FOLLOWING the 2014 downturn in the oil and gas (O&G) sector, Coastal Contracts Bhd, primarily a shipbuilding group, has been diversifying to reduce its reliance on this business, which has remained in choppy waters.
To fill the gap in earnings, it has shifted course towards high-end offshore asset chartering.
The group’s main earnings’ driver currently is a jack-up gas compression platform in Mexico serving state-owned company Petroleos Mexicanos (Pemex).
It started this project, worth RM1.5bil, in 2015 for a 12-year period.
Coastal Contracts owns and operates two shipyards that cover over 97 acres of land in Sandakan, Sabah, Malaysia.
It has about six offshore support vessels (OSVs) in its books, but utilisation rates for these are currently low because of weak demand from the double impact of Covid-19 and the fall in oil prices.
Leveraging on its experience in Mexico, the group recently secured its second Pemex project – a RM258mil onshore gas sweetening plant project that should start contributing to earnings in the financial year ending June 30,2022 (FY22).
Earlier in February, Coastal Contracts embarked on its first venture into the liftboat chartering business.
This followed the acquisition of Teras Conquest 7 (TC7) from Singapore’s Ezion Holdings Ltd, through a partnership with a seasoned liftboat operator, JUB Pacific Pte Lte.
The company tells StarBizWeek that it is eyeing several projects this year amid a market recovery and plans to venture into the offshore wind farm business.
“The strategy to move from a shipbuilder to a high-end offshore asset owner was to avoid heavy reliance on our shipbuilding business, which is cyclical in nature.
“The diversification will provide the group with a more sustainable source of recurring income, namely, in the floating production, storage and offloading (FPSO), mobile offshore production units (MOPU) and floating regasification and storage unit (FSRU)-related type of assets, ” Coastal Contacts says in email replies on its prospects.
It adds that the foray into the liftboat charter market could, in turn, pave the way for plans to go into the wind farm renewable energy (RE) sector.
This is because liftboats are seen as a preferred and cost-effective option for the installation and maintenance of offshore wind farms where “there is abundant opportunities from rising demand (of more wind farms) in tandem with the world’s RE transition”.
TC7 currently has an orderbook worth RM67.3mil in a 20-month charter, serving a major oil company in the Middle East.
“The 2014 downturn has affected our core business of shipbuilding as oil companies reduced their capital expenditure spending. Banks too have been selective or restricted in lending to our vessel buyers.
“This has reduced the demand for OSV tremendously, while on the supply side, there’s been congestion since, ” the company says.
It foresees the OSV market equilibrium gradually normalising in the next one to two years when the global Covid-19 vaccination programme is successfully rolled out.
On its part, Coastal Contracts says it has maintained minimal capital and operational expenditure and undertook cost-cutting measures to preserve cash in order to better position itself to weather the current downturn due to Covid-19.
Against the backdrop of limited financial resources in the O&G sector, analysts note that the company has a strong balance sheet with a net cash of RM250mil which it can leverage on to secure new projects.
For context, the stock has a market capitalisation of RM426mil based on Wednesday’s 79.5 sen closing price.
For FY18-FY20, the Mexico jack-up gas compression platform contributed some 60%-80% to the group’s top line.
However, over that period, the bottom lines were mostly in the red due to depreciation and impairment charges of unsold vessels, as well as finance cost.
In the first six months ended Dec 31,2020 (H1 of FY21), Coastal Contracts posted a net loss of RM9.7mil versus a profit of RM22mil in the same period a year ago.
Revenue, meanwhile, fell 33% year-on-year to RM75.7mil.
On a more positive note, Coastal Contracts is optimistic on its performance for the remainder of FY21.
“Operationally, we have always maintained positive earnings before interest, taxes, depreciation and amortisation (ebitda).
“During H1 of FY21, our loss after tax was due to the unrealised foreign-exchange (forex) loss as the ringgit had strengthened during that particular period, ” it adds.
AllianceDBS Research notes that while the group is looking to do some housekeeping on this to reduce the forex fluctuations going forward, its recent ventures would shift its earnings profile, where there will be increasing contributions from longer-term contracts.
The research firm believes that Coastal Contracts could potentially win more jobs in Mexico as it gains a track record in onshore gas processing plants and enhance its capabilities in terms of technology and technical know-how by partnering Nuvoil Group of Mexico, an onshore oilfield operator, on this project.
The field has reserves of 1.3 billion barrels of oil equivalent, making it the largest onshore discovery in Mexico over the past 25 years. Once the field hits its peak, it is expected to be the highest-producing onshore field in Mexico, pointed out AllianceDBS in a recent report.
The research firm estimates that net profit from this plant could come up to around RM10mil-RM12mil per year, based on its share in the joint venture and assuming margins of some 20%-25%.
As for the OSV market, AllianceDBS says charter rates could pick up in H2 of FY21 onwards with the improving crude oil price, given the continued cuts by Opec+.
“FY22-FY23 will see better utilisation rates for OSVs from improving market conditions. More scrapping in the market could lead to better supply demand dynamics versus an oversupply market currently, ” it adds.