Making Sense of Ezion’s Trading Suspension: 2 Key Things to Know
On Monday morning around 7:00 am, Ezion (SGX: 5ME) released its 2017 second quarter earnings. Less than 40 minutes later, the company issued a request for its shares to be suspended from trading. As of the time of writing, the suspension remains.
As a brief background, Ezion is an oil and gas support services provider. The company is an owner of a fleet of offshore assets that include multi-purpose self-propelled jack-up rigs and heavy-haul vessels. It also provides services such as well-servicing and maintenance, among others.
To explain the rationale behind the suspension, Ezion’s chairman, Dr Wai Kai Yuen, issued a letter to shareholders at 8:00 am on the same day. There are important takeaways from the letter.
The lingering effect of low oil prices
In his letter, Wai referred to section 10 of Ezion’s 2017 second quarter earnings release that outlined “the severe threats and opportunities” the company was facing. From the section:
“Brent oil prices have dropped from about US$110 per barrel in June 2014 to below US$30 per barrel in January 2016 and although the oil price has recovered modestly since, it has however been predominantly hovering around US$52 per barrel range.”
Indeed, oil prices have been trading way below their pre-2014 levels as shown in the graph below:
In addition, oil prices are expected to remain around the US$50 level in the next 12 months. The low oil price environment has caused Ezion’s customers to reduce their capital and operating expenditure for the same period. Ezion reported:
“Consequently the Group does not expect any significant increase in the capital and operating expenditure of oil and gas companies over the next 12 months.
Furthermore, Ezion stated that “languishing oil prices and a difficult outlook would hamper any recovery in Singapore’s oil and gas sector”.”
The rubber hits the road for Ezion when it receives lower charter rates from its customers. The company said in its latest earnings release that its current rates are down in a significant way, and are expected to remain low for the next 12 months:
“The Group thus has been affected by the above and has witnessed charter rates being significantly depressed for most of the Service Rigs as compared to the pre-2014 period, and the depressed charter rates look likely to continue for the next 12 months.”
Piyush Gupta, the chief executive officer of Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05), seems to be in agreement with Ezion. In a recent DBS earnings briefing, Gupta made the following comment about oil and gas support services firms:
“At the prices they’re getting for the contracts right now, they’re barely able to cover opex, so it’s really hard for them on a sustained basis to cover [payments on] interest and principal.”
In short, Gupta believes that the current rates are barely enough for oil and gas support services companies to cover their operating expenses. To compound the situation, Ezion may not be receiving payments for its services in a timely manner. In its 2017 second quarter earnings release, Ezion said:
“Furthermore, collection of receivables continues to be slow. If the situation worsens, significant impairments may be needed.”
Going back to the shareholder letter, Wai wrote that the present operating environment has presented challenges to Ezion’s cash flow and that the company is in discussions with its principal lenders for financing options. He added that the company’s shares have been temporarily suspended, pending a resolution with its stakeholders.