Credit rating agency Moody’s Investor Service stated that the acquisition of Topaz Energy and Marine by DP World is credit negative because Topaz’s business is exposed to the oil and gas industry, which Moody’s considers to be more cyclical and therefore volatile than DPW’s traditional port business
The rating agency further stated that this adds to DPW's acquisition trail of businesses outside its port operations, some of which are riskier and can not support higher leverage compared to a traditional port operator.
Moody’s revealed that the acquisition equates to about six per cent of DPW’s 2018 revenue and seven per cent of EBITDA. The deal is subject to regulatory approvals and is expected to be completed in the second half of the year,
Dion Bate, a vice-president-senior analyst at Moody’s, said, “DP World’s announced acquisition of Topaz Energy and Marine Limited (B2 stable) equates to around seven per cent of DP World’s 2018 EBITDA. While it adds to the DP World’s business diversification it makes DP World’s cash flows susceptible to increased volatility given Topaz’s exposure to the cyclical oil and gas industry.”
Topaz has a strong market position for offshore supply vessels in the Caspian Sea with more than 50 per cent market share in a region with high barriers to entry, but Topaz’s customer base is exposed to the cyclical oil and gas industry, resulting in weaker cash flows for Topaz during periods of declining oil prices.
In view of the extension of contracts for 12 vessels with BP p.l.c (A1 stable) in Azerbaijan in March 2019 and a three-year contract to supply and operate 20 specialist module carrying vessels for the Tengizchevroil oilfield expansion project (Tengiz contract) in Kazakhstan, which started in June 2018, Moody’s expects a strong increase in EBITDA in 2019.
However, the EBITDA contribution from the Tengiz contract will not fully convert into free cash flows as the construction costs of the new vessels (above US$300mn) were pre-funded by Tengizchevroil and will be paid back over the life of the contract. The rating company expects Topaz to generate free cash flows of around US$50mn in 2019, which translates into a free cash flow-to-debt ratio of below 5 per cent adjusted by Moody’s.
