Tuesday, December 23, 2008

Ezra - FY 2008 Annual General Meeting Highlights

After attending the AGM for Ezra and speaking with Finance Director Mr. Tay Chin Kwang, my feel is that Management is prudent and are treading cautiously into FY 2009 with a view to lower their capex commitments as well as conserve cash. Here are some of the issues asked about and Management's clarifications and replies. Note that this is typed purely from memory (I did not take any notes as it would be awkward) and so the writing may seem haphazard and disorganized, so please forgive this.

Question: Will lower oil prices have a significant impact on Ezra's operations and business outlook moving forward ? Note: As of this writing, oil prices are hovering at around US$40 per barrel.

Answer: There should be no significant impact of lower oil prices on current E&P activities and projects which have already started. The lower oil prices MAY affect decisions to invest in capex for deepwater E&P by oil majors, this is still quite fuzzy and unknown, but current projects which are ongoing will continue to generate oil, and cannot just be "switched off" this month and then "switched on" again when prices rebound. Currently, all of Ezra's vessels are on time charters which last 1-3 years and utilization rate is 100%, so there is no expected impact on the lower oil prices on current charter contracts.

Question: Are charter rates expected to ease off since there is an expected influx of new AHTS vessels for shallow waters ? How are charter rates holding up now ?

Answer: Management reiterated that there is no such thing as a published spot charter rate. These charter rates vary according to the period of charter, type of vessel and also the usage so it's almost impossible to determine the current rates as they depend on so many factors. Some rates may be mis-quoted as being very high because the charter term is only for a month, and the oil major may be desperate and willing to settle for supernormal rates. That said, the general trend of charter rates is still going up since Ezra's vessels are very specialized. However, Management does see a possible softening of charter rates once additional supply comes in for the shallow water division.

Question: Any updates on the proposed review of the MFSV in light of the economic crisis ? Are there plans to cancel these contracts, will there be penalties involved and moving forward, how will the Company resolve these difficulties ?

Answer: Ezra is currently reviewing 3 newbuilds, 2 are 27,000 bhp MSFV being built by Karmsund in Norway while the other is a MFSV built by Keppel Singmarine (recently announced). The remaining 2 30,000 bhp vessels being built by Dubai Drydocks (formerly known as Labroy Marine) will continue to be built. Ezra's 1Q 2009 results are expected to be announced some time in mid January 2009. By then, there may or may not be a decision on whether to pull the plug on these 3 newbuilds. However, the Management has said that they will respond latest by February 2009. As for the deposits paid to Karmsund, it is 20% and there is a clause for a full refund should construction not continue. It is Management's understanding that the company (Karmsund) may be running into financial difficulties and needs financial support from the Norwegian Government, which is why they decided to review the newbuilds. As for Keppel Singmarine, the deposit amount will probably be forfeited but this amount is small compared to the committed capex assuming the building had gone ahead.

Question: How are the yards progressing in Vietnam ? What is the status of Saigon Shipyard and the new yard at Vung Tau ?

Answer: Saigon Shipyard is fully operational and is taking on Fabrication and Construction jobs. In fact, capacity is getting quite constrained at this yard, but the Vung Tau yard is still in the intial stages of being developed and it not ready yet to take on any jobs or to ease the congestion at Saigon Shipyard. Gross margins for such projects are anticipated to be about 20%.

Question: Any updates on EOC's proposed bidding for their second FPSO contract to be awarded in Vietnam ? This was reported some time back.

Answer: EOC is still finalizing the details for this FPSO contract and there is no news of them being awarded it yet. The main issue to be resolved is the funding for this US$1.2 billion (sufficiently massive !) FPSO deal, which involves a charter period of 9+7 years (total 16 years) ! Currently, Lewek Arunothai is only contracted for 3+2 year term. If EOC manages to secure the funding and clinches this project, it will be a massive boost for earnings to the Group. But I would rather the company settle all the issues surrounding the technically complex FPSO deal before it announces any firm contract award. Though gearing for EOC is high (currently), these FPSO deals bring in very steady and predictable cash inflows which should ease the gearing level over time as long as the company (EOC) has no other capex requirements.

Question: How are cashflows likely to be for the Company assuming it cancels 3 of the newbuild MSFV ? What does Management intend to do with any excess cash ? Would it be more economical to purchase growth (i.e. assets) rather than build ?

Answer: Considering the company has already secured the necessary funding (via bank loans) for the newbuilds, cancelling them simply frees up the cash commitment. However, for the bank loans, since they were earmarked for the capex, they will have to be sought again should the Company undertake another capex exercise in future. Internal funds would not need to be used though and can be saved for better opportunities. Management is currently NOT looking at acquiring assets and are adopting a wait and see attitude to determine if good assets or companies can be acquired at fire-sale prices. Especially vulnerable are those companies which had leveraged heavily to grow during the boom years of 2006 and 2007 - these will be ripe for the picking should they need to sell themselves off to pay their creditors.

Question: Will the company really be privatized ? Wasn't that what the MD mentioned during a recent Bloomberg interview ?

Answer: The MD was mis-quoted and was quoted entirely out of context, and the Company has released a statement to clarify this.

Question: What is the purpose of the 66.7% acquisition of Telemark and how does it gel with the Group's business ?

Answer: Telemark is a company which deals with engineering design and they are the ones who measure and calculate the engineering specs for oil and gas projects (the technical stuff la). Currently, the company is engaged to provide the design work and specs to Saigon Shipyard for the fabrication of say, turrets for oil and gas projects. These are then built by the shipyard and then sold to final customers at a mark-up. Thus, Telemark's end customers include oil majors as well as contractors who work on behalf of the oil majors to supply equipment to them.

Question: Page 66 of the Annual Report states a loss of US$2.152 million relating to the disposal of 5 vessels in FY 2008. What has caused this loss ? Was it because of a drop in market value of the vessels to be disposed of ?

Answer: No, the loss on disposal was a result of unfavourable exchange rates causing a realized exchange loss. The sale and leaseback for the 5 vessels was settled at a fixed price 2 years ago, but part of the contracted sum was denominated in local currency. As the USD weakened, the conversion from SGD to USD led to this exchange loss being realized in the books.

Question: Note 15 states an increase in the provision for Trade Receivables of USD 7.239 million during FY 2008. What is this for and are there any issues with collectibility from customers ? What is the customer mix like ?

Answer: Ezra's major customer is Shell currently, and the Company is doing work for Shell at 4 different locations now, taking up about 30% of total revenues. Other customers would include National Oil Companies and other oil majors and small independent oil companies only constitute about 5-10% of Ezra's revenue base. This provision relates to a project loss suffered by Samsung Heavy Industries, for which they are attempting to counter-claim against Ezra. Ezra has, for prudence, included this amount as a potential liability but Management asserts that their claim is baseless and there is a good chance of this amount being written back in subsequent periods.

Question: What is a conservative estimate of the company's growth for FY 2009 ? Is the company expected to grow at all or remain stagnant ?

Answer: The Company took delivery of 5 new vessels in FY 2008 which were only chartered for several months for FY 2008, so for FY 2009 they will be chartered for a full financial year so there should be positive impact there. Also, core earnings are expected to grow at double digits though Management could not elaborate more due to market sensitivity of the information.

Question: Energy Services division contributed their maiden revenue stream in FY 2008. What are the prospects like for this division ?

Answer: Energy services are expected to remain flat for FY 2009 but growth is expected from FY 2010 onwards as more oil rigs come onstream and also the large deepwater vessels.

Overall, the mood was light and cordial and Management was friendly and approachable. There were the usual questions about why a dividend was not paid but these were tactfully handled by the Management Team. When asked if a rights issue was possible (like what DBS recently announced), Management affirmed that no further fund-raising was required as they do NOT intend to grow further as visibility into the future was too poor. If they were to order vessels now, they would have to see beyond 2010 and right now the future outlook is very murky and uncertain.

I trust that the best move now is to conserve resources and allow cash to build up, and wait for good opportunities to deploy them productively. In this, I have faith that Management can continue to deliver as we move in a new calender year 2009.

12 comments:

centaur said...

Good work musicwhiz. Saw u at the AGM and notice u are well prepared with questions in hands. I am glad that the management are prudent and my investment is in good hand. Mr. Tay is friendly and willing to share informations but I cant seem to get much out of Mr Lee Kian Soo.

Akatsuki said...

Akatsuki has their eyes on this stocks. Lol.
Key Risks involving this company are as follows
1)Lower-than-expected offshore support vessel charter rates
2)More shipyard delays
3)Higher-than-expected cost inflation
4)Funding difficulty for its capex program;
5)Significant slowdown in global E&P spending;
6)Potential contract cancellations.
After reading your article,most of the risks have been properly dealt with and probably have been factored into the current share price, howevr im still concern about "other income" $137,942k in their P/L. This year's other income came mostly from"Gain on disposal of interest in a subsidiary" $147m last year was "Gain on dilution of interest in a subsidiary"$32m, how sustainable are these accounts in the future? How many more times must the company gain on dilution or disposite of subsidiary? Beacuse factoring out the "other charges" the ROE/NetProfit/EPS wouldnt look very good. sry if i sound too long winded. :)

John said...

yes, I am more concerned with the off balance sheet items for EZRA.

In this climate, maintaining a robust balance sheet with recurring cash flow is very important !

musicwhiz said...

Hi Centaur,

I was quite happy that there was a group of shareholders also asking Mr. Tay very pertinent questions. It pleased me to just stand around and listen to the replies; some of these questions would not have occurred to me either.

As for Mr. Lee Kian Soo, I've spoken to him before on a previous occasion and he did highlight Ezra's growth plan and was quite chatty. I assume he let Mr. Tay handle the shareholder queries this time around and he may also have been quite busy. Lionel Lee is generally "shareholder-shy" and I have not once spoken to him at length. He seems like the no-nonsense type who would chide shareholders for not reading information in the Annual Report should they ask silly questions. He strikes me as one who is serious about the business and does not have time to entertain frivolous queries. On the other hand, perhaps he could articulate his vision for the company to shareholders and be a little more approachable. Thus far he has only granted interviews to Reuters and Bloomberg, haha.

Cheers,
Musicwhiz

musicwhiz said...

Hello Akatsuki,

Do not fret yourself too much over the exceptional items within "Other Income". I think I forgot to mention in my AGM highlights that the main reason for the S&L is to be enable to grow the fleet off-Balance Sheet. Mr. Tay had mentioned that the cashflow effects are the same for Ezra Group. He was comparing the S&L method to the "normal" method of keeping a vessel in the books and then depreciating it over 25 years. The P&L effects would have been different but the cash outflows would have been similar.

My take is just look at core earnings which Mr. Tay's team summarized in the presentation slides. Ignore the glossy press releases which are prepared by the IR company (Oaktree if I am not wrong), and focus instead on the hard numbers coming from recurrent cash inflow from long-term charters and also their C&P division.

Regards,
Musicwhiz

musicwhiz said...

Hi John,

Ditto my reply to Akatsuki above - just focus on the core items and you will realize recurring earnings have increased, albeit not with such "spectacular" numbers which the IR company has churned up.

The Balance Sheet is robust enough as gearing is just 11% of equity (mentioned during AGM). If the capex commitments are removed, then Ezra's move to do the 2 S&L and sell part of EOC would have netted them lots of working capital, ready to deploy for good opportunities.

Thanks,
Musicwhiz

donmihaihai said...

Hi musicwhiz,

I think I forgot to mention in my AGM highlights that the main reason for the S&L is to be enable to grow the fleet off-Balance Sheet. Mr. Tay had mentioned that the cashflow effects are the same for Ezra Group. He was comparing the S&L method to the "normal" method of keeping a vessel in the books and then depreciating it over 25 years. The P&L effects would have been different but the cash outflows would have been similar.

I am surprise. Any shareholder ask further?
If S&L and keeping it inhouse is the same, then which st@p&d want to go into this kind of transaction? I mean the one who buy and lease back to Ezra? What is he going to gain?

Shipping Trust is doing exacting this kind of S&L transaction. Who want to be the unitholder?

Not to say someone can project exact number of years into the future --- as much as 25 years? Who in this world of real economic can do it? Unless revenues and expenses are fixed then it is possible(but still not anywhere near 100%). Now are these fixed?

Grow OBS? Out of sight, out of mind. Isn't one of the reason that the current downturn in US is due to the use or aggressive use of OBS?

Sorry Musicwhiz, I think my tone is not good but reading it make me angry despite being an outsider.

musicwhiz said...

Hi donmihaihai,

It's ok I kind of got used to your mildly aggressive and somewhat confrontational tone by now and was expecting some sort of response from you regarding Ezra as I know you did a post yourself highlight Ezra's "strong" balance sheet. No worries about it - let's call a spade a spade.

You are actually quite correct - this kind of OBS financing works well when times are good and everything is booming, but the returns from S&L are quite poor and do not make much sense once downturns come in. Management has mentioned that they are slowing down expansion precisely because things are so uncertain now and funds are harder to raise (even using S&L model does not work anymore). So you can argue that everyone goes back to plain vanilla financing using good old fashioned debt and internal cash flows.

As a shareholder, why ask further ? Management has indicated their intention NOT to expand further, thus they will not risk weakening their Balance Sheet further. The S&L are a thing of the past (2 years ago) and has helped them grow to their current size (you know the history as well as I do), but is unlikely to be repeated again. Growth will be steady but stagnant until new growth drivers appear. I am not opposed to using OBS methods as long as they do not generate the kind of hidden liabilities which CDO and other derivative instruments did. Ezra uses simple hedging and does not go into the complex stuff.

Feel free to respond to this comment, I think we all learn more that way. I can't say everything the Management has done thus far has been right, but then such decisions usually only look bad on hindsight, don't you think ?

Regards,
Musicwhiz

donmihaihai said...

Hi Musicwhiz,

haha.. thanks for your understanding.

On my posting on Ezra and Swiber? Not against you but I got the idea or you can say I disagree with what were being written in DBS research report and The Edge Singapore some time back. To me, they were wrong. Clear cut.

Hindsight? I would rather say on hindsight Ezra achieved what they want to achieve(1st half) --- high share price, use it as curreny to achieve grow which included S&L. On hindsight, I was wrong because I din enjoy the ride and sold it off when the price is rich. But that is not the way I want to do, which was why I avoid Ezra and Swiber. I still avoid them. I invest in stock base on safety 1st. They don't have that.

I am not concern at all on whether Ezra is going to do more S&L. It doesn't matter to me as compare to shareholders But I have some good ideas what going to happen going forward. The unavailable of funds is one thing. There are 3 more dangerous factors to consider.
1) lease is fixed but revenues from chartering is not. What will happen when charter rate drop? From reading and looking at Jaya rate, I think the rate increased is around 200 to 400% since 2001.Don't quote me, check around.

2) Another reason for not doing S&L during falling vessel price is that company will need to report losses in P&L.If company still do it, chances are, they need the cash
3) Lastly, watch the parties of the S&L. If it goes down, lot of problem will happen to the vessels and operational wise. But how to watch?

My earlier post is not on Ezra doing S&L but on

"I think I forgot to mention in my AGM highlights that the main reason for the S&L is to be enable to grow the fleet off-Balance Sheet.Mr. Tay had mentioned that the cashflow effects are the same for Ezra Group.He was comparing the S&L method to the "normal" method of keeping a vessel in the books and then depreciating it over 25 years. The P&L effects would have been different but the cash outflows would have been similar."

See what I questioned earlier. By saying that, either he was treating the other party st@p&d or shareholder st@p&d.

Maybe it is just me as gain can be created out of transactions. I was angry on that.

Anyway, make a guess what the presentation to shareholders be like for the other parties? I guess it will be like ....By using shareholder funds plus leverage, buy and lease back vessels, we are generating good and sustainable income --- like locally listed shipping trust and REIT.

musicwhiz said...

Hello donmihaihai,

Thanks for taking the time and having the patience to explain yourself. I sincerely thank you for that and for this discourse.

I think it's safe to say we all have our own opinions about certain issues with respect to the research we do or the facts we dig up. I won't go as far to say the magazines were clear-cut wrong, but neither am I going to say they are always 100% accurate.

The idea of investing is not always to buy a company and sell when "the price is high" because on hindsight it will always seem much higher and as I said on hindsight we always seem to know when we SHOULD have sold, so I don't find that to be a valud argument (sorry). As to why Swiber and Ezra are not "safe" even though they have viable business models and a core business which sees steady demand, I cannot quite fathom. But to each his own, and I respect your views on this.

You are right about charter rates. They have been on uptrend for the last 5-6 years. The contracts are locked in and the charter rates are also locked in for 2-3 years. As to what will cause a sudden crash in rates, I will hazard a guess - falling demand for oil and decreasein E&P spending which will lead to oversupply of support vessels. Since E&P is moving into deepwater, logically this should keep rates high. But this is just my opinion which may be incomplete since I did not consider other possible factors.

For point 2, you are right. No issues about that. For point 3, yes if the finance company goes bust there will be problems, but thus far there's no news of such an event occurring. Not impossible I admit, but the likelihood is not that great.

Gain can be "created" out of S&L but it's an exceptional gain, and not core operating profits. As long as an investor is cognizant of this, he will have no problems valuing the company accurately.

Regards,
Musicwhiz

donmihaihai said...

Hi musicwhiz,

One part of investing is getting to know all possibilities and weight probabilities. Since you put the likelihood is low, I guess you knew who are the finance company. I don't know any.

Exceptional gain is not just for S&L alone, just need to sell the vessel. All locally listed OSVs for at least some years reported exceptional gains for last few years. These gains are real money too.

Ok, not going to write anymore. But before that, look at the S&L from the other side of the party --- finance company as you put it. The whole thing will brighten up. And it is always a good point to do it in all kind of transaction --- to see what everybody want. So far I haven't see any transaction that was entered to give the other party a free ride.

musicwhiz said...

Hi donmihaihai,

I never said I knew any finance companies. But there is a limit to the amount of "scuttlebutt" I will do, as I am not Phil Fisher himself who had the time and tenacity to visit so many companies and do the dirty groundwork to get info. Some part of my investing style also relies on reports I read on industries and general business news. Thus far, I have not read of any ship financing companies going bust, but there could be such cases in the future which I cannot discount. In the meantime, I put my faith in the Company that they have chosen a good finance company to do their S&L with.

The gains are real money on to the extent of the cash received from the S&L. Other than that, they are paper gains. The cash flow is to help to finance a new generation of vessels to scale up business expansion, but I think you know this already.

Of course everyone is in it for their own benefit - I am not so silly that I can't see that ! You can argue that every party is able to benefit when the economy is good, but trouble starts brewing when the economy takes a tumble. I will have to see how things pan out as Management themselves cannot confidently see past 2009. Such is the uncertainty surrounding businesses these days, which I think applies to ALL businesses, not just Ezra alone.

Regards,
Musicwhiz