• Current oil prices are still high enough
• Low downside risks to earnings
• Lower P/E valuation with broader de-rating

Stock not spared from recent rout

With the recent sell-down in oil and gas related plays, Ezion Holdings has not been spared – its share price has fallen by about 30% since its recent high of $1.91 in mid Sep, although there has not been any significant negative news on the company besides the fall in oil prices.

What oil price would be too low?

Brent crude is currently hovering around $72/bbl and WTI around $68/bbl, and we believe that demand in liftboats would only fall when oil prices fall below $40/bbl or so, as this is the typical breakeven price of shallow water oil fields. However, investors should note that at this low price, most of the ultra-deepwater and shale oil projects would be unprofitable, constraining oil supply growth. Unless there is a global economic crisis like in 2008, we do not think that the chances of $40 oil look high for now.

Downside risks to earnings are low

All of Ezion’s liftboats and service rigs (including those yet to be delivered) have secured a charter contract, and the group does not undertake in speculative building. With charter tenures ranging from 2 to 5+2 years, we see that most of FY15 and a large part of FY16 earnings are already locked in. We also see low contract cancellation risks due to the group’s diversified customer base and it will also be relatively punitive for customers to walk away from existing contracts.

Maintain BUY

Going into 2015, there are four units coming off hire and re-contracting at similar charter rates would boost investors’ confidence, in our view. Meanwhile, with the disposal of the marine supply business to Ausgroup, Ezion will also have more resources to focus on its core liftboat/service rig business. Among the oil and gas related plays under our coverage, the group has one of the best earnings visibility going forward, but despite positive company-specific factors going for it, we deem it necessary to lower our P/E valuation from 11x to 10x with the de-rating of the broader sector, resulting in a lower fair value estimate of S$2.04. Maintain BUY.

Source: OCBC Research - 1 Dec 2014