This article first appeared in The Edge Malaysia Weekly on September 12, 2022 - September 18, 2022

ICON Offshore Bhd continues to surprise the market with its corporate exercises. Over the last three years, the company has transformed from a loss-making pure offshore support vessel (OSV) player into a profitable, geographically diversified entity making a foray into the offshore drilling business.

Its latest move is the sale of its crown jewel in the form of a jack-up drilling rig as part of its larger plan to adopt an asset-light business model.

It has been only less than two years that the group made its foray into the offshore drilling business. However, by disposing of the rig, the group is carving a path to become an all-round energy player, not only focusing on the oil and gas (O&G) sector, says Icon Offshore managing director Datuk Seri Hadian Hashim.

The group is also looking at substantial debt reduction from the proceeds of the sale of its core assets, while looking for mergers and acquisitions (M&A) opportunities.

“Over the past three years, Icon Offshore has transformed its business from a pure play OSV company to diversify into drilling, as well as expanding our operations regionally. Now, we want to grow from a traditional company that provided ‘hard assets’ to the O&G industry to become an asset-light company,” Hadian tells The Edge in an interview.

Among the sub-sectors that Icon Offshore is eyeing is the maintenance, repair and operations that can cater to the O&G as well as other energy-related sectors. “We are currently on the lookout for an acquisition with recurring income potential,” he says without disclosing further details as negotiations are ongoing.

Hadian says the group is also looking at offering consultancy services in the O&G sector by tapping into the company’s expertise as a service provider.

The disposal of the jack-up rig, dubbed Icon Caren, for RM381.65 million — more than double the price it paid in 2020 when crude oil prices crashed to below zero — will put Icon Offshore on a better footing to embark on M&A. It will book a gain of RM185.5 million from the sale that was announced on Aug 30.

Of the RM381.65 million in proceeds, the company says it has ring-fenced RM159.2 million to settle the mortgage for the rig, earmarked another RM208.61 million for general corporate purposes and working capital requirements, and set aside the remaining RM13.84 million for the estimated expenses of the disposal.

According to Maybank Investment Bank Research, following the completion of the deal in the fourth quarter of this year, Icon Offshore will be in a net cash position of RM24.4 million, compared with a net debt of RM343 million at end-June.

Given the substantial gain from the sale, will Icon Offshore consider a special dividend payout to its shareholders? Hadian declines to comment, stating that the company is on the lookout for a new income stream to support its growth.

As for M&A, The Edge reported in June that Icon Offshore was one of the parties interested in buying a 51% stake in Sapura Baker Hughes TPS Sdn Bhd, which sells gas turbines, compressors, generators and electric motors, as well as provides maintenance services. When asked, Hadian declined to comment on the matter.

Icon Offshore took the market by surprise when it bought Icon Caren in 2020, when oil prices were suppressed due to declining demand, as economic activities had come to a halt following the imposition of movement restrictions to curb the spread of Covid-19.

The asset was one of the main contributors to its bottom line. For the first half of the financial year ended June 30, about 73% of Icon Offshore’s profit came from its drilling operations while the other 27% was from its OSV fleet.

When asked about the sale of the drilling assets, Hadian explains that the sale is timely and it will help strengthen the group’s balance sheet. He points out that the environment for O&G service providers, especially the ones that own “heavy assets”, is getting more challenging.

Inflationary pressures, higher cost of equipment, manpower crunch and volatility of charter rates are among the key issues faced by O&G service providers for years and have adversely impacted their bottom line.

“It is getting more challenging and margins are being compressed. Even if charter rates improve, we will need to consider the maintenance cost of the assets during downtime too,” says Hadian.

It is worth noting that OSV players could be one of the beneficiaries of the ongoing contract renegotiations with national oil company Petroliam Nasional Bhd (Petronas).

Late last month, Petronas president and CEO Datuk Tengku Muhammad Taufik Tengku Aziz said the group was renegotiating the existing contracts with its service and equipment providers to match the current market rates. While he did not explain the quantum and the timeline, he revealed that spot rates for OSVs had gone up 30% to 40% while jack-up drilling rigs had surged as much as 200%.

Hadian says the improvement in rates is a boon for Icon Offshore, but it would not address the challenges faced by OSV players. Nonetheless, he adds that the company will not be moving away from its core OSV business entirely, even though the sale of some of its vessels is on the cards. “We will consider selling at the right price,” he quips.

Icon Offshore currently operates a fleet of 21 OSVs, three of which are deployed in Brunei. Its current utilisation rate stands at 93%.

Despite the improvement in charter rates, asset owners are under pressure to maintain profitability due to the volatility in the O&G sector. During the 2014 oil crash, many local O&G service providers went into the red and some have yet to recover from the aftermath.

The Covid-19 pandemic did not help as restrictions disrupted operations.

In addition, more investors are shying away from fossil fuels as part of a global movement towards cleaner energy. Without a doubt, O&G service providers need to reposition themselves in the volatile operating landscape. Meanwhile, the market awaits Icon Offshore’s next move.

Maybank IB said in a Sept 1 note to clients that while the sale of the jack-up rig was positive for Icon Offshore, the company’s management would still need to come up with “a sound alternative business strategy”. The IB sees this and a special dividend arising from the sale as catalysts for Icon Offshore’s shares.

Shares in Icon Offshore, which is 56.1%-owned by Ekuiti Nasional Bhd’s (Ekuinas) Hallmark Odyssey Sdn Bhd, have been trading sideways over the past year due to the bearish sentiment in the local O&G service industry. The spike in global crude oil prices has failed to excite investors as the stock has traded between eight and 12.5 sen this year.

The counter only gained some traction in the past two months. Icon Offshore’s share price surged about 37% from eight sen on July 14 to 11 sen on Sept 8, valuing the company at RM297.53 million.

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