• 5 or 6 additional units will be put to work in FY17, lifting up average fleet utilisation from 65% to 78%. Utilisation rates may have seen a bottom.
• Working fleet replenishment is expected to offset negative impact from possible further drop in charter rates.
• Conversion of units into more economical Mobile Offshore Production Units (MOPUs), together with offshore wind sector redeployment, is expected to create new demand for these new fleet.
• Temporary liquidity crunch will be alleviated.
• We initiate coverage on Ezion with a Buy rating and a target price of S$0.48 based on discounted free cash flow to firm (FCFF) valuation with weighted average cost of capital (WACC) of 8.9%, implying an upside of 57.4%.

Investment Thesis

• Persistent dim outlook: oil prices are not due for a sustainable recovery yet due to uncertainties of output cut

The possible plan to cut total OPEC output to between 32.5mb/d to 33mb/d will be decided at the OPEC meeting by end of November 2016. If the supply cut does not fall below 32.69mb/d, the glut of oil will continue, based on estimated world oil demand for 2017.

• Contagion from drilling-related activities spreading through to operational activities in the upstream sectors

Capital expenditure (CAPEX) cut on exploration and production has led to operating expenditure (OPEX) reduction among the industry.

• Offshore wind market sees bright prospects

The upswing in offshore wind infrastructure development will pull up the demand for related facilities such as wind turbine, foundations, and vessels.

Investment Actions

We initiate on Ezion with a “Buy” rating and a target price of SG$0.48 based on discounted free cash flow to firm (FCFF) valuation with weighted average cost of capital (WACC) of 8.9%.

Company Background

• Involved in the market of offshore energy including fossil and non-fossil, Ezion Holdings Limited (Ezion), together with its subsidiaries, is a global specialised offshore assets provider.
• Currently, the group is engaged in the development, ownership, and chartering of two main asset classes, self- and non-self-propelled services rigs (Service Rigs) and Mobile Offshore Production Units (MOPUs).
• With the footprint extended to regions owning rich oil and gas resources, including Asia Pacific, Middle East, West Africa, North Sea, and the Americas, the group has established longstanding and solid relationships with market majors such as Chevron, Saudi Aramco, and Shell.
• As of Jun-16, the fleet size of service rigs was reported at 26, 17 of which were in operation, and the rest under construction or maintenance.

To diversify the product mix, Ezion has entered the non-traditional energy market like offshore wind. Apart from redeploying service rigs in North Sea previously, in Jun-16, the group announced its entry into China’s offshore wind farm market through collaboration with two state-owned corporations in China, Sinotrans &CSC and China Huadian.

Investment Thesis

Persistent dim outlook: oil prices are not due for a sustainable recovery yet due to uncertainties of output cut

The oil rout, which started from mid of 2014, went through a price plunge from more than US$100/bbl to mid-US$20/bbl in one and a half years. Moving into 2Q16, the short-term rally that lasted for 3 months lifted the oil price (Brent) up to c.US$53/bbl. Thereafter, the price has been fluctuating between US$40/bbl and US$54/bbl since mid of 2016.

Factors impacting oil price vary, including economic growth, demographic changes, technological innovations, and so forth. Amongst all, oil supply and demand balance is the fundamental that results in price volatility and drives short-term trend (1 to 3 years). Apparently, the current supply glut is still casting an overhang on oil prices. Year to date, two impactful events- the liftings of Iran oil sanction and US crude oil export ban, had caused volatilities on supply side, and especially the former increased the uncertainty as to whether OPEC nations will be able to come to a consensus on an output cut.

According to November OPEC Monthly Oil Market Report (MOMR) 2016, the world oil demand in 2016 is estimated to be 94.4 mb/d. Deducting the supply amount of 62.48mb/d from non-OPEC and OPEC NGLs, the shortage is estimated to be 31.91 mb/d, shown in Figure 1. Energy Information Administration (EIA) revealed that OPEC crude output rose to a record of 33.64mb/d in Sep-16, as Iraq pumped at an all-time high of 4.78 mb/d and Libya reopened ports. The possible plan to cut output to between 32.5mb/d to 33mn/d will be decided at the OPEC meeting by end of November 2016. If the supply cut does not fall below 32.69 mb/d, the glut will continue based on estimated world oil demand for 2017.

Figure 1. Supply/demand balance forecast for 2017, mb/d

Source: MOMR Nov

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