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.