Capex cuts, liftboat oversupply threaten to sink Ezion in 2016

Major oil players plan to further slash capex by 30%.

More headaches await Ezion this year, as analysts see the company’s balance sheet struggling under the weight of deteriorating fundamentals.

According to a report by KGI Fraser, this year marks the third year of capex cuts for Ezion, the only period of more than two year of consecutive capex cuts in about 30 years. Major International Oil Companies (IOCs) intend to slash another 30% from capex in 2016 after 10-20% cuts pa since 2013.

Moreover, the liftboat market is not immune to economic slowdown. In the past, a key investment thesis for Ezion had been its trailblazing move of bringing liftboats to the underpenetrated Asia Pacific region. This thesis now seems to be under pressure on back of a looming supply glut in liftboats.

KGI Fraser notes that supply is poised to be exacerbated by more than 20 liftboats currently under construction in China and Southeast Asia, which puts Ezion’s utilization and dayrates in danger of sinking even further. Consequently, the company’s ROEs will have to struggle under more pressure.

Currently, downside catalyst in 2016 may be further write-downs and higher-than-expected on back of maintenance and upgrade works. On the flip side, surprise cuts and geopolitical friction may drive a sustained rally in crude oil prices above US$60.