On 14 February 2017, OCBC reported a net profit after tax of S$3.47 billion for the financial year ended 31 December 2016, a decline of 11% compared to last year. Not surprisingly, the decline in earnings was due to an increase in net allowances for loans, mainly in the ailing Oil and Gas (O&G) sector. The bank has $15.8 billion exposure to this sector and Non Performing Loan (NPL) has crept to $1.3 billion. Will Ezra sink OCBC share price?
Ezra is an offshore contractor and provider of integrated offshore solutions to the global O&G industry. The Group has three main business divisions, namely Subsea Services (“EMAS AMC”), Offshore Support and Production Services, and Marine Services offering a full range of seabed-to-surface engineering, construction, marine and production services globally.
The struggling Ezra recorded a net current liability position of US$887,220,000 for the financial year ended 31 August 2016. It seems that Ezra has miscalculated the business risks and this led to various obligations owed to financial lenders and trade creditors. The troubled company recently flagged that it could possibly write down $170 million worth of investment due to problems with one of its joint ventures, EMAS Chiyoda Subsea.
Amid all these troubles, Ezra announced that it is undergoing a restructuring exercise to “preserve value for the Group”. If the initiative is unsuccessful, Ezra will be faced with a going concern issue.
As a result of the problems, investors dumped the shares and led to Ezra share price reaching a new low of $0.021 as at 15 February 2017. Even during the dark days of the Great Financial Crisis, the share price has not sunk so low. Thus, investors can imagine the severity of the crisis Ezra is facing. Even if investors of Ezra were to cut loss now and sell off their existing shares on hand, they won’t be getting back much given the current trading price.
I know it is unfair to single out Ezra as the oil slump continues to unfold. After all, several players in the industry has already filed judicial management – Swiber and Swissco, just to name a few. Being a downstream player Ezra, the risk of collapsing is real. Unlike big boys like Keppel and Sembcorp, Ezra does not possess the sort of balance sheet to withstand the prolonged slump in the oil price.
The collapse of Ezra, coupled with the other oil and gas companies, will have an impact on OCBC to a certain extent. For FY16, the net allowances increased by 49%, led by higher specific allowances for corporate accounts in the oil and gas support services sector. However, Ezra’s downfall will not sink the bank because the risk will be mitigated by the latter’s diversified business operations. In fact, FY16 full year results saw a strong wealth management fee income growth and increased contributions from their Indonesia and Hong Kong banking subsidiaries.
It is unknown how much loan OCBC extended to Ezra because normally banks do not reveal or breakdown their customer’s details. It is estimated that Ezra owed DBS, OCBC and UOB a total of S$1.1 billion, with DBS rumored to have $600 million exposure while OCBC having $300 million exposure to Ezra.
Ezra’s story will be just another tragic case in SGX history. Ten years ago, it was flying high and share price was trading at $2.00. Now the shares are practically worthless. Investors could not be faulted for catching a falling knife unwittingly because the development was too swift for most investors to react. To put things into perspective, Ezra was making a healthy profit of USD67 million for full year 2015. Who would know that in 2016, it recorded a frightening loss of USD1 billion for full year 2016?
One year seems like an eternity in the corporate world, at least for Ezra. Those giddy days must be surreal for Ezra and its investors.
Ezra is a homegrown company and to be frank, I hate to see it fold up from the perspective of a Singaporean. However, successful corporate turnaround is very rare in Singapore, so chances of Ezra making a remarkable comeback is extremely low unless a shining white knight appear out of the blue. Until then, it will be woes for Ezra and its investors.
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