Ezra - Defining the next growth phase

Subsea to be the next growth pillar: Ezra announced its expansion plans for the next few years with the establishment of the Subsea division, which will encompass the existing Energy division. The division will comprise 3 assets - a heavy lift well intervention subsea construction vessel (via EOC) and 2 multi-function support vessels, which are already under its US$350 million capex plan for 2008-2011.

A post-2010 story for now: The vessels will only all be delivered by 2H CY2010 so any meaningful earnings contribution should come after that. The vessels are not contracted out yet, as management is also cautious of potential delays at the shipyards and the possibility of securing higher charter rates next year. The division is expected to contribute about 30-40% of group revenue, based on our estimates.

Scope of work in the subsea space: Ezra will focus on its core expertise as an integrated offshore services provider with its venture into the subsea business geared towards the following aspects: (i) subsea construction support, (ii) system installation, (iii) production maintenance, and (iv) decommissioning. According to the World Deepwater Market Report by Douglas Westwood, subsea spending is expected to exceed US$80 billion for 2009-2013. Management noted that a typical subsea services contract could last from 2 to 5 years with charter rates per vessel ranging from US$150,000 – US$300,000/day depending on the type of work involved. This translates to US$5-10/BHP on a 30,000BHP vessel, based on our estimates, which is significantly higher than the US$2/BHP blended average for the existing AHTS fleet.

Earnings and valuation neutral for now: We have not factored in the contribution of the 3 vessels in the Subsea division into our earnings estimates and valuation as the risk remains over whether Ezra will be able to contract out the vessels and at the charter rates guided. Hence there could be potential upside to our earnings estimates for FY2011.

Stayed focused on execution: For now, there is also a lack of operating track record in this segment so it remains to be seen how the company may penetrate the market, although Ezra’s position as an integrated service provider does position it favorably to secure subsea-related contracts from the oil and gas majors. Upside catalyst for the stock would come from a successful contracting out of the vessels at a dayrate equivalent to US$5-10/BHP.

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