Posted by: donmihaihai | December 17, 2008

Surviving the offshore bust? A look at B/Ss of CH Offshore, Ezra, Jaya and Swiber.

Is there a bust in offshore industry? Share price of listed offshore companies seem to suggest that there is one but from various news, there is likely to has a big slow down due to sharp slump in crude oil price but nothing sort of bust now as most utilisation and charter rate are no slumping yet. Due to the slump in share price of OSV players, analysts are recommending EZRA and Swiber as the surviving players with better Balance Sheets. But that is not the true to a certain extent and by taking EZRA, Swiber together with Jaya and CH Offshore, my pet companies, I would like to point out that the “speculative vessel builder” Jaya and CH Offshore having healthy B/Ss while EZRA and Swiber having weak B/Ss. As for EZRA, this offshore company is certainly a candidate for the title “best off balance sheet activities” by shifting leaking liabilities off their B/S.
Quarterly results are not included as it is unlikely to dig out much from the P/L, B/S and cashflow statements so annual reports are being used. This is a disadvantage to Swiber as it has a Dec financial year end while Jaya and CH Offshore in June while Ezra in Aug. But a quick look at their latest results show that nothing much has change for Jaya and CH Offshore while Swiber is still continue having its own fun in Off-Balance Sheet(OBS) activities.

On the surface.

CH Offshore – FY2008 NPAT – USD$40 million.

Cashflow from operating activities – USD$29 million.

Total Assets – USD$159 million. Shareholder Equity – USD$141 million. Leverage – 1.1X. Net cash position

EZRA- FY2008 NPAT – USD$176 million.

Cashflow from operating activities – USD$17 million.

Total Assets – USD$704 million. Shareholder Equity – USD$362 million. Leverage – 1.9X. Net debt position – SGD$42 million. Net gearing – 0.12X

Jaya – FY2008 NPAT – SGD$150 million.

Cashflow from operating activities – SGD$19 million.

Total Assets – SGD$849 million. Shareholder Equity – SGD $432million. Leverage – 2X. Net debt position – SGD$192 million. Net gearing – 0.44X

Swiber- FY2007 NPAT – USD$50 million.

Cashflow from operating activities – USD$12 million(-ive).

Total Assets – USD$370 million. Shareholder Equity – USD$177 million. Leverage – 2.1X. Net cash position.

From the simple data, CH Offshore is clearly having the best B/S with net cash position and leverage of 1.1X. Then follow by Swiber, also net cash position and leverage of 2.1X. 3rd is EZRA with leverage at 1.9X, Net gearing at 0.12X. Jaya having the weakest B/S with Net debt of SGD$192million and Net gearing at 0.44X while having the same leverage of 2X with Swiber and EZRA. It is worth nothing that all 4 companies cashflow from operating activities are much lower than NPAT so how can they having a relatively “healthy B/S”? Well in the cashflow statements,

CH Offshore : Showed cash inflow of USD$18.5 million from disposal of Assets(vessels) and USD$2.1 million from liquidation of associated companies. Total = USD$20.1 million.

EZRA : Showed cash inflow of USD$105.5 million from disposal of Assets(vessels), cash inflow of USD$12.3 million from disposal of Assets, Cash inflow of USD$178 million from sales of interests in subsidiary and USD$14.3 million from sale of treasury shares. Total = USD$310 million.

Jaya : Showed cash inflow of SGD$123 million from disposal of Assets(vessels). Total = USD$ 123 million.

Swiber : Show cash inflow of USD$99 million from disposal of Assets(vessels), cash inflow of USD$24.3 million from sale of PPE and USD$78.6 million from issuing of new shares. Total = USD$201.9 million.

This will show a better picture. despite having main core operating businesses in offshore support areas, their “strong B/Ss” come from other actitives like disposal of vessels, sale of interests in subsidiary and issuing of new shares. While this does not look at where the cash goes, it does pointed out one important for point — Other cash inflow/shareholder equity and Other cash inflow/ total Assets. CH Offshore : 0.14X & 0.13X, Jaya : 0.28X & 0.14X, EZRA : 0.86X & 0.44X and Swiber : 1.14X & 0.55X. While this ratio is incomplete and perhaps misleading but it does show that the “relatively healthy B/S” of Swiber and EZRA come mainly from “other activities”. While EZRA and Swiber which use these as fuel for growth, it also pointed out that 1) Current cashflow is not enough for their capital expenditure requirement, 2) as their capital expenditure usually spread over a number of years, if the window or option for further cash inflow(either sale of vessels, sale of interest in subsidiaries or raising capital through the market) is limited or closed, there will be trouble.

Another thing to note is that gain from disposal of vessels has different meaning for 4 companies. While Swiber is start their shipyard business last year but has no impact on the disposal of vessels, it is Jaya which build their own vessels different from the other 3 companies and has a policy of having a young fleet of <5 years, this mean cashflow from disposal of vessels for Jaya is actually part of their operating business( it doesn’t matter whether sell at newbuild or sell after 5 yrs). For the other 3, it become “trading income”. It is just like buying a car drive for a few months/years then sells it away with a profit because the car appreciates in price and buys another car again. In fact, vessels are sold even before they are out of shipyard. Well, if the car market is like OSV, it will become the biggest bubble in the world as everyone will be buying and selling car. So OSV is a bubble huh? Demand and supply.

Another look at vessels on B/Ss.

So it is clear that buy building their own vessels, Jaya capitalized their vessel at cost of building while CH Offshore, EZRA and Swiber capitalised their vessel at market price. This has an effort as it “weakens” Jaya B/S while strengthen CH Offshore, EZRA and Swiber on the B/S. But in reality, Jaya B/S strengthens while CH Offshore, EZRA and Swiber weaken.

Now there is another difference. Depreciation period.

– Jaya vessel depreciation period 8 – 15 years

– Swiber vessel depreciation period 15 – 20 years

– EZRA vessel depreciation period 20 – 25 years

– CH Offshore vessel depreciation period 4 to 86%( 1.16 – 25 years)

It is very strange those who talk about strong B/S never look at depreciation period especially for OSV companies where vessels are their main assets. OSV is known to use for > 20 years but not all will has a life span that long. Just like Car. So EZRA and CH Offshore depreciation period should be OK but it is clearly that Jaya is conservative (aggressive in depreciating faster is conservative as it understate earnings) with Swiber in-between.

After this, Jaya B/S strengthens further while Swiber move for the better too as CH Offshore and EZRA continue to weaken.Off-Balance Sheet(OBS) time

CH Offshore

CH Offshore does not have much OBS items at FY2008. So the number at B/S can be use. In fact, CH Offshore has USD$1.7 million deferred gain booked as liabilities which can be taken out and another USD$0.3 million office operating leases for 2 years which has to capitalized into B/S. By ignoring both deferred gain and operating leases(wrong way to do it but the amount is insignificant)the number remain the same.

Total Assets – USD$159 million. Shareholder Equity – USD$141 million. Leverage – 1.1X. Net cash position.
Other than that CH Offshore has USD$9.5 million of guarantees of which USD$7.9 million is for associated company. Beside that CH Offshore has another USD$80.5 million commitment for capital expenditure(likely for new vessels). While guarantees and capital expenditure commitment is not going to have an (immediate) impact, it is good to take note Especially on Associated companies as their Assets are USD$24.5 million with USD$22 million of liabilities. That make it extremely leverage so USD$7.9 million of guarantees can be use anytime but the total amount is not a significant proportion to CH Offshore Equity and total Assets . Lastly, their largest customer represent 52% of total trade receivables(outside parties) which is a concern too but it is pretty interesting to know that CH Offshore charge 12% to 21.9% for receivables that are > 90 days.

Pretty clean and strong B/S except their associated company.

Jaya

Another company with not much OBS as well. Operating leases for premises, one year – SGD$0.3 million, two to five years – SGD$0.6million and >five years – SGD$0.2 million total is SGD$1.1million. Ignore it as it is insignificant as compare to total assets and equity. Beside that will ignore another SGD$22.2 million of purchase option received in liabilities for future purchase of vessels from their customers. If this will to be included, Jaya liabilities can be reduced further by 5%.

Other than that, there are also information regarding Jaya as lessor of 1 year – SGD$61.7 million and 2 to 5 years – SGD$62.6million which will reduce to 1 year – SGD$29.2 million and 2 to 5 years – 35.1 million when purchase options are exercised. These are not included in the Asset portion as they are gross without any expenses. Including will overstate Jaya assets.

Total Assets – SGD$849 million. Shareholder Equity – SGD $432million. Leverage – 2X. Net debt position – SGD$192 million. Net gearing – 0.44X
As for guarantees, there isn’t any. While Jaya trade with associated companies, it should be noted that these are pretty strong companies with Total Assets of SGD$67.7 million and Liabilities of SGD$10.4 million. As for commitment for capital expenditure, which are mostly for the construction of vessels(speculative) in their shipyards and sub-contractor, stand at SGD$129.1 million and SGD$610.1 million respectively. Is this amount alarming? Well, it must note that this is an inhouse program and with sub-contractor in which the cost of slowing and canceling them are lower. Next it is pretty stable compare to FY2007, lesser in fact. And Jaya spent about SGD$480 million in FY2008 building vessels for own usage and sale.

Another clean B/S. In fact, Jaya B/S strengthen.

Swiber

On-B/S number 1st. Total Assets – USD$370 million. Shareholder Equity – USD$177 million. Leverage – 2.1X. Net cash position.

Swiber has operating leases offices and vessels(due sale and lease back contract) of 1 years – USD$25.2 million, 2 to 5 years – USD$99.8 million, > 5 years – USD$96.7 million. Total = USD$200.7 million. Adding them back to B/S( wrong but easy to use), Total Assets – 570.7 million. Leverage – 3.2X.

If I use cost of debt at 5%(should be higher for Swiber) and spread USD$99.8 million evenly into 4 years, USD$96.7 evenly into 5 years(guesstimation since data is incomplete), I will getUSD$175.1 million. Adding this into Swiber B/S, total Assets – USD$545.1 million. Leverage – 3.1X.

So, just by bringing OBS items back to B/S increase Swiber Leverage by 50% to 3.1X. This does not sound good as only 32% of Swiber is fund by equity. While Swiber Associated companies is having pretty healthy B/S with Total Assets at USD$14.3 million and Liabilities at USD$5.2 million which usually it look better than Swiber, it is the joint Venture that is questionable. Total Assets – USD$43.7 million. Total Liabilities – USD$34.8 million. Net Assets – USD$8.9 million. Leverage – 4.9X. And Swiber choose to equity account for their joint Venture rather than proportion accounting. It is of course correct but by doing it in this way, another USD$17.4million(34.8/2) will not appear in the B/S. And this is smart because the leverage is at 4.9X. Of course I can ignore it and there is another USD$21 million of deposits received from customer recorded as liabilities. But it does show us another way to put thing out of B/S.

Other to take note are – 1) commitment of USD$239.5 million for capital expenditure. 2) Interests on some older debts are at 16.75%. 3) About 17% of trade receivables amounted to USD$17.4 million are past due which the management believes that credit quality is still intact. The average outstanding is 150 days. 4) One debtor accounted for 35% of all receivables. 5) USD$8.9 million of other receivables(due sale of vessels?) are to be received within 8 to 10 years.

After putting those OBS items, Swiber “healthy B/S” weaken and doesn’t look clean. A lot of question marks are to be answered.

EZRA

The final one and I try not to write too much about it as it does not justify my effort. On-B/S number 1st. Total Assets – USD$704 million. Shareholder Equity – USD$362 million. Leverage – 1.9X. Net debt position – SGD$42 million. Net gearing – 0.12X

EZRA has operating leases offices and vessels(due sale and lease back contract) of 1 years – USD$33.7 million, 2 to 5 years – USD$127.8 million, > 5 years – USD$53 million. Total = USD$214.5 million. Adding them back to B/S( wrong but easy to use), Total Assets – USD$918.5 million. Leverage – 2.5X.

If I use cost of debt at 5% and spread USD$127.8 million evenly into 4 years, USD$53 million evenly into 19 years(guesstimation since data is incomplete), I will getUSD$161.1 million. Adding this into Swiber B/S, total Assets – USD$865.1 million. Leverage – 2.4X.

While EZRA B/S is getting worse, it is still pretty ok as 42% of total Assets are fund by equity. But it not ok when considers how much liabilities are shift OBS when EZRA sold EOC interests below 50% market. This effective change the accounting method from consolidation into equity method. Of course it is correct BUT the thing is EZRA remained as the main shareholder. If EOC fail behind their debts, whom would the bank look for? Just look at EZRA guarantee USD$133 million of EOC debts. What does it say? That is a huge amount to consider. Beside that EZRA also guarantee their joint venture debts of USD$22.3 million. EZRA is doing the same thing as Swiber.

Associated Total Assets – USD$531.5 million. Total liabilities – USD$394.9 million. Leverage – 3.9X.

Joint Venture total Assets – USD$42.2 million. Total liabilities – USD$37.6 million. Leverage – 9.2X.

While that is not all, I am lazy to write more but one of the biggest question mark beside abovementioned is there are so much related parties transactions going on which included with EOC, how can one be ascertain that nothing is wrong there? These are not one or two line kind of stuffs, it goes into pages in the note to financial statements of EZRA. And to be more accurate look into EOC annual report as well.

In short, EZRA B/S stinks. And perhaps EZRA accounting department is the best place in Singapore to learn accounting.

In conclusion, while CH Offshore and Jaya having their own little problems, i.e CH Offshore associated and Jaya B/S debts due “speculative vessels building”, both are having a healthy B/S as compare to Swiber and EZRA when OBS and commitments are considered.

 

Advertisements

Responses

  1. Gd analysis.Just want to add that the OSV bubble has burst with oil prices coming down drastically.It will many years before they can climb to new heights , provided that they survive the crisis first.Thus, a strong balance sheet is critical.

  2. Hi cy,

    Burst? Are you referring to crude oil price? Well, the drop of > USD$100 will hurt OSV. That is a certainty.. Other than that, please show me that the utilisation and charter rate have burst as well.

  3. Well,common sense tell you that the utilisation and charter rate will follow with a lag. ‘Move to where the puck will be, not where it is now”

  4. Ok cy. So far I am still waiting for the lag crash — Since Jul when crude price declining from peak and Nov when it hit 50 bucks.

    And yes, do you know what happened to utilisation and charter rate when crude price surge to almost 150 bucks?

  5. it’s all a matter of supply and demand. Warning signs like cancelling of planned purchase of new OSV implies that vessel owners are jittery about the future demand.

    I certainly don’t know when the charter rate will come down,just like i can’t predict when the stock market will rise. But, if good old supply-demand dynamics tells me that sky high charter rates can’t be substained when the fuel(oil) has gone down. If not, competitors will be attracted to build more as in previous few years, thus destroying the excess returns. I can’t see any wide investment moat there in building OSV.

  6. In any investment, price is one of the biggest factor and I think the price is good and this is where I place my bet.

    And cy, this discussion is not going anywhere so I think it is better to stop here.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: