If you haven’t heard, the oil & gas-related company Ezra Holdings Limited (SGX: 5DN) is in serious jeopardy at the moment partly because of the troubles one of its joint-ventures, Emas Chiyoda Subsea (ECS), is currently facing.
My colleague Stanley Lim had described the ECS situation and how it affects Ezra in an article he published earlier today:
“ECS had defaulted on payments for its charter of the vessel Lewek Inspector since October 2016. In addition, ECS’ other two owners – both of which are Japanese companies – revealed last week writedowns totalling S$635 million that are tied to the joint venture.
Ezra’s own total exposure to ECS is US$170 million and the company said that “the full amount may have to be written down” once an assessment of the situation’s made.”
The drama happening with ECS is thorny for Ezra because the latter’s latest financials show that it has total shareholders’ equity of merely US$233 million as of 31 August 2016; Ezra’s entire exposure of US$170 million to ECS thus represents a massive chunk of its shareholders’ equity.
Oil prices, at around US$55 currently, are still down by around half from where they were in the middle of 2014. This is still causing difficulties for the oil & gas industry.
Ezra has net current liabilities of US$887.2 million and this sum represents the financial obligations that the company has to meet by 31 August 2017. As things currently stand, Ezra’s shareholders’ equity of US$233 million already represents a razor thin cushion for the company to absorb untoward developments and still survive. A US$170 million write down for Ezra would slim that already boney cushion significantly.
Back in 29 July 2016, I wrote and published an article titled Who’s Next In Line To Fall After Swiber Holdings Limited? The article was written in response to offshore support services provider Swiber Holdings Limited’s (SGX: BGK) decision on 28 July 2016 to wind down its business. (The company eventually changed its mind by opting for judicial management, but it does not change the fact that it has still essentially collapsed.)
In my article, I wrote:
“[Swiber’s] decision to essentially kill its own business raises an interesting question that many investors likely would want answers to: Which oil & gas company may be next to fall?
It’s hard to say. After all, Swiber’s decision caught many by surprise, me included. But it’s also worth noting that shareholders of a company can get hurt badly even if it does not go bankrupt or has to wind itself down. So, it’s still worth thinking about the companies with very shaky finances.
I decided to run a screen on the oil & gas stocks in Singapore to find stocks that meet the following two criteria:
1) A net-debt to equity ratio of over 100% (where net-debt refers to total debt minus cash and short-term investments)
2) A negative operating cash flow over the last 12 months.
Companies that show up in my screen would be those that have a really weak balance sheet as well as an inability to generate cash. In a challenging business environment (which is an understatement for the situation that oil & gas companies are finding themselves in), these two characteristics can be a really toxic combination.”
There were six names that popped up on my screen back then and Ezra was one of them. The other five were, namely, Cosco Corporation (Singapore) Limited (SGX: F83), KS Energy Services Limited (SGX: 578), AusGroup Ltd (SGX: 5GJ), Pacific Radiance Ltd (SGX: T8V), and Nam Cheong Ltd (SGX: N4E).
Here’s how the sextet’s shares have performed since my earlier article was published:
Source: S&P Global Market Intelligence
You can see that all six companies have seen their shares fall, and most of them have suffered large double-digit declines. This has happened for the other five even when their situations – while certainly very tough and challenging – aren’t as dire as Ezra’s by comparison.
The experience of the group of six, and in particular Ezra’s current predicament, serves as an important reminder of the dangers that can exist with oil & gas companies that are heavily in debt and can’t produce cash flows.
It’s worth noting too that the price of WTI Crude Oil had gained some 30% from 29 July 2016 to today. A rising tide can’t lift leaky boats.
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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 owns shares in AusGroup.