Email. More details will be provided on this blog once I get the reply from the IR team.

Another worry is whether the Group is able to adequately fund this large purchase. The press release mentions that the contract will be settled “in stages”, which I assume to mean that progress payments will be made as the vessel is being constructed. Will the Group have sufficient cash flows to ensure that they can meet the payments ? It was also mentioned in the press release that they will be using a mixture of internal funds and bank borrowings to finance the purchase; but just what % of the purchase will be funded using debt ? This is of course a concern as gearing will then increase and interest expenses will go up as well, which will impact cash flows further. Although the listing of EOC on the Oslo bourse will free up cash amounting to nearly S$240 million (roughly), Ezra did not mention that it would be using the proceeds from the listing to fund this latest purchase.

Costs aside, the advantages of having such an advanced and sophisticated vessel are also questionable. Will jobs in the North Sea require such a vessel and are there already many such vessels of this size and capability deployed there ? If so, then are Ezra just following the crowd or are they at the forefront of new technology in terms of coming up with this MFSV ? These are just some of the serious questions to ask Management in order to probe for more details on the rationale for this newbuild acquisition. Other questions will include the exact function of this vessel (in relation to their fleet of AHTS which most shareholders know are used as support vessels for the oil and gas industry), as well as the charter rates for such vessels (if any).

It was mentioned that this vessel would form part of a special “task force” to meet the demands for mid to deepwater oil and gas exploration activities. Thus, will the vessels all be deployed as a whole unit (package deal so to speak) to service a client, or will they each be deployed individually for various jobs ? It would be good if Management could enlighten shareholders further on these queries, as these new vessels are unfamiliar and shareholders would need to gain more comfort by knowing more about how these vessels work and where they will be deployed.

Another pressing issue is: how much of the earnings from these new vessels will be recognized in the Group’s books ? As it is, the vessels will be 100% owned by EOC Limited which will only be 48%-owned by Ezra post-listing. Thus, there may be a gap between recognized profits on the charter of the vessels versus the costs of building them (which are fully borne by the Group).

Thus, it would seem that this announcement has thrown up more questions than answers, and I hope to be able to resolve this in the upcoming Dec 2007 AGM for FY 2007 results.


Anonymous said...

It would be good is u can ask them all the questions via email instead of waiting for an answer at the end of 2007.

Any idea when will the results for the fy 2007 be announced?

musicwhiz said...

Dear Anonymous,

Thanks for visiting. Last year (FY 2006), the results were announced on Oct 24, 2006, while for FY 2005 the results were announced on Sep 30, 2005. In view of the listing of EOC in late October 2007, I suspect the announcement may come in mid to late October 2007 instead of end-September. This is just my personal view though.

The questions which I posed in my post are best answered face-to-face rather than through email. There is only so much info you can communicate through email and misunderstandings may occur if something typed out is taken out of context. I have always preferred a face to face aproach (as per my EGM experience with Mr. Tan). As such, I will email them on the more key questions while saving the not-so-important ones for later.

Cheers, musicwhiz

Anonymous said...

hi musicwhiz,

I look with increasing concern at the price of china fishery. It has been going downhill for the past week for no apparent reason. Do you know what could possibly be behind this fall in price?


musicwhiz said...

Hi Simon,

The tone of your comment makes it sound like you are vested at a higher price than the current market price, which is why you seem worried.

Think of it this way: the price is just a reflection of investor sentiment, but it does not always reflect the actual value of a business. To accurately value a business, you have to undertake the steps as outlined in my research series. Even then, some part of it will be subjective.

So, if there is no problem with CFG, why get so worried about the market price ? In fact, a low price should spur you to buy more if you think the company has potential and if it gives you a better margin of safety.

Regards, musicwhiz

Anonymous said...

Hello MW,

Though we trade on different strategies, I must stay you do a good job with your analysis and I am impressed.

Keep up the good work.


musicwhiz said...

Hi MMind,

Thank you for visiting and thanks for your compliment.

Cheers, musicwhiz :)