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This was not supposed to be such a quick follow-up post to my just concluded Analysis of Ezra’s FY 2009 financials, but certain corporate actions made by the company necessitated my immediate action and attention and which compelled me to act.
Securing of US$1 Billion Chim Sao FPSO Project by EOC
Immediately after my posting on Wednesday morning October 21, 2009 of Part 2 of my analysis and rationale for partial divestment, Ezra dropped a bombshell by announcing that its 48.5% associated company EOC had clinched the much talked-about Chim Sao FPSO deal, which was worth US$527 million for the first 6 years and US$477 million assuming an option is exercised to continue for another 6 years. Thus, the total value of the contract is US$1,004 million over 12 years, or if smoothed out equally, will represent revenues (not profits) of about US$83.7 million per year. The worrying aspect of this announcement is how EOC are going to fund the conversion of a deadweight tonne oil tanker into an FPSO as they are already very highly geared (2.31x as at August 31, 2009). It immediately became clear to me that EOC (through Ezra) would have to do some fund-raising to be able to take on this project, and I was proven right (see next section on Issuance of Convertible Bonds).
Note that although the press releases from Ezra and EOC both tout the value of the contract and talk about stable revenue contributions and asset utilization for at least the next 6 years, I actually analysed the situation and came up with a different perspective:-
1) Assuming additional revenues of US$83.7 million per year, and assuming a very healthy net margin of 20% (gross margin for Offshore Support Services is 38% as at August 31, 2009, so 20% is reasonable to assume for net margin, albeit a little optimistic), this means an additional US$16.74 million worth of profits accruing to EOC each year. Since Ezra owns only 48.5% of EOC, this means they only recognize an additional US$8.12 million per year on a Group basis. This only constitutes about 11.6% of their core FY 2009 net profit, and thus cannot be considered very significant. This is because of the risks to be factored in when taking on a project of such massive size (see point 2).
2) The first FPSO deal clinched by Ezra and announced in 2006 experienced many delays and hiccups as first gas took very long to achieve, and in fact it was only today (October 22, 2009) that Ezra announced that the client had commissioned and accepted the FPSO, with almost a year of delay between deployment to production of first gas. Originally, it was announced that Lewek Arunothai would contribute to 1Q 2009 revenues; but this has since been pushed back all the way to 1Q 2010. This demonstrates the technical difficulty of operating an FPSO, and for the Chim Sao Project the complexity may again lead to delays of a similar nature.
3) Note that EOC mentions that the FPSO would be owned by “4 entities”, though it does not give details of these entities and whether they are part of Ezra Group. Assuming that the entities are external parties, this may imply that EOC may only share up to 25% of the revenues accruing from the FPSO. This makes Point 1 assumptions drop by 75% to just about US$2 million accruing to Ezra Group per year. Read more...
Read all about Musicwhiz's post on Ezra here.[caption id="attachment_1605" align="alignright" width="150" caption="Photo by Anderson Mancini"][/caption]
This was not supposed to be such a quick follow-up post to my just concluded Analysis of Ezra’s FY 2009 financials, but certain corporate actions made by the company necessitated my immediate action and attention and which compelled me to act.
Securing of US$1 Billion Chim Sao FPSO Project by EOC
Immediately after my posting on Wednesday morning October 21, 2009 of Part 2 of my analysis and rationale for partial divestment, Ezra dropped a bombshell by announcing that its 48.5% associated company EOC had clinched the much talked-about Chim Sao FPSO deal, which was worth US$527 million for the first 6 years and US$477 million assuming an option is exercised to continue for another 6 years. Thus, the total value of the contract is US$1,004 million over 12 years, or if smoothed out equally, will represent revenues (not profits) of about US$83.7 million per year. The worrying aspect of this announcement is how EOC are going to fund the conversion of a deadweight tonne oil tanker into an FPSO as they are already very highly geared (2.31x as at August 31, 2009). It immediately became clear to me that EOC (through Ezra) would have to do some fund-raising to be able to take on this project, and I was proven right (see next section on Issuance of Convertible Bonds).
Note that although the press releases from Ezra and EOC both tout the value of the contract and talk about stable revenue contributions and asset utilization for at least the next 6 years, I actually analysed the situation and came up with a different perspective:-
1) Assuming additional revenues of US$83.7 million per year, and assuming a very healthy net margin of 20% (gross margin for Offshore Support Services is 38% as at August 31, 2009, so 20% is reasonable to assume for net margin, albeit a little optimistic), this means an additional US$16.74 million worth of profits accruing to EOC each year. Since Ezra owns only 48.5% of EOC, this means they only recognize an additional US$8.12 million per year on a Group basis. This only constitutes about 11.6% of their core FY 2009 net profit, and thus cannot be considered very significant. This is because of the risks to be factored in when taking on a project of such massive size (see point 2).
2) The first FPSO deal clinched by Ezra and announced in 2006 experienced many delays and hiccups as first gas took very long to achieve, and in fact it was only today (October 22, 2009) that Ezra announced that the client had commissioned and accepted the FPSO, with almost a year of delay between deployment to production of first gas. Originally, it was announced that Lewek Arunothai would contribute to 1Q 2009 revenues; but this has since been pushed back all the way to 1Q 2010. This demonstrates the technical difficulty of operating an FPSO, and for the Chim Sao Project the complexity may again lead to delays of a similar nature.
3) Note that EOC mentions that the FPSO would be owned by “4 entities”, though it does not give details of these entities and whether they are part of Ezra Group. Assuming that the entities are external parties, this may imply that EOC may only share up to 25% of the revenues accruing from the FPSO. This makes Point 1 assumptions drop by 75% to just about US$2 million accruing to Ezra Group per year. Read more...
Read all about Musicwhiz's post on Ezra here.
[/caption]
This was not supposed to be such a quick follow-up post to my just concluded Analysis of Ezra’s FY 2009 financials, but certain corporate actions made by the company necessitated my immediate action and attention and which compelled me to act.
Securing of US$1 Billion Chim Sao FPSO Project by EOC
Immediately after my posting on Wednesday morning October 21, 2009 of Part 2 of my analysis and rationale for partial divestment, Ezra dropped a bombshell by announcing that its 48.5% associated company EOC had clinched the much talked-about Chim Sao FPSO deal, which was worth US$527 million for the first 6 years and US$477 million assuming an option is exercised to continue for another 6 years. Thus, the total value of the contract is US$1,004 million over 12 years, or if smoothed out equally, will represent revenues (not profits) of about US$83.7 million per year. The worrying aspect of this announcement is how EOC are going to fund the conversion of a deadweight tonne oil tanker into an FPSO as they are already very highly geared (2.31x as at August 31, 2009). It immediately became clear to me that EOC (through Ezra) would have to do some fund-raising to be able to take on this project, and I was proven right (see next section on Issuance of Convertible Bonds).
Note that although the press releases from Ezra and EOC both tout the value of the contract and talk about stable revenue contributions and asset utilization for at least the next 6 years, I actually analysed the situation and came up with a different perspective:-
1) Assuming additional revenues of US$83.7 million per year, and assuming a very healthy net margin of 20% (gross margin for Offshore Support Services is 38% as at August 31, 2009, so 20% is reasonable to assume for net margin, albeit a little optimistic), this means an additional US$16.74 million worth of profits accruing to EOC each year. Since Ezra owns only 48.5% of EOC, this means they only recognize an additional US$8.12 million per year on a Group basis. This only constitutes about 11.6% of their core FY 2009 net profit, and thus cannot be considered very significant. This is because of the risks to be factored in when taking on a project of such massive size (see point 2).
2) The first FPSO deal clinched by Ezra and announced in 2006 experienced many delays and hiccups as first gas took very long to achieve, and in fact it was only today (October 22, 2009) that Ezra announced that the client had commissioned and accepted the FPSO, with almost a year of delay between deployment to production of first gas. Originally, it was announced that Lewek Arunothai would contribute to 1Q 2009 revenues; but this has since been pushed back all the way to 1Q 2010. This demonstrates the technical difficulty of operating an FPSO, and for the Chim Sao Project the complexity may again lead to delays of a similar nature.
3) Note that EOC mentions that the FPSO would be owned by “4 entities”, though it does not give details of these entities and whether they are part of Ezra Group. Assuming that the entities are external parties, this may imply that EOC may only share up to 25% of the revenues accruing from the FPSO. This makes Point 1 assumptions drop by 75% to just about US$2 million accruing to Ezra Group per year. Read more...
Read all about Musicwhiz's post on Ezra here.
