Ezion’s Latest Earnings: Weakness Leads Ezion to Explore a Merger?

Ezion  (SGX: 5ME) released its fiscal third-quarter earnings report this morning. The reporting period was for 1 July 2015 to 30 September 2015.

Ezion is an oil and gas support services provider (these services include well-servicing and maintenance, among others). The company owns a fleet of offshore assets that include multi-purpose self-propelled jack-up rigs and heavy-haul vessels.

You can catch the firm’s previous quarter’s earnings here.

Financial highlights

The following’s a quick rundown on Ezion’s latest financial figures:

  1. Overall revenue for the third-quarter fell by 9.1% year-on-year to US$86.2 million.
  2. Profit for the period was around US$30.3 million, down a hefty 38.4% compared to the same quarter last year. The decline was mainly due to a 31.8% jump in cost of sales and servicing.
  3. Ezion’s earnings per share (EPS) for the third-quarter shrank by 51.4% to US$0.0189 in the reporting quarter.
  4. For the reporting quarter, cash flow from operations came in at US$26.6 million with capital expenditures clocking in at US$53.6 million. This gave the oil and gas services outfit around US$27 million in negative free cash flow. As bad as that sounds, it’s actually an improvement from the same quarter a year ago when free cash flow was a negative US$97.3 million (US$71.9 million in cash flow from operations and US$169.2 million in capex).
  5. As of 30 September 2015, Ezion had US$245.5 million in cash and equivalents and hefty borrowings of about US$1.65 billion. This puts Ezion at a net debt position (borrowings minus cash and equivalents) of around US$1.4 billion. Ezion’s balance sheet has weakened compared to a year ago when it had US$333 million in cash and equivalents and borrowings of US$1.49 billion.

Unfortunately, the bleeding continues at Ezion. After posting a 36.3% decline in profits in the prior quarter, profit for the reporting quarter fell by a similar magnitude amidst a tough operating environment for the oil and gas industry as a whole. Ezion also entered negative free cash flow territory for the first nine months of the year while its balance sheet weakened compared to the year before.

Notably, trade receivables rose from US$159.6 million a year ago to $202.3 million in the reporting quarter. This development comes despite the fall in revenue. This could mean that the company may not have been able to collect customer payments in a timely manner.

Operational highlights

The decrease in Ezion’s top-line was mainly due to the absence of contribution from the marine and offshore logistics support services division. Cost of sales and servicing rose despite the fall in revenue. The increase was due to the deployment of additional multi-purpose self-propelled jack-up rigs.

As for the outlook ahead, this is what Ezion’s management team has to share in the earnings release:

“With the fossil fuel prices remained depressed, the Oil Majors are expected to continue to reduce capital expenditure on exploration and development. While the focus will be on extraction and production related activities, the lower fuel prices have prompted tightening of related operating expenditure and the increase in demand for higher standard of equipment and services from clients. The Group is doing its best to meet these requirements through switching the units among its clients and through strategic modifications and upgrades.

The Group will also explore merger and acquisitions and strategic tie-ups to enhance returns from its existing assets.”

Foolish take away

At its closing price today of S$0.66, Ezion traded at around four times its trailing earnings. While Ezion’s price looks cheap on the surface, it should be noted that the oil and gas support services provider’s trailing earnings include a one-off disposal gain of a subsidiary in the fourth-quarter of 2014.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.