Ezion secures US$73m contract with Maersk Oil

Good returns, with an eye of more rig conversion jobs. Atlantic Labrador (Atlantic), a 50:50 JV between Ezion and Treatmil, has secured a US$73m contract for four years (two years firm plus option for another two) to provide a North Sea class accommodation jack-up to a European oil major, believed to be Maersk Oil. Although rig conversion jobs would appear to mark a diversification from Ezion's core liftboats business, we note that there are synergies between the lifeboat and rig conversion businesses as expertise required is similar.

The news
Ezion’s Atlantic JV will be acquiring a cold-stacked rig, GSF Labrador, from Transocean, and converting it to an accommodation-purpose rig. Major conversion work would include the removal of the drilling package and conversion of existing cabins to 140 single man-cabins. Due to the short lead time, conversion will commence this week at the Scheldepoort yard in the Netherlands. The rig is slated for conversion in 4Q11.

A unique concept. We understand that the rig will be the only one in the North Sea which is entirely furnished with single man-cabins vs. a typical mix of single and double man-cabins. Ezion had competed with European competitors such as Seafox and Consafe Engineering for this contract. Its concept of a single-man cabin rig at competitive prices is believed to have helped secure the contract.

Atlantic JV to own and bareboat the rig for US$73m over four years or US$50,000/day. Once converted, the rig will be deployed to offshore Denmark and be used by a European oil major (believed to be Maersk Oil) to service and provide accommodation for oil platforms. Accordingly, the JV will own and bareboat the rig to Treatmil’s operating company, which will supply the crew and operate the rig.

Treatmil, an old friend. Treatmil is a European offshore company that provides specialised rig management services to offshore oil & gas as well as wind industries' operators in the North Sea. It has a management team with a proven track record and over 20 years of experience in the European oil & gas market. Ezion is familiar with Treatmil, with CEO, Mr Chew, having worked with it on an almost identical project during his time with KS Energy.

Funding. The JV has paid-up capital of US$10m. Total project cost is estimated at US$85m, of which US$53m will be incurred to acquire the rig, US$30m for conversion and US$2m as a buffer. Some 65% of the project cost or US$55m will be funded by bank borrowings and 35% (US$30m) by equity.

Why the decision to go into such rig conversion projects? With competing and limited resources for Ezion’s core liftboat business, management has decided to pursue near-term earnings growth through such ad-hoc projects. Investing in liftboat newbuilds would only yield contributions after 18-22 months. Timely payment terms from quality customer were another reason behind management’s pursuit of the project. On the other hand, one negative for rig conversion projects is its lesser return on capital vs. liftboats.

Comments
Adjusting earnings estimates for FY11-13 by -5% to 8%. Incorporating contributions from the Atlantic Labrador JV, partially lessened by work stoppage for a 2,000 dwt PSV operating in South America, we adjust our earnings estimates for FY11-13 by -5% to 5%.

Good returns, with an eye of more such jobs. This is the second such rig conversion project which Ezion has undertaken. Return on equity for this project are good at around 20%. However, the downside is that such moves would appear to mark a diversification from Ezion's core liftboats business. We note that there are synergies between the lifeboat and rig conversion businesses as expertise required is similar. We believe that there could be further of such rig conversion jobs.