COLUMN | Chickens come home to roost – Part Two: Ezion and Emas [Offshore Accounts]

Photo: Ezion Holdings

It wasn’t supposed to end this way. On October 29, embattled Singaporean rig owner Ezion announced that it had sold three of its jack-up drilling rigs, which were laid up in Mexico. The price? Three US dollars. A dollar apiece.

For less than the price of a Big Mac, or a pumpkin spice latte, the company offloaded the early 1980s built rigs formerly known as Roger Mowell, GSF Rig 136, and Ensco 59, to hitherto unknown Mexican buyers, TK and HR Services. According to Bassoe, Ezion purchased the Ensco 59 alone in 2012 for $23 million.

As jack up utilisation and day rates improve around the world, and as activity in Mexico picks up with foreign energy companies like ENI, Cairn Energy and Malaysia’s Petronas all drilling in the country, why is Ezion giving away rigs which it had held through the preceding four years of the industry downturn?

Ezion has nearly $700 million of negative equity

For a start, the buyers are assuming liabilities of around $659,000, so each rig is actually costing them $220,000 (or one per cent of the purchase price in 2012). Ezion stated that the sale is in line with its survival plan to reduce the cash burn from rigs that are not working.

Ezion is in an awful financial position. Its shares have been suspended and it reported a loss of $367 million for the second quarter ending June 30. Its balance sheets showed assets of $989 million, but liabilities of over $1.6 billion. This is insolvency on a massive scale, especially as the value of the remaining assets are questionable, as we shall see with the Mexican rigs.

The only asset with a known and proven value was the $48 million of cash on the Ezion balance sheet on June 30. Every day the assets were sitting in Mexico, they were costing the company cash. Even cold stacked boats and rigs have to pay berthing fees, agency charges, security guards, and for insurance.

Four years of industry wide recession have left drillers and boat companies devastated. Ezion needs that residual cash more than it needs three idle rigs, which will need millions of dollars spent on them to bring them back into class, and back into service to earn revenue.

The unreliability of the asset values on Ezion’s bombed-out balance sheet, even after huge past impairments, can be seen by the fact that the book value of the three rigs was approximately $2.91 million, which means that the company faces yet another write-off when the deal closes later this month. Ezion will incur a loss on the disposal of $2.25 million.

Why not scrap the rigs?

Why not do what the other major drilling companies have done and scrap the rigs? The end of October saw the 2000-built DP drillship Belford Dolphin sent to the beach in Alang after four years cold stacked in Malaysia, and Diamond Offshore announced that it had taken the decision to scrap the ultra deepwater semi-sub Ocean Confidence from cold stack in the Canary Isles. Unfortunately, Ezion reckoned that the scrap value of the trio was only US$1.1 million and that the cost of getting them to India or Turkey would make it uneconomic to scrap them.

One of the more bizarre facts to emerge from the case is that there are no scrap yards capable of cost-effectively dismantling an ageing drilling rig in the entire Western Hemisphere. So, to earn the $1.1 million from a scrap dealer capable of breaking up the rigs, the company would have to incur heavy lift ship costs of more than that scrap price just to transport them there. Ezion is probably wise not to try to tow them, after its previous misfortune, when its liftboat Teras Lyza capsized en route to Taiwan in June 2018 towed by one of its own Teras tugs.

Another Asian white knight story

Ezion’s future is now very unclear. In April, Yinson, the Malaysian FPSO company announced it would step in and recapitalise Ezion as part of an audacious debt for equity restructuring with Ezion’s lenders.

Unfortunately, the conditional debt conversion agreement and conditional option agreement with the would-be white knight lapsed on October 1. The agreement would have saved Ezion. It was based on Kuala Lumpur-listed Yinson wiping out US$916 million of Ezion’s debt, and then receiving new Ezion shares at 5.5 Singapore cents apiece.

The proposed subscription and grant of options came with certain conditions, which were not met within the six months deadline in the agreements (and were not disclosed to the market). On October 1, the deal lapsed and Yinson decided not to extend the deadline.

Yinson has a market capitalisation of $1.8 billion at the time of writing and has seemingly gone from strength to strength through the crisis, whilst its competitors have gone to the rocks, so it would have been one of the few companies in the industry with the resources to rescue Ezion. The departure of Yinson leaves Ezion with negative equity of $700 million and its lenders facing no good outcomes.

Pacific Radiance nearly rescued second time around?

Followers of the many Singaporean corporate offshore disasters of downturn will recognise the familiar saga of the “white knight,” the heroic new investor who apparently will ride in and rescue a bankrupt OSV owner in its hour of need.

Unfortunately, like Yinson for Ezion, few of these white knights have actually closed their deals. The Business Times of Singapore ran a scoop that the “Popiah King” Sam Goi, “may fork out the lion’s share of some SG$120 million [US$90 million] worth of new equity being raised for Pacific Radiance,” in May 2018.

Despite his track record selling millions of Teochow spring rolls (popiah) to hungry overseas Chinese, which is how he had made his fortune, Mr Goi ultimately decided not to buy the Pang family’s ailing vessel company. But Pacific Radiance has now found a new white knight, featuring a venerable Arabian stallion ridden by Allianz Marine Services of the UAE, which, in concert with a US private equity firm, may step in to save struggling Singapore company.

Emas Offshore spurned by the knightly community, left to dragon

The lesson of Emas Offshore is that not even the approaches of two white knights are enough to save some of the zombie companies of the Lion City. Emas Offshore seemed close to securing a restructuring in 2018 as BT Technologies circled and offered a $50 million rescue deal.

Unfortunately, BT then abandoned Emas at the altar and moved to acquire CH Offshore instead. Emas Offshore seemed to get a second chance when it signed a non-binding term sheet with Udenna Corporation, as part of the financial restructuring of the group. Philippines-based Udenna said it would inject $73 million into Emas Offshore. But after due diligence on Emas it decided not to proceed and galloped off into the sunset.

Last month Emas was placed under judicial management in Singapore and the authorities in Namibia announced the judicial auction of the 2012-built, 21,000 bhp/255-tonne bollard pull anchor handler Lewek Teal in Walvis Bay later this month.

Why? Emas has apparently failed to pay a docking bill and the bank holding the mortgage (believed to be Standard Chartered) would rather see the asset sold by the creditors than put in more cash to recover the vessel without the prospect of any decent cash flow from the ship.

Brokers estimate the unit might fetch $5 million in the auction, but nobody really knows. We’ll keep you posted here. The ship has been out of class for over a year and will require significant cash investment to return it to service. The market for such units in West Africa is limited and dominated by Maersk and Swire. So a lowball bid might succeed.

This is what the bottom of the market looks like. Formerly valuable assets are worth pennies, and major players lack the cash to hold onto them anymore. Cold hard cash is worth more than assets, which may bleed for longer than their owners have the resources to sustain them. The agony continued as the Mexican Day of the Dead passed.

Part One

Notes

If you want a real post Halloween horror show, you can review Ezion’s June 30, 2019 unaudited results and balance sheet here:

http://ezion.listedcompany.com/financials.html

You can track the reported sale of every offshore drilling rig here on Bassoe’s excellent free website:

https://www.bassoe.no/rigsales/

Specification of the Lewek Teal here:

http://emasoffshore.com/system/pdf_fleet/AHTS/Lewek_Teal.pdf

If you buy it, please ask the Namibians to send the address commission to Baird!


Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.