Risks intensify for Ezion as jackup order cancellations mount

Five Mexican rigs were cancelled in Q1.

Risks are on the rise for rig builder Ezion after Mexico's national oil company Pemex cancelled another jackup contract last week, bringing the total number of cancelled Mexican jackup rigs to five.

Joel Ng of KGI Fraser Securities warned that this move raised further cancellation risks for Ezion's five jackups in Mexico, which might shave 10-15% off the group's earnings if cancelled.

"More worryingly, we estimate that around 11 of its service rigs are utilized for drilling, based on our channel checks, and this raises concerns on their long-term contracts. Assuming our conservative estimates that half of its drilling rigs are out of work by next year, Ezion’s net profit may need to be shaded lower by 35% next year," stated Ng.

But the risk of contract cancellations isn't Ezion's only enemy. Ng believes that the offshore rig glut remains even if oil prices were to recover.

"Judging from the comments of international rig operators, the earliest recovery for the offshore rig supply/demand balance is expected to be 2016 at the earliest. The longer rig operators keep old assets in service and delay scrapping them, the longer the oversupply drags on,” Ng stated.