This article first appeared in The Edge Malaysia Weekly on August 26, 2019 - September 1, 2019

THE rock-bottom share price of ICON Offshore Bhd at the moment is a telling sign that many of its shareholders are anxious about its prospects. Against this backdrop, it is anyone’s guess if the struggling offshore support vessel (OSV) provider will be able to convince them to pump in more money via a cash call.

After the company proposed last Monday to raise a maximum of RM250 million from its shareholders, the stock crumbled, falling 41.2% over the week to close at a paltry five sen last Friday.

So, should shareholders give ICON a chance?

For starters, say industry players, oil majors are dishing out more OSV contracts, which indicates a recovery in demand and subsequently an uptick in the industry’s rates.

“The corporate exercise will provide ICON’s shareholders with the opportunity to participate in its revival as the amount raised will be utilised for the recapitalisation of its balance sheet and substantial savings on finance costs, just like at Velesto Energy and Sapura Energy.

“There is a high possibility that ICON will break even next year as we are seeing a recovery in pockets of the OSV industry, especially in accommodation barges and anchor handling tug supply (AHTS) vessels,” says an industry player who declined to be named.

To recap, ICON announced a slew of corporate exercises on Aug 19, including a consolidation of its shares, a rights issue with free detachable warrants as a sweetener, and a debt restructuring with a list of creditors.

It proposed to reduce the number of its issued shares by a factor of 50 to 1, an issuance of rights on a 60 to 1 basis with free warrants to raise a minimum of RM183 million and undertake a debt restructuring involving RM577.1 million with eight lenders, which, if accepted, will slash its borrowings by more than 36% to RM412.99 million. At the same time, ICON’s gearing will improve from 9.16 times to 1.14 times.

According to ICON, the share consolidation and rights issue with warrants will also strengthen its capital base.

But can the company sell this idea to its shareholders, nudging them into investing more money in the company to help it restructure its capital base and debt, and ride alongside the recovery in the OSV market?

According to Nik Haziq Nik Alwi, an analyst with Petrodata by IHS Markit who covers the OSV space in Southeast Asia, day rates in Asia-Pacific stabilised over the first two quarters of the year and are unlikely to rise significantly over the next few years.

“The competition to secure charters is expected to remain intense throughout the region, and indeed across the global markets, as OSV owners continue to focus on increasing fleet utilisation and aggressively chasing all term and spot contracts at cut-throat day rates,” he says in a report published last Thursday.

He adds that while day rates are not as high as before, they have stopped falling and the market remains sanguine for now.

Meanwhile, vessels required for spot or prompt charters, including urgent cargo runs, can secure higher day rates, he says.

“We are expecting day rates in a number of regions to increase in the coming year but at a slow pace, although an increase is welcome compared to the slide seen between 2016 and 2018 because of the oil crisis.

“However, delays in projects and contracts, cancellation of ongoing projects, cost pressure on OSV operators and day rate renegotiations are still inevitable. OSV operators continue to face reduced profitability from their vessels.”

Regardless of the situation in the OSV market, ICON’s largest shareholder, government-linked private equity fund Ekuiti Nasional Bhd (Ekuinas), will be backing the corporate exercises and has pledged to subscribe for the minimum amount of RM183 million.

“The past few years have proved to be challenging for the overall oil and gas industry. The prolonged decline in prices led to lower upstream activity, which put companies in the OSV sector in a difficult position, resulting in the vessels being laid up,” Ekuinas tells The Edge via email.

“This, coupled with the high activation cost and the lack of new build since the downturn in 2014, led to the tightening of supply. In the short term, this will put upward pressure on the charter rates.”

The corporate and debt restructuring exercise is not the only step ICON is taking to revive itself. On Aug 20, the group announced the appointment of Datuk Seri Hadian Hashim as its new managing director, a role that had been left vacant since the departure of Amir Hamzah Azizan in November 2017. Between Amir’s departure and Hadian’s arrival, Captain Hassan Ali, the group’s chief operating officer since 2015, was the acting CEO.

Hadian has vast experience in the oil and gas industry, having started his career with Sarawak Shell Bhd in 1982. In 2012, he co-founded Sona Petroleum Bhd, a special-purpose acquisition company, and took it public in July 2013. While at Sona Petroleum, Hadian was its managing director and an executive director. The company was delisted from Bursa Malaysia on June 28, 2018, after failing to secure the acquisition of the Stag oilfield located off Western Australia in April 2016.

ICON was formed in 2012 via the merger of Tanjung Kapal Services Sdn Bhd (TKS) and OMNI Petromaritime Sdn Bhd. It was listed on Bursa Malaysia in June 2014 at an IPO price of RM1.85 per share, raising RM534.69 million.

ICON’s listing allowed Ekuinas to realise RM645.5 million out of its total investment of RM435.9 million in the establishment of the group between 2012 and 2014. This translates into a gross internal rate of return of 25.5% per annum.

ICON was formed and listed at the peak of the oil price boom, when crude prices surged to above US$100 per barrel. The high prices encouraged oil majors to undertake more exploration and production, which, in turn, increased the demand for OSVs and other support services.

However, within weeks of its listing, crude oil started to fall and by the end of January 2015, the benchmark Brent crude was trading at around US$50 per barrel, and slid further to a low of US$28 per barrel in early 2016, forcing countries, including Malaysia, and oil and gas companies to recalibrate their budgets.

In its financial year ended Dec 31, 2014 (FY2014), ICON’s net profit almost halved from RM113.6 million in FY2013. This was followed by a net loss of RM364 million in FY2015, RM152.75 million in FY2016, RM62.1 million in FY2017 and RM439.97 million last year.

In its first quarter ended March 31, ICON’s accumulated losses stood at RM854.43 million compared with its share capital of RM899.8 million.

Looking at the group’s distressed condition, it is not surprising that it has proposed a restructuring. Indeed, Maybank IB Research analyst Liaw Thong Jung says the exercise is timely, allowing the company to capitalise on the revival in the OSV market and its fleet rejuvenation programme.

“The corporate exercises are structured to lower ICON’s borrowings/net gearing levels (-37% to RM413 million/from 9.1 times to 1.1 times) on a proforma basis, and improve its capital management (that is a longer repayment period).

“From this, ICON will be able to save about RM18 million per annum in interest expense (raise its net profit by 2.6 times) and register a RM27.5 million one-off gain,” says Liaw. He suggests that if the exercises are indeed undertaken, that will be a re-rating catalyst for the group.

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