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Swissco’s Upstream Move Towards Oil Rigs; Potential Opportunities Await
Corporate Digest | 05 April 2013
By: Nicholas Tan
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By: Louis Kent Lee
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Backed by robust performance in FY12, Swissco took a step into the future by venturing upstream to diversify its business, leading its share price to move to a year high of $0.305 after a relative dormant 2012. Will this new venture coupled with a fleet expansion programme lead it to test its all-time high of $0.605 last seen on August 2009?

The two words that most companies try their best to sharpen all the time spell out competitive advantages in caps. Swissco Holdings (Swissco), a locally-based marine service provider has created quite a buzz lately among market watchers through its latest move to venture upstream in its value chain into the oil rig construction business. In a recent exclusive interview with Shares Investment, Swissco shared their view on the oil and gas industry and its plans, moving forward.

Bullish On Oil Prices
“With Europe’s economies still in a slum, the US about just recovering off the bottom of a recessionary phase, and Asia still performing quite well though dragged by the poor economic performances of the two major economies in the world, oil prices are still at a commendable price level above US$90 per barrel,” said Alex Yeo, chief executive officer and director of Swissco.

Oil prices, a metric used to gauge the demand for the fossil fuel and how well the world’s economy is performing, is often used as a forward indicator to determine the future direction of the global economy. Looking at the oil price trend, the crude oil prices at the start of the year was US$93 per barrel and has trended upwards towards US$98 per barrel for the year, clearly signaling a bright outlook for the offshore exploration and production sector in Asia-Pacific.

“There could be a possibility that if these economies do pick-up in the next three years, the demand for energy could lead to a bull-run in the oil market and oil prices could reach the all-time high of US$146 per barrel, which was last seen in July 2008,” he fervently added.

Due to the limited quantity of oil as a natural reserve, Yeo opined that the demand for oil will always be there unless other alternate energy sources emerge. If his predictions on oil prices do come true, that could provide a bonanza for Swissco as international oil majors will likely ramp-up productions to build-up reserves, leading to greater demand for offshore and marine services.

Regional Outlook
For the South-east Asia region, Yeo quoted that most of the countries here are still developing economies, this offers huge potential for future oil demand and opportunities to grow.

In Malaysia, oil major Petronas is looking to spend the equivalent of US$10 billion in the next three years just on exploration and rejuvenation programme to turn their old oil fields into more efficient producers and build up their declining oil reserves. The increased capital expenditure in oil exploration and production (E&P) has led total production to increase 3 percent year-on-year to 1.99 million barrels of oil equivalent (BOE) a day, reversing a four-year downward trend. Subsequently, oil reserves also increased to 32.6 billion BOE in 2013 versus 28.4 billion BOE in 2012, as of January 2013.

Moving up north, Thailand has been slow in terms of being a major oil producer in this region due to a lot of political instability over the past few years. However, Thailand’s Prime Minister Yingluck Shinawatra has shown her mettle and things in the country have been improving with the state-owned investment company PTT Public having invested a lot in the oil and gas sector. Chevron, the top oil and gas producer in Thailand, has also pumped in a lot of capital expenditure and has lots of vested interest in the country. According to Yeo, this region looks quite vibrant in the near term.

Upstream Venture
Most recently, Swissco formed a Special Purpose Vehicle (SPV), Rockwood Asset Holdings, a significant development that allows them to diversify its business model to move up the value chain and into the oil rig sector. Besides allowing them to venture out of their traditional spherical operation area – offshore support vessel and gaining expertise in the area of oil rig engineering, procurement and construction (EPC) contracts, the transaction is also in-line with Swissco’s strategy to invest for growth in the longer term with fleet diversification to improve the profile of its fleet available for charter.

The SPV will enter into an EPC contract with Jiangsu Rongsheng Heavy Industries and Rongsheng Offshore & Marine for the construction of an oil jack-up rig, with an option to construct a second one. The initial investment outlay of US$8.2 million representing a 46.5 percent stake in Rockwood will be funded through a convertible loan from Golden Arch Worldwide Offshore, one of its partners in the SPV. Sam Kwai Hoong, chief financial officer of Swissco elaborated, “The beauty of the convertible loan is that it gives us the option to redeem it if cash flow permits and allows us to preserve the cash needed for our continual fleet expansion.”

Sam further explained that as Swissco is on a fast-track of expanding and developing the fleet, they are very careful with the issues of financing such deals and a convertible loan enables them to save coming out with cash while achieving their corporate aims. This prudent management style is evident in its balance sheet which is well-balanced with a healthy leverage ratio of 0.64, in comparison to its industry peers whose leverage ratios’ are much higher as they had funded rapid expansion of their fleets with high levels of debt and off-balance sheet leases.

Increased Capacity Boost In 2013
As of current, Swissco has a fleet size of 30. Eight vessels are expected to be delivered in the year 2013, which will further boost the capacity of the expanded fleet. In FY12, Swissco’s Chartering segment has seen a close to 10 percent growth.

“We are excited about the expected delivery which will most probably be in the second or third quarter of 2013. We have been able to achieve the kind of top line and returns that are positive for this segment and it will be interesting to see this additional capacity for our chartering business and the potential of what can be further achieved,” Yeo said.

The current market indicators for the chartering sectors are positive and the impact of expected delivery of vessels, could very well be positive for FY2013.

Stellar Growth For FY12
Looking at the latest financial statement of Swissco Holdings, you would have realised that its performance has been nothing but spectacular. Net profit for FY12 rose by 100.3 percent, as revenue showed a 70 percent growth. A further breakdown revealed that among the revenue growth seen across all sectors, Swissco’s Martime Services saw a gain of more than two-fold. On the possibility of such performance, Yeo mentioned that the company does see the continuity of the contribution from the Maritime Service sector this year, right up to even 2014, but also pointed out that as businesses are cyclical, the importance of diversity should not be neglected.

“We are diversifying our fleet composition and doing other things, we are hedging that two years from now things will change, and that’s why we are currently heading towards the higher end of the OSV market, which is now the rigs. So this is our way of broadening, and to expand our revenue stream,” quipped Yeo.

Rewarding Shareholders
Including a special dividend of $0.003 for FY12, the dividend for FY12 stands at $0.008 a share, which raises the brow of many when compared to the $0.003 dividend paid out in FY11.

“We have been trying to reward shareholders who are loyal to us, FY12’s performance has been remarkable and we have doubled our net profit. I think as long as we continue to outperform ourselves, our dividends should be sustainable,” said Sam. Nonetheless, Yeo cautioned that the industry is capital intensive and it is very important to strike a fine line between paying out dividends, and preserving cash.

With a relatively low Price to Earnings ratio of 7.2, and the potential room to run for its move up the value chain, Swissco, might have already appeared on the list of hungry value investors.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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