Ezra’s new growth strategy is focused on the drilling market (support of oil production activity) instead of the exploration market. This is the market where oil majors are spending their additional capex dollar. Ezra plans to grow through the addition of highly specialized vessels that perform installation and maintenance work for drilling projects in the deepwater sub sea segment. While the long term chartering of its current fleet of 25 AHTS vessels, which support exploration rigs, will provide a stable earnings source.
By adding new specialized equipment such as drilling towers, ROVs and moon pools to assets that it already has under construction and by providing a highly qualified team of engineers, Ezra is able to bid for contracts in the deepwater sub sea segment that could obtain significantly higher charter rates than if the assets were to be used to in the exploration segment. For example, after converting a pipe-laying barge into a DP3 sub sea construction vessel, Ezra could potentially obtain charter rates of US$250-300,000/day instead of the US$130,000 we had factored in.
After taking conservative estimates on the DP3 and 2 MFSV assets that Ezra will use for the sub sea segment, our FY11 earnings estimate rose by 11%. In a blue-sky scenario, our FY11 EPS estimate could be another 20% higher than our new estimate. Besides this the company has signed an agreement with a third party to market and operate their support vessels in return for a share in their profits. This could add another US$8-10m in earnings annually.
Based on our new earnings estimates, Ezra is trading at 7.7x FY10, more than one standard deviation below its long term average. We value the stock at S$2.10/share, based on our DCF-derived target price, 11% above our previous target. Risks remain on the FPSO for which Ezra has yet to be paid.
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