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Analysts: Buy Ezion For 50 Percent Upside
Aspire, Hot Picks | 31 July 2015
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By: Lim Si Jie
Articles (169) Profile

Analysts' updates on Ezion Holdings Limited as at 30/07/15

The Oil and Gas (O&G) industry as a whole is facing a challenging year ahead in view of the drastic decrease in the price of fossil fuel over the past year. The slow recovery in crude oil prices over the first half of 2015 suggests that the initial price plunge was too great for high-cost oil producers to stomach.

That being said, after a slight plunge over the past two weeks, Ezion has been picked by analysts as a strong fundamental play for long term investment with a potential upside of at least 50 percent.

Oil & Gas Outlook

OPEC Competes For Market Share against Shale Oil Producers

The Organisation of the Petroleum Exporting Countries (OPEC ) has been maintaining its production quota as it sees the need to preserve market share. There are also speculation that OPEC might even exceed its production quota of 30 million barrels per day. In fact, OPEC has been exceeding its quota levels for some time, and the expected increase in crude oil supplies from Iraq.

Additionally, Libya (due to their low base in 2014) has led OPEC to comment that there is a chance for total OPEC production to exceed the said quota. There are also upside risks to OPEC supplies attributed to Iran’s 40 million barrels of oil export backlog given that Iran’s sanctions have now been lifted.

Global Demand Recovery

Crude oil, a growth-related commodity, is expected to see global demand recovering further into 2H15. There are already signs of encouraging demand growth from China, India, and Europe. Empirically, Europe’s crude oil demand in volume terms have recovered significantly from its 18-straight month of contraction to Jan 2015, to a robust import growth of 18.8% in April.

During the period, Chinese and Indian crude imports stayed healthy at 6.4 percent and 3.4 percent respectively in May. Moving forward, both OPEC and US Energy Information Administration had voiced their optimism for global demand to grow further as global economic growth looks increasingly healthy despite the initial US Q1 soft patch.

Ezion’s Strategy

Despite the recent rebound in crude oil prices, Ezion’s management expects major oil producers to reduce exploration and development activities, cut corresponding capital expenditure, and to re-focus on extracting from existing infrastructure.

Major oil producers have announced major Capital Expenditures (CAPEX) cuts to reduce cost as they tide through the rough times of low oil prices. Instead of CAPEX spending, oil producers are allocating a greater budget for OPEX. Oil producers are focusing their efforts on improving the efficiency of current offshore platforms to steer bottom line back to profitability.

Ezion’s management guided that it will continue to focus efforts in its Service Rig division to support its customers to better cope with the current environment through the deployment of more Service Rigs in 2015. Ezion will also look to explore strategic tie-up to strengthen its position in the O&G industry.

The strategy has been effective up till now, which is evident in Ezion’s first quarter results where Q1 FY15 revenue only decreased slightly compared to year-on-year.

Ezion’s 1Q15 Results

Earnings  for FY15 to be Supported by Future Asset Deployment

Ezion Holdings reported a 4.6 percent year-on-year fall in revenue to US$90.1 million and a 9.4 % drop in net profit to US$41.0 million in 1Q15. While it was the first year-on-year decline in 31 consecutive quarters of rising profit, Ezion has proven to be relatively resilient versus its peers in terms of earnings. Ezion is expected to remain resilient in a challenging oil and gas environment. Furthermore, with more assets expected to be deployed in the year, it is likely to support earnings for later quarters.

Renewal Rate to Remain Steady

Renewal rates for the remaining units are expected to be similar to previous rates or at a maximum of five percent discount. Out of Ezion’s five units up for renewal this year, unit 1 has been renewed at the same rate for another two years.

Management updated that unit 5 (originally for Brunei) saw an eight to night percent increase in rates as it is now going to work in the South China Sea. A rig that will replace unit five is likely to get the same rates.

Although some conversion work would be required, unit 11 for Maersk was also renewed at the same rate. The remaining two units are also likely to be renewed at the same rate.

Recommendation

2015 is likely to be a challenging year with Ezion plagued with delivery delays. The risk of contract cancellation remains a concern as recent price action has already captured this risk. Analysts do warn that there are no short-term catalysts to drive the stock either.

While the O&G industry continues to be a battered industry, the potential upside for Ezion provides a margin of safety for long term investors who are able to hold their investments till oil prices recover.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Ezion Hldgs  -- -- --   
Business: Co develops, owns, and charters offshore assets to support the offshore energy markets. [FY17 Turnover] Liftboats (49.7%), Jack-up Rigs (39.5%), Offshore Support Logistic Services (10.8%).

Insight: Aug-18, 1H18, Co returned to the black with a net ... Read More


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