Falcon energy: Oil price recovery fuels share price rise, future placements could boost growth

Written by Goola Warden   

Monday, 06 July 2009 16:53

Tan Pong Tyea, 61, wants to get the listing of his Falcon Energy Group moved from Catalist to the Mainboard of the Singapore Exchange, where it might attract a wider investor following, but his applications have so far been rejected. The problem: It lacked a sufficiently broad public shareholding spread. After placing out 60 million of his own shares last month, however, Tan might finally get what he wants. Following the placement, some 26% of the company is now in public hands. To list on the Mainboard, companies need to have at least 20% of their shares outstanding in public hands; and, to maintain a listing, the free float must not fall below 10%. Tan still holds 482 million shares, representing a 66% stake.

But why does Tan think investors will get excited about Falcon once it moves to the Mainboard? Tan acquired control of the company, formerly Sembawang Music, in May 2006 with plans to use it as a means to get his privately held offshore support services business listed. “It was plain. It had one business, the music business,” Tan tells The Edge Singapore, in a recent interview. “There was not much liability in it.” Moreover, there was only one controlling shareholder who was willing to sell out, he adds. “So, it was very straightforward.” After gaining control, Tan made an offer for the rest of the company, sold its music retail chain store business back to its founder, and changed its name. “The whole idea was to develop it as an oilfield company.”

Tan has been in the offshore services business since the 1970s. In 1983, he ventured out on his own, buying offshore support vessels and chartering them out to customers in the oil and gas industry. In 2002, Tan consolidated his businesses under Hong Kong-based Oilfield Services Co (OSCL). Last year, he used Falcon Energy to acquire it in exchange for new shares. “We had the public company take over the private company,” Tan explains. To improve Falcon Energy’s public shareholding spread, Tan and his partners sold some of their shares in a “compliance placement” at 67.5 cents each in June last year, just as the stock market was going into a tailspin. “We were quite lucky to be able to do the placement,” Tan says. “We did the minimum [amount] because by that time, the market was quite tough.”

Source: Bloomberg.

With the steep recovery in the market recently, however, Tan has succeeded in broadening Falcon Energy’s shareholding spread. And, if additional free float helps lift the stock further, the company might begin to raise money through share placements to fuel its growth, he says. “I had two objectives when we went into the RTO [reverse takeover] — one was to try and double the profit level in the next three years. And, in line with that, double the market capitalisation.” Shares in Falcon Energy are up 119% this year to 61.5 cents as at last Thursday, and the company has a market value of $442 million. For the 15 months to December, the company chalked up profit after tax of US$36.1 million ($52.41 million), or US$28.8 million for the 12 months to Dec 31.

Image: The Falcon Warrior, one of the vessels belonging to the Falcon Energy Group. The company has a fleet of 12 production support vessels, which it charters to oil majors like Shell and Chevron complete with a crew. Credit: Bloomberg

RECOVERING OIL PRICES

Falcon Energy has a fleet of 12 production support vessels, which it charters to oil majors like Shell and Chevron complete with a crew. “They are production support vessels,” Tan says. The vessels are usually anchored near offshore platforms and often customised for a particular client to provide anything from a floating workshop to accommodation. “We have the cranes on the vessels to lift things. Their contractors need to stay on our vessels to allow them to work on the platform every day,” Tan describes. “When they are doing work on the platforms, invariably they need a workshop.”

Tan says Falcon Energy is involved mostly with the development and production phases of offshore oil and gas wells, rather than the exploration part of it. That makes the company less susceptible to swings in oil prices — oil companies don’t usually cut back on oil production after having borne the exploration and drilling costs. “When the [oil] price drops, the ones that worry most are the deepwater oil programmes because they need high oil prices to sustain them,” Tan says. “In the production phase, they will have to go ahead, although the companies may look at ways to reduce production costs.”

Even so, Falcon Energy isn’t completely insulated from the profitability situation of big energy companies. Last year, when oil prices crashed to as low as US$34 per barrel, Tan began to anticipate major cuts in offshore energy programmes and held back on expansion plans. But things are looking up again as the global economy appears to be stabilising and oil prices have rebounded. “We are quite optimistic about the next two years and I think wecan embark on a certain amount of expansion.”

Thomas Kraegi, head of macroeconomic research at UBS, expects oil prices to rise to US$80 per barrel in the next three months. “We estimate an average price of US$85 for 2010,” he says. “The upswing will likely be led by increased economic activity around the globe.” For Tan, even oil prices of as low as US$40 to US$50 per barrel are “very okay”. He says, “A lot of the fields we work in are of very low cost.”

Plans to double fleet size 

Tan plans to renew and double the size of Falcon Energy’s ageing fleet of vessels in the next two years. According to industry sources, some of Falcon Energy’s vessels could now be more than 20 years old. That hasn’t posed much of a problem for the company so far because the vessels are not used for towing heavy loads, Tan says. But with some troubled shipyards desperate to sell their vessels, he is now on the hunt for bargains. “[Some shipyards] built a huge number of vessels with plans to sell them, but the financing has dried up, with the global crisis. So, nobody comes to buy and the market drops,” he says. Falcon Energy had a gearing of 18% as at Dec 31, and expenditure commitment for this year, according to its annual report, is US$28.4 million.

Meanwhile, the company has been quietly expanding its market beyond the waters of Thailand, Indonesia, Malaysia and Brunei. “We are starting to go to the Middle East,” Tan says. “I also see the Chinese companies as a source of growth.” In April this year, the company completed the acquisition of a 52% stake in Longzhu Oilfield Services, satisfied by the issue of 23 million shares at 37.5 cents apiece to Cai Wenting, whose brother Cai Wen xing is a director of Falcon Energy. That could pave the way for the company to begin serving Chinese companies soon, an industry observer says.

Falcon Energy also plans to offer new services. Last November, the company announced a long-term contract to charter a seismic survey vessel and a sale contract for a supply vessel to BGP Inc, a subsidiary of China National Petroleum Corp. The total size of the contract is US$84.47 million. Earnings from these one-off, long-term deals are easy to determine from the outset. “Most of the projects are self-liquidating,” Tan says. “We know how much we can make from the project when we go into it, as opposed to the marine business, which is an ongoing thing.”

Falcon Energy has no analyst coverage at the moment, but if the company announces more contract awards and expansion moves in the months ahead, interest in the stock could grow.