Ezra – EGM on August 29, 2007

I attended the EGM held by Ezra today at 10:00 a.m. in order to approve 3 resolutions, namely the 1-for-1 bonus issue, company’s share repurchase scheme and the sale of 43% of EOC Limited on the Oslo bourse. The official business of the meeting was quickly concluded (as it usually is) with all resolutions being proposed, seconded and passed without objections. I took the opportunity to meet up with Mr. Tan Tat Ming (Finance Executive and also in charge of investor relations for Ezra Group) to discuss some salient issues regarding the company. Below are a list of issues which we covered and I am just providing a summary as I could not remember 100% of the details:-

a) On the Bonus Issue – Mr. Tan mentioned that due to the high absolute price of Ezra’s shares on SGX, several funds have been reluctant to buy into the company. Doing a 1-for-1 bonus will double the number of issued shares and half the price, thus increasing trading liquidity and also lowering the absolute cost of each lot. He said that several institutions and funds have shown interest in collecting more of Ezra’s shares but have been constrained from doing so due to the lack of liquidity.

b) On share buybacks – Previously, Ezra had purchased 3 million shares at a price of S$5.60 per share from the open market but this was declared a “void” transaction as the company did not have the mandate for a share buyback program at the time. Thus, this 3 million shares will be released (sold) back to the open market and the company will make an appropriate announcement when this occurs. The company has no plans to buy back shares in the foreseeable future.

c) On rationale for divestment of 43% of EOC – I queried Mr. Tan on the rationale for the disposal of 43% of EOC, arguing that Ezra Group will actually recognize lower profits because most of the profits from the new vessels were coming through the production and construction division helmed by EOC. He mentioned that it was to be a trade-off as Ezra wanted to “lighten” their balance sheet, thus by disposing of the 43% interest in EOC, they need not consolidate line-by-line items for EOC from FY 2008 onward. On the flip side, profits will also be slightly lower and will be incorporated into a line “share of profits from associated company” as EOC will now be an associate instead of a subsidiary. The intention, he said, was for Ezra to grow its AHTS fleet separate from the production and construction division helmed by EOC, and their idea was to beef up the balance sheet of EOC as a result of this divestment. I do not totally agree that this is the best thing to do but I am willing to put my faith in the Management, seeing their track record at managing the company so far.

d) On progress of divestment of EOC – As stated in the circular, the agreed upon price for the divestment and subsequent sale of vendor shares was estimated at between NOK 24 and NOK 26, and the final price will be determined once the contract is signed for the listing. Mr. Chan Eng Yew is currently in Norway handling the EOC matter, and everything is going smoothly as planned. A few weeks ago, CLSA came up with a report speculating that delays may occur in listing EOC at an attractive valuation due to the recent weakness in the markets and reduced confidence on the part of investors. Mr. Tan’s assurance was that this was an equity offering (not debt), thus there should be significantly less resistance to it.

e) On clinching another FPSO deal – EOC will be working towards that as the company plans to bid for another FPSO deal some time in the future. Financing was of course an issue but Mr. Tan’s assurance was that once the announcement was made, all the required tie-ups with regards to financing would have been made. The Group is looking towards acquiring an FPSO in the range of US$200 million to US$300 million rather than the super-large types in the North Sea which can go as high as US$1 billion.

f) On progress of conversion of current FPSO – The current conversion of the FPSO “Kitty Knutsen” is progressing smoothly and the vessel has been renamed Lewek FPSO 1. It is expected to be delivered some time in FY 2008.

g) On alternative fuels and whether they can threaten Ezra’s business – Mr. Tan assured me that oil and gas will always have a part to play in society, even if alternative fuels should one day become commercially viable to produce in mass quantities. This is because too many vessels, aircraft and vehicles are constructed for use with gasoline, and this will not change for at least 50 years (my personal estimate). He also mentioned that for bio-diesel, he has heard that the cost of producing it (from corn) is now higher than the price of the output generated, thus long-term feasibility of this procedure is in question.

h) On charter probabilities and rates for 30,000 bhp vessels – According to Mr. Tan, there was a recent charter of a 28,000 bhp AHTS at a spot rate of US$250,000 per day ! This rate is, of course, not sustainable for longer-term charters but will average around US$100,000 to US$150,000 per day, still a very significant amount indeed. As such, the new 30,000 bhp vessels being built by Pan-United Marine are also equipped with state-of-the-art DP3 (Dynamic Positioning) systems. This technology gives the vessels an added competitive advantage and this should enable them to command higher rates.

i) On charter of Lewek Champion (recently delivered pipe-lay vessel) – I wanted to clarify the charter of Ezra’s pipe-laying vessel Lewek Champion as there were two separate announcements regarding the charter of this vessel, one to ConocoPhillips for 1H FY 2008, and another for a sub-sea pipeline installation for a national oil company. Mr. Tan said that the sub-sea charter can be considered a long-term one, while the ConocoPhillips is more of a spot rate charter which will not extend beyong 1H FY 2008; thus the vessel can be deployed to 2 different locations depending on the needs of the charterer. He also clarified that the US$888 million as announced in the press release was the entire project value, but that Ezra would only be earning a part of that (he did not elaborate on the % as it would be market-sensitive I guess).

j) On strategic stake in Ezion Holdings (formerly known as Nylect) – Ezion is involved in semi-submersibles and Ezra had acquired part of the company in order to enable a strategic fit between Ezion and its Vietnamese fabrication yard. The yard is currently expanding and Ezion’s role in future would be to support the new pre-fabricated vessels coming from the yard. Personally, I have no shareholdings in Ezion as I feel there is no value at current market prices. Ezra’s entry price into Ezion was 33.1 cents, thus they are sitting on some good unrealized gains as well. Hopefully, they will be able to integrate Ezion into their business smoothly and enable more profits to be recognized as a result.

k) On their Vietnamese Fabrication yard – This yard is expanding and Ezra will announce something soon on the development and progress of this yard. Staff strength currently number about 300+ (mostly Vietnamese skilled workers including welders) and is set to increase. The yard is constructing platforms, which are used alongside rigs during the oil drilling phase. Platforms and deployed as fixed structures alongside floating rigs in order to stabilize the operations and enable drilled oil to be piped back to the rig for collection. I am guessing that this will be another area of growth for Ezra as it intends to capture a larger portion of the oil and gas cycle by constructing platforms. Mr. Tan did casually mention that Ezra has identified another land parcel for possible expansion of the Vietnamese yard, but this cannot be confirmed unless the company does an official press release.

I have covered the major points discussed with Mr. Tan, and hopefully the company can continue its growth trajectory to make this a value company to own for many years down the road. From what I heard today, I expect to see more positive developments down the road for shareholders and interested investors. Unlocking the value of EOC through a vendor sale of shares on the Main Board of Oslo is only the first step in Ezra’s ambitious expansion plan.