Why Has Ezion Fallen By 5% for the Week?

As of the time of writing today (10:57 am), Ezion (SGX: 5ME) has fallen by some 3.91% to S$1.35. Since last Friday’s close, shares of the oil & gas support services provider have slid by some 4.9%. Given that the Straits Times Index (SGX: ^STI) in Singapore has remained essentially flat (it ended last Friday at 3,345 points and is now at 3,346), this makes Ezion a big loser for the week.

It’s very likely that Ezion’s decline can be traced to the Opec (Organisation of the Petroleum Exporting Countries) meeting which took place just yesterday. The members of Opec came to a decision that they would not be cutting the production of oil in a bid to shore up the commodity’s falling price.

According to the BBC, Brent crude “hit its lowest since August 2010,” after the Opec made its announcement, “falling below US$72 a barrel, before settling at US$72.82, a 5% drop on the day.” For some perspective on how fast oil prices have declined, it was only in June when Brent crude was at US$115 a barrel.

Ezion’s an owner of a fleet of offshore assets that include multi-purpose self-propelled jack-up rigs and heavy-haul vessels. The company then contracts its fleet to oil & gas producers to provide services like well-servicing; commissioning, maintenance, and decommissioning of offshore platforms; and offshore marine logistics, amongst others.

As oil prices fall, it’s only understandable that the producers have much less incentives to drill for oil, thus potentially leading to less work for Ezion. With these as a backdrop, it’s obvious to see why the company’s shares have declined steadily during the week.

Elsewhere, Ezion’s heavily-leveraged balance sheet can also give investors some pause. As of 30 September 2014, the company carried US$333 million in cash, but has some US$1.16 billion in total borrowings.

But despite falling oil prices and a highly-geared balance sheet, there’s still some cause for optimism about Ezion’s business given the following comments made in the company’s latest third quarter earnings release:

“While there has been recent weakness in the prices of fossil fuel, the management continues to observe the requirement on assets and services related to platform and well related works in the Group’s existing market such as Asia Pacific, Middle East, West Africa and Europe.”

So, it seems that management’s still seeing healthy demand for Ezion’s services despite the unfavourable macro-economic situation. Time will tell if Ezion’s business can pull through unscathed, but meanwhile, investors might want to keep a close watch on the company’s finances given the heavy leverage on its balance sheet.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.