Ezion charts a new course

Ezion Holdings is the largest provider of liftboats in Asia Pacific. These vessels provide offshore oilfield services for existing energy infrastructure in Asia and all over the world. It also offers heavy haul vessels for oil and gas logistics which are active in our northwest shelf. Ezion also owns the Melville Port in Northern Australia. The company is also active in commissioning and decommissioning oil and gas platforms via a fleet of special purpose barges.

Ezion is a growth stock but trades at a very undemanding valuation. Core earnings per share (EPS) is expected to grow at 39% between 2013-14 and 2015-16 as the company effectively doubles its fleet from 18 units to 35 by end of the fourth quarter this calendar year. 94% of these are backed by secured contracts from the oil majors. Earnings visibility is excellent. It's hard to believe, but Ezion currently trades on a modest price-earnings (P/E) multiple of 8.5 times in 2014 and 6.7 times in 2015 (the company's fiscal year is the calendar year).

The investment case for Ezion is based almost solely on the liftboat business. Analysts believe that the company will place the logistics and barge businesses in a separate entity, freeing up the balance sheet to grow the core business.

Ezion's liftboats are offshore elevating platform-based vessels with manoeuvring capabilities. They can also be called “multi-purpose self-propelled jack up rigs”. They support the following activities:

• Oil well intervention activities (e.g. wireline and coiled tubing)
• Maintenance and repairs of offshore platforms
• Upgrading of offshore platforms
• Removal of old platforms
• Operational support of offshore platforms
• Temporary housing for construction and service crews

These liftboats provide a stable and mobile work platform for offshore services. Since they are self-propelled, there is no need to incur mobilisation costs for rigs. As a result, they are effectively a low-cost alternative for a wide array of offshore jobs – construction, work-over, maintenance and platform removals.

Liftboats are generally safer and more efficient than workboats or tugs and essentially replace higher-cost derrick barges. The design and core function of the liftboat allows offshore operations to persist despite harsh weather conditions and they have the ability to operate in water depths of up to 450 feet (around 137 metres). They also have crane lifting capability and can accommodate 160-200 workers. 

Source: (company website)

The appeal of liftboats over more traditional service vessels is that the use of these state of the art vessels can significantly improve oil and gas production as well as improving decline rates. They allow more frequent and cost effective topside repair and maintenance. National oil companies in Southeast Asia have a large amount of shallow water energy infrastructure that historically has not been maintained properly and are also actively deploying new acreage. The National oil companies of Malaysia and Indonesia have recently announced large and ambitious capital expenditure and exploration projects. That is the dual opportunity for Ezion.

Recent contract wins and pipeline

Ezion's recent contract pipeline is impressive with over $US600 million of contracts secured this year alone at an average rate of one contract per month. They are as follows:

• January 16, 2014: A five-year contract to provide a liftboat to a national oil major in Southeast Asia (believed to be Petronas) for $US94 million.
• February 18, 2014 A three-year contract to provide a service rig to a national oil major in South Asia (believed to be ONGC) for $US87.6 million
• April 15, 2014: A three-year contract to provide a service rig to a national oil major in South Asia (believed to be ONGC) for $US 43.7 million.
• April 15, 2014 A three-year contract to provide a service rig to a state-linked company in the Middle East for $US 30 million.
• May 7, 2014: A five-year contract to provide a service rig to an oil major in the Middle East for $US 63.7 million.
• July 15, 2014: A seven-year contract to provide a service rig to an East European national oil major in the North Sea for $US122.6 million.
• July 15, 2014: A five-year contract to provide a liftboat to a national oil major in South East Asia for $US146 million.
• September 14, 2014: A three-year contract for new liftboats from a national oil company in Southeast Asia for $US 76 million.

Management

The management team is very experienced and the board structure is more in line with Western best practice.

Chief executive and co-founder, Chiew Thiam Keng, was previously managing director of Singapore stock exchange listed KS Energy, one of the largest distributors of equipment and consumables to the oil and gas industry in Southeast Asia. Currently he holds 15% of Ezion's shares.

Chief operating officer and executive director, Captain Larry Johnson, has over 38 years' experience in the maritime energy business and is responsible for the group's day-to-day operations. He established Ezion's tug and barge business for the group's Gorgon joint venture and has spent most of his career working on projects for energy majors such as ExxonMobil, Chevron, Aker, Conoco Philips and Technip.

The Board consists of Keng, Johnson and three independent non-executive directors. Lee Kian Soo is the non- executive chairman and has over 30 years' experience as the founder of the Ezra Group of companies that operate in shipping and offshore services industry.

Share price catalysts

Ezion is followed by 16 analysts, 14 of whom have a buy on the stock. However, at 8.5 times 2014 EPS, the market doesn't believe Ezion will effectively grow in excess of 35% over the next three years. Therefore the first catalyst will be demonstrating the consensus revenue outlook is too low. I believe this will start in the second half of calendar 2014 when quarter-on-quarter profit growth resumes after delivery delays impacted the first-half calendar 2014 results.

More contract wins in the second half of 2014 and into 2015 will underpin the shares. Pricing will improve. Day rates for time charter contract rigs could rise 15-30%. This is not in analyst's expectations as of yet.

Ezion's shares, unlike its global oil service peers, don't really trade with the oil price (and that's a good thing) and have a low correlation with the Singaporean market. Share performance is more dictated by news flow, which I expect to be positive over the medium term.

Conclusion and recommendation

Ezion is a “buy” at current prices with a target price of $SG3.03 based on an achievable P/E multiple of 10.5 times 2015, with EPS of $SG 27 cents. That's a 67% upside from current prices.

Risks

• Vessel deliveries could be delayed.
• Like any contractor, Ezion could suffer contract delays which would be material to quarterly earnings.
• Contract renewals from existing customers could be cancelled.
• Ezion needs a more tolerant attitude in Malaysia and Indonesia regarding cabotage rules which disadvantage non-local flag carriers. Currently it has to operate under exemptions.

To see Ezion's forecasts and financial summary, click here.