Ezion aims to buy or build 2 service rigs per year

Stock Name: EzionHldg
Company Name: EZION HOLDINGS LIMITED
Research House: DBS Vickers

Singapore oil and gas services firm Ezion Holdings (EZHL.SI) aims to buy or build two rigs every year to service offshore oil platforms as strong crude prices keep the industry buoyant, its CEO said.

Chew Thiam Keng, Ezion’s CEO, declined to give details on the costs, but industry analysts estimate that building one such service rig could cost US$60 million ($73.9 million). Buying it may be more expensive due to the limited supply in the market.

“We will probably commit to two units per year. I would like to have as many units as possible because the demand from the market is very strong,” Chew told Reuters in an interview.

“In West Africa, Middle East and Asia Pacific, there are over 3,000 fixed platforms and out of these, close to about 2,000 units are almost 20 years old. In the next 5-10 years, there is a lot of work that needs to be done, especially on all these old platforms.”

The charter of such rigs can go up to around US$60,000 per day.

Ezion, which has two rigs in operation, said it may fund this expansion through 25% internal resources and 75% loans from both Singapore and foreign banks. Chew said there were currently no plans to issue new shares.

As of December 2010, Ezion had cash and cash equivalent of $88 million. The firm recently sold one service rig for US$78 million and it said in January it had issued 53 million preference shares that raised net proceeds of $51.3 million.

Ezion’s two rigs are currently working in Africa and the United Arab Emirates, respectively, and the company expects to triple its fleet to six units by next year.

It is slated to take deliveries of one unit in May this year and two more by the first quarter of 2012.

One of the rigs is likely to be chartered to Exxon Mobil (XOM.N) on a bareboat basis in West Africa for three years with an option to extend for another two years, Chew said. 

For bareboat charter, the owner of the unit rents out only the hardware to the customer.

The firm had also entered a joint venture with Buccaneer Energy (BCC.AX), an oil and gas company listed in Australia, to acquire a rig and upgrade it so it can do both repair work and drilling.

The joint venture had secured a five-year contract worth US$109.5 million to provide the rig for oil and gas activities in Alaska’s Cook Inlet. The project is expected to start before the end of 2011.

DBS Vickers said in a report that it estimates the Alaska project could contribute $3.6 million per year to Ezion’s bottom line and generate a return on equity of 55%, or a payback period of under two years.

The brokerage has a buy rating and target price of $1.09 on Ezion stock.

At 9:58 a.m., Ezion shares were up 1.4% at $0.72 on a volume of 2.5 million shares. The stock has risen 1.4% so far this year.

“Judging from its debt level and cash flow, they will not have problem to build two units of liftboats a year,” said Jason Saw, an analyst at DMG & Partners Research, adding that the company has

Service rigs are also known as liftboats.

Saw said key risks are the cancellation of charter contracts and further delays in the firm’s Australian marine supply base operations. He has a buy rating and a $1.04 target price on the stock.

Ezion’s plan to build two marine supply bases in Australia has been delayed due to the customer’s request for a change in design in order to comply with environmental standards.

Chew said the firm remains committed to the project and is trying to resolve the issue as soon as possible.