Published August 25, 2008

Smaller players ride crest of maritime boom

Offshore and marine service providers are making quiet gains but they'll need to look out for inflation and competition in region

By VINCENT WEE
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WHILE the multi-million dollar deals of the big rig builders tend to hog the headlines, the recent quarterly results of the lesser known providers of services to the offshore and marine industry show they have also been making quiet gains on the back of the same boom.

While there are clearly many opportunities in the offshore development segment, the capex is also correspondingly high. And there are other international players with deeper pockets and more experience.

These can be divided into two main groups - the smaller service support companies focused on basic services and maintenance and building, and the larger capitalised offshore industry players with bigger ambitions. Companies like ASL Marine and Jaya Holdings fall into the former, while Swiber and Ezra make up the latter category.

The first group comprises smaller players that focus on providing tug, supply and other services to the offshore industry as well as some shipbuilding and ship repair. The biggest of these is Jaya with a market cap of nearly $1 billion and an aggressive fleet expansion programme set to bring it up to 86 vessels by 2011.

Jaya reported a 24 per cent rise in full-year profit to $149.8 million on flat revenue of $307.2 million. Not surprisingly the offshore shipping division contributed the most ($84.6 million) to profits on the back of a good 54 per cent gross profit margin from chartering and sale of vessels. The shipbuilding division was the other main contributor with a 14 per cent rise in profit to $59.6 million.

Next up would be ASL Marine, although its fleet makeup and revenue composition is quite different. Although ASL has a fleet size of 180 vessels, the bulk of these are smaller tugs and barges with only four anchor handling tugs. The mainstay of the group's chartering business is the infrastructure sector where its tugs and barges transport construction materials.

ASL leverages on the oil and gas boom by building vessels to support the industry. Although a relatively low margin (10.3 per cent) business, a 20.5 per cent jump in revenue to $244.2 million yielding $25.1 million in profits still makes it a handy growth driver. A strong $693 million order book puts it in a good position for the next couple of years as well.

The third leg of the business is ship repair and conversion where revenue increased by more than half to $68.2 million and profit nearly doubled to $21.2 million on margins of 31.1 per cent. ASL attributed the gains to both an increased number of ship repair and conversion jobs undertaken as well as higher margin type jobs.

ASL has an interesting model where over 60 per cent of full-year revenue of $400.4 million comes from shipbuilding but profit is almost equally spread out between the three divisions. Ship chartering accounted for 36 per cent, shipbuilding 35 per cent and ship repair 29 per cent of gross profit of $72.6 million.

For the offshore industry players, deepwater exploration is the future and they know it. Ezra and Swiber are the ones with the biggest ambitions and the most aggressive expansion plans. They are the ones that are best-positioned to benefit from the deepwater exploration boom taking place now and are putting in place plans to take advantage of this.

Ezra already has an integrated range of vessels for charter across a broad spectrum of the support supply chain. These include anchor handling, towing and supply vessels (AHTSs), anchor handling tugs (AHTs) and fast crew utility boats, a jack-up rig, two heavy lift accommodation crane barges, a pipelay vessel and a floating production, storage and offloading facility (FPSO).

The group is having a sterling year with profit for the third quarter ended May 31, up 77 per cent to US$17.4 million and revenue up 85 per cent to US$55.2 million. For the first nine months, profits leaped six times to US$168.7 million and revenue doubled to US$149.1 million. Ezra attributed the increase to the robust offshore chartering and engineering fabrication markets. The offshore support services division was kept busy managing 32 vessels. Higher charter rate renewals and better rates from bigger vessels boosted the results as did contributions from speciality vessels like accommodation barge Lewek Chancellor and pipe laying barge Lewek Champion owned by Ezra's production and construction arm EOC.

Ezra has made a break into the FPSO market with EOC's US$400 million Lewek Arunothai contract in Thailand and is setting its sights firmly on making further inroads. It is spending US$650 million to build five large Multi-Functional Supply Vessels (MFSVs) and is looking to the deep and ultra deep water offshore support service sector for growth.

'We are reaping the benefits of our fully integrated offshore support services model and execution of our plan to build up our capabilities in the deep water segment,' said managing director Lionel Lee. 'In view of the opportunities just waiting to be tapped in this segment, Ezra will remain committed to growing a young, technologically advanced, deepwater capable fleet as well as enhancing our service offering. We expect these moves, which includes our latest foray into the FPSO segment, to boost our earnings in the medium term.'

Swiber did even better, with profit for the second quarter ended June 30 more than tripling to US$20.8 million and revenue up almost five times to US$124.5 million. Key revenue drivers in Q2 were increased offshore construction projects during the quarter which saw the group undertaking six simultaneous projects in Malaysia, Indonesia and Brunei.

Rapid expansion will see it ramp up its fleet to a total of 51 by 2010 which it says will be funded by equity and bond issues, cash and sale and leasebacks. Swiber points to the expected growth in global offshore spend from US$254 billion last year to US$361 billion in 2012 for its future prospects. A key future revenue contributor is its Equatorial Driller deepwater drilling ship which Swiber bills as a cost-effective solution for deepwater drilling. It has, however, yet to secure a contract for it.

The group is also branching out into aspects of the energy market. At its Q2 results briefing, Swiber highlighted the prospects of the global offshore wind market with £pounds;10.1 billion (S$26.2 billion) of capex forecasted from 2008 to 2012. Of course, it will also continue to benefit from its traditional strengths in offshore engineering, procurement, installation and construction where the subsea market is expected to grow 25 per cent from 2007 to 2011 and reach about US$41 billion. Growing maintenance, major modification and future decommissioning issues from the world's huge ageing offshore installations is yet another steady market.

While the prospects for the sector remain bright, there are issues to take note of. Like their bigger counterparts, the pure tug operators and builders will need to keep a keen eye on costs. Singing the same tune of hedged steel costs and measures to keep labour and other administrative costs in check, the cost inflation pressures affecting the global industry are a factor that must be closely watched in relation to future contract values.

Competition from lower cost yards in China and elsewhere could also be a factor in future. ASL managing director Ang Kok Tian says that his main Batam yard is priced between Singapore and China. Both ASL and Jaya have yards in Batam and China, but if the current new order boom at the Chinese yards dissipates as some market predictions say it will, they may become more aggressive in pitching for the same lucrative market these two companies are benefiting from with an inevitable detrimental effect on margins and profits.

Risks for the two offshore service players come mainly from overextension of capacity. Soon after sealing the Lewek Arunothai contract, Ezra in June announced it had established a $500 million multi-currency medium term note programme. Swiber also did a $300 million multi-currency medium term note programme last July and in March raised $100 million through a bond issue.

While there are clearly many opportunities in offshore development segment, the capex is also correspondingly high. And there are other international players with deeper pockets and more experience. When push comes to shove, playing with the big boys may end up being a bruising experience for the unwary.