In January 2014, Ezra announced that it had appointed J.P. Morgan (SEA) to advise the company on strategic options with the aim of optimising its international profile and the competitive position of its Subsea Services Division, EMAS AMC. Potential options included a listing in the U.S.[1]
Six months later, it was announced that the offshore support services business will be consolidated to create one of the Asia-Pacific’s largest offshore services players. That year saw numerous announcements of contracts awarded to EMAS AMC. In October 2014, Ezra announced record revenue of US$1.5 billion for FY2014, which it said was powered by EMAS AMC’s “sustained operational capability”.[2] The contract wins continued in 2015.
Lionel Lee was appointed Chairman of EMAS AMC in May 2015, after relinquishing his director roles at Triyards and EOL.[3] Two months later, the company announced that it had clinched a six-year long term agreement from Saudi Aramco, with options to extend for another six years, through a consortium of EMAS AMC and Larsen & Toubro Hydrocarbon Engineering (LTHE).[4]
The 50-50 EMAS Chiyoda Subsea JV (ECS) was announced the following month.[5] With EMAS AMC as the main revenue driver, then Ezra Chairman Koh said that “it is imperative to devote focused attention on our subsea strategy”.[6]
Meanwhile, EOL announced contract wins totaling more than US$200 million between June 2015 and December 2016 following the announcement of its US$500 million multi-currency debt issuance programme.[7],[8]
Triyards which was aiming to expand its product line announced numerous orders for lift boats, multi-purpose support vessels, chemical tankers and high-speed craft between June 2014 and October 2015 amounting to more than US$700 million.
In 2014, Triyards also announced the incorporation of a number of new subsidiaries and several acquisitions. Contract wins totaling nearly US$200 million were announced in 2015 up till March 2017 for vessels such as oil barges, wind farm support and river cruise vessels, ferries and catamarans, together with successful inroads made beyond the offshore oil and gas sector into renewal energy sector.[9],[10],[11]
Photo by GEORGE DESIPRIS from Pexels
Choppy Seas
Oil prices began to fall in 2014. Figure 2 below shows the Brent crude oil prices over the last 10 years.[12]
Figure 2: Brent Crude Oil Price Over Last 10 Years
In February 2014, Ezra redeemed US$50 million of convertibles. The following month, it announced a S$95 million 4.75% Fixed Rate Notes Issue due 2016.[13] Between the start of September and late November 2014, Ezra’s share price had fallen by about 30%, and it had lost half of its value on a year-to-date basis.[14]
In May 2015, it announced a US$300 million rights and convertible bond issue to repay S$225 million of fixed rate notes and S$150 million of perpetual securities.[15]
By late 2015, leverage in oil services companies had steadily risen. According to a report, the median debt to equity ratio of 18 Singapore-listed offshore service vessels (OSV) owners was up by about a third from a year earlier at 1.08 at the end of the second quarter.[16] Charter rates and utilisation of the global OSV fleet had fallen about 20%. The oil and gas sector saw a growing strain on liquidity, as banks were cautious about lending to the sector because of its uncertain prospects. To de-leverage, Ezra Holdings sought to sell and lease back its flagship construction vessel, Lewek Constellation, as an alternative to bank lending, even after taking steps to reduce leverage.
In November 2015 – less than six months after the US$300 million rights and convertible bond issues – Ezra announced a consent solicitation exercise for its S$150 million notes due in 2018 and the S$95 million notes due in 2016. In its circular, it said that the “sustained downturn in oil company expenditure continues to result in lower industry activity and the timing of new awards to market remains uncertain. Consequently, the Company believes that the Company and its subsidiaries (the “Group”) is likely to face strong headwinds in the foreseeable future.”[17] Ezra sought approval for amendments to the “negative pledge, financial covenants, and non-disposal clauses of each of the Notes”.
By the Numbers
All three companies had financial years ending 31 August, and up until 2015, all three had increasing revenues and were profitable.
Ezra had relatively lean returns, with return on equity of around 1.2% in 2013, before increasing to just 4.6% in 2014 and 4.9% in 2015, while return on assets was about 1% in 2014 and 2.9% in 2015. Profit before tax to finance expense fell to 0.91 in 2014 before increasing to 2.8 in 2015, while debt to total assets was consistently above 0.6, with a ratio of 0.67 in 2015 (with perpetual securities of about US$123 million included in debt in this calculation). In 2015, current liabilities as a percentage of total assets had risen to 50% from about 32% the year before, with current liabilities making up 74% of total liabilities compared to 47% in 2014.[18]
In 2014 and 2015, there were rights, convertible bonds and fixed rate note issues amounting to nearly US$400 million by Ezra, with earlier convertible bonds, fixed rate notes and perpetual securities repaid.[19]
In terms of profitability and interest coverage ratios, Triyards and EOL ratios were better, with EOL’s total debt ratio comparable to Ezra, while Triyards’ was generally lower.[20]
Triyards placed out 29.5 million shares to institutional investors and accredited investors at S$0.70 each in September 2014. It also issued 29.5 million warrants to Ezion Holdings in November 2014, exercisable at a premium of 9.6% to the then market price, with vesting conditions based on new ship building contracts worth at least US$150 million and contracts for engineering services being entered into by Ezion group or a party introduced by Ezion, and Triyards or its subsidiaries.[21] While there was no direct relationship between Ezion and Triyards, Ezion’s independent chairman Dr Wang Kai Yuen was an independent director of EOL.
EOL chose a different strategy to raise more funds – it pursued a secondary listing on SGX in October 2014. DBS Bank was the issuer manager, and DBS Bank and OCBC Bank were joint bookrunners and underwriters for the public offer of 9.085 million shares and 39.5 million placement shares at S$1.21 each.[22] It was followed by the announcement of a US$500 million multi-currency debt issuance programme in March 2015.[23]
By the time of the date of registration of the prospectus on 29 September 2014, the Brent crude oil price had fallen nearly US$20 from its peak that year of US$114.02 on 17 June 2014 to US$95.70. The multicurrency programme was announced when the price had fallen further to about US$60.[24]
Within about 15 months of the secondary listing, EOL had announced a net loss for 1Q 2016 and never recovered.[25] Its trading on the OSE and SGX was suspended on 4 March 2017,[26] and it was to be delisted from the OSE although that is still being appealed.[27]
Still Healthy on Board…But Getting A Little Seasick
All three companies were audited by Ernst & Young LLP (EY).
Even though Ezra announced a consent solicitation exercise on 9 November 2015, [28] both the directors and external auditor gave the company a clean bill of health in the annual report for the year ending 31 August 2015. In the Directors’ Statement dated 23 November 2015, the directors said that “at the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.” Similarly, the Independent Auditor’s Report gave an unmodified opinion, with no emphasis of matter.[29] However, the company was about to report its first quarterly loss for the quarter ending 30 November 2015 less than two months later, on 14 January 2016.[30]
Likewise, the directors and external auditor of Triyards gave the company a clean bill of health – not only for the year ending 31 August 2015 but also for the following financial year. The Directors’ Statement and Independent Auditor’s Report for the two years were dated 18 November 2015 and 21 November 2016 respectively.[31]
However, all the major financial indicators for Triyards for FY2016 were getting worse – return on sales had about halved; return on equity had fallen from 13% to 8%; return on assets have fallen from 7% to 4%; net profit before tax to finance expense had fallen from 6 times to 4 times; cash flow from operations had turned from positive S$58 million to negative S$30 million; bank borrowings, notes and other payables increased from S$103 million to S$150 million; and the ratio of bank borrowings, notes and other payables to total assets had risen from 0.23 to 0.31.
Over at EOL, the Directors’ Statement and Independent Auditor’s Report dated 12 November 2015 for the financial year ended 31 August 2015 indicated that all was well. The FY2015 results were boosted by a huge “other income” income amounting to US$154.7 million relating to “bargain purchase arising from the reverse acquisition” (negative goodwill) – to provide some perspective, total revenue for FY2015 was US$247.2 million and gross profit was US$29.4 million. Note 6 on page 97 of the annual report provides more information on this. It states:[32]
“Following the completion of the Business Combination on 3 October 2014, the Acquiring Group have been consolidated as a reverse acquisition. For the purpose of the reverse acquisition, the cost of acquisition of the legal subsidiaries listed under the Acquiring Group is recorded as equity. The cost of acquisition is determined using the fair value of the issued equity of the Group before the acquisition, being 110,952,502 shares at the market price of Norwegian Kroner 5.09 (equivalent to US$0.78) per share at the date of acquisition. It is deemed to be incurred by the Acquiring Group in the form of equity issued to the holding company. The Business Combination has enabled the Group to become a full-service offshore support service provider and to create cross-selling opportunities derived by leveraging on the enlarged operating platform and client bases, hence generating economies of scale. The bargain purchase arose as a result of the lower share price at the completion date.”
Revenue had fallen from US$285 million the year before to US$247.2 million, gross profit from US$50 million to US$29.4 million and the ratio of bank borrowings, notes and other payables to total assets was 0.98 in FY2014 and 0.89 in FY2015.[33]
Serious trouble was just a ship length away……which is covered in Part III of the series.
Note: This series of articles draws on certain parts of a case study written by Cliff Seah Wen Jie, Goh Mei Qi, Hu Jingyi, Kelsey Feng Qiqi and Liu Yuchen, BBA (Accountancy) students at NUS Business School, under the supervision of Associate Professor Mak Yuen Teen. It has been written solely from public information, including media reports.
ENDNOTES (Note: Draft only)
