Coastal Contracts seeks foothold in South America

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COASTAL CONTRACTS BHD, which says it is close to securing a US$100 million to US$200 million charter contract from Mexico’s state-owned petroleum company Petroleos Mexicanos (Pemex), is now looking to make Mexico its hub in South America.

It has been 73 years since the Mexican government nationalised the oil and gas industry and forced out foreign companies operating there as it felt it was not getting its fair share of the proceeds.

However, the passing of the Mexican Energy Reform Bill this month is set to transform the country’s energy sector as the law is expected to increase its oil and gas production and encourage foreign investment.

It is worth noting that the Sandakan-based shipbuilder, which clinched a RM1.24 billion jack-up gas compression service unit (JUGCSU) charter contract from Pemex in February this year, is positioning itself strategically in Mexico and eyeing jobs in the South American market.

“We have a gas plant in Mexico and we plan to secure charter contracts and deploy our drilling rigs to the country. Naturally, we want to start our South American expansion from Mexico,” executive chairman Ng Chin Heng tells The Edge in a phone interview.

“South America, especially Mexico, is a huge market and if we gain a foothold there, it is good for Coastal Contracts in the future.”

According to Ng, who is also the principal founder and substantial shareholder of Coastal Contracts with a more than 44% stake, the company plans to open an office in Mexico next year, making it its gateway to neighbouring countries such as Colombia and Venezuela.

“Moving forward, we expect contributions from South America to overtake those from our existing markets in Southeast Asia. We need more resources there and Mexico is probably the most ideal country that provides us with a perfect introduction to South America,” he says.

Following the reforms to open up Mexico’s oil and gas market to direct foreign investment, the US Energy Information Administration (EIA) estimates the country’s oil production to rise to 3.7 million barrels per day by 2040, up from 2.875 million barrels last year.

Three offshore assets in Mexico

At present, Coastal Contracts’ plan is to own and operate three offshore assets in Mexico. In addition to the JUGCSU, it is building two jack-up drilling rigs at US$215 million each, for which the charter contracts are still being negotiated with Pemex.

The JUGCSU is expected to be delivered by the second quarter of 2015 and is seen to start contributing to the group’s revenue in the second half of next year and generate profit from 2016.

In 2012, Coastal Contracts placed an order for its first jack-up drilling rig in order to diversify into the upstream sector and change its business model from build-and-sell to asset ownership.

The rig, dubbed Coastal Driller 4001, is being constructed by CIMC Yantai at a shipyard in China and is due for delivery by the end of this year. CIMC Yantai has also started work on Coastal Contracts’ second rig and is expected to deliver it late next year.

Despite the challenging market and the fact that it has yet to secure charter contracts for its two drilling rigs, Coastal Contracts is unperturbed. “We are still in the negotiation stage as the Mexican Energy Reform Bill was only passed this month. We have yet to sign any contract but we are quite optimistic. We expect an outcome in December and January,” says Ng.

Coastal Contracts is negotiating a three to four-year charter contract with Pemex for Coastal Driller 4001 and will discuss a similar contract for its second rig. The contracts could be worth US$100 million to US$200 million each.

“There are many players in the rig market but our competitive advantage is that we have new rigs whereas there are a lot of old rigs all over the world. The majority of the current global fleet was delivered in the 1980s and the industry will soon face a significant challenge replenishing its ageing equipment,” says Ng.

“A year ago, it was reported that Mexico alone needed 50 to 100 rigs. We have only two rigs now but we will not stop there. If we can perform and deliver, we will expand.”

With the new law in place and the contract negotiations going well, Ng says it is “very unlikely” that Coastal Contracts will undertake Plan B — to sell the rigs.

In early September, he had said that if the market remained unfavourable, the company may consider selling the rigs or deploying them to other places.

He also said Coastal Contracts aimed to increase its market capitalisation from RM2.67 billion to at least RM5 billion in the next five years.

The stock has declined more than 30% since then, dragged down by the rapidly falling global oil prices. It closed at RM3.44 last Thursday for a market capitalisation of RM1.827 billion.

Commenting on this, Ng says Coastal Contracts cannot control its share price. But he notes that business is ongoing and that the company has yet to feel the impact of the recent drop in oil prices. It is not overly concerned because its cash flow is strong, he adds.

“Generally, the market moves up and down over the years. Everyone will experience downtime in their growth trajectory for sure. To me, sustainability is important to the company’s growth and cash flow is imperative for it to survive during downtime.”

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.