Ezion likely facing $700m in write-downs over next two years

They’ll be necessary to bring values to reality.

Ezion may have to battle through massive write-downs as the down cycle persists, according to a report by KGI Frasers.

Amid the supply flood and capital expenditure cuts in the industry, companies will likely write-down the value of their assets in the next two years to reflect the realities of the current market. Ezion’s total assets may be looking at a write-down of up to $700m over the next two years, leading to its net gearing surging to 2.8x well above the 0.7x peer average.

KGI Frasers further asserts that $700m is a conservative estimate, may present fore downside as offshore rig utilization rates stay around 60 to 70% levels for the next two years. For 2015 alone, around 75 jackups are slated for delivery while current owners are not scrapping rigs fast enough to balance the markets.

Moreover, KGI Frasers sees several downside risks for Ezion on the next three years given the aging profile of its fleet. The average jackup age securing new contracts over the past year is 22 years old, and are typically for short term contracts of less than a year. This puts Ezion in a tricky situation as around 60% of its units are over 30 years old and it is unlikely that these units will bag contracts in the next three years.

Additionally, the intended US$350m remaining capital expenditure for the 9 units to be delivered over the next 12 months will lead to negative cash free cash flows over the period, further putting pressure on Ezion’s balance sheet.

Ezion’s current net gearing sits at 1.3x(but 2.8x assuming KGI Frasers’ estimated write-downs), in contrast to 0.7x peer average, which is even after peers have taken 10 to 30% write-downs in recent quarters.

In addition, the planned US$350m remaining capex for the 9 units to be delivered over the next 12 months will result in negative free cash flows over the period, which is expected to put pressure on its balance sheet. Ezion’s net gearing is currently at 1.3x (but 2.8x assuming our estimated write-downs) vs 0.7x peer average (even after peers have taken 10-30% write-downs in recent quarters).