Given the low oil prices, many investors fear that oil and gas companies will not be able to withstand this difficult time. As a result, due to high financing costs and high gearing ratio, companies with loans and bonds might not be able to survive. Hence I have been advocating this company Mermaid Maritime as the gearing ratio remains low. The additional cashflow+benefit they net from Mermaid is likely small, given that earnings will remain low going forward. Maybe, as the industry nears the cusp of a recovery, will Thoresen then consider taking the company private to enjoy the benefits of the uptrend. Mermaid Maritime 2Q16 profits beat expectations DBS Group Research | August 16, 2016 Key summary points
Margins up on higher revenues and reduced costs. Mermaid reported US$7.8m in net profits for 2Q16, beating our earlier expectations of US$2.0m in profits. This was the result of: i) higher-than-expected revenue of US$49.6m, which was 13% above our forecast of ~US$44m (although 2Q16 revenues were still down 54% y-o-y on lower subsea fleet utilisation and a slowdown in cable-lay work); and ii) an improvement in costs as the company cold stacked two more non-performing vessels in 2Q16 and continued to drive down crew expenses. As a result, gross margins jumped to 23% this quarter, versus 18% in 2Q15, while administrative expenses recorded a marked 42% decline y-o-y.
Newbuilds have had their delivery dates deferred – a net positive. Mermaid has deferred the delivery of its two newbuild tender rigs to end-2016 from 1H-2016 previously, and the newbuild DSV from 3Q-2016 to June 2017. As these three newbuilds have struggled to find contracts so far, the deferral is a net positive. Otherwise, these vessels would merely incur operating costs and depreciation expenses and depress overall profitability.
Associate income should decline on renewal at lower day rates. The recent extension of contracts for two of the three rigs owned by associate Asia Offshore Drilling at day rates of around US$100,000 was essentially in line with our forecasts. We would thus expect to see a gradual drop-off in associate income hereon as the new rates kick in. Compared to the US$3.5m associate income in 2Q16, we expect less than US$1m in share of profits from associates from 4Q16 onwards. Additionally, the third associate rig has yet to have its contract renewed, with negotiations currently underway. Nonetheless, since customer Saudi Aramco had invested US$60m previously to upgrade these rigs, and as it continues to maintain output levels, we expect the third rig to also secure a contract extension at similar lower day rates.
Gearing remains low for now. Mermaid’s net gearing stands at a mere 0.04x, with no bonds outstanding and positive operating cash flow over the last four quarters. This gives the company a reassuring cushion against a still-lacklustre industry backdrop. The key risk remains the ability to take delivery of the three newbuild vessels on order, as Mermaid will need to secure financing for the c.US$400m remaining capex commitments amidst challenging market conditions. Mermaid’s gearing could rise to around 1.0x once capex commitments have been fulfilled in 2017.
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Quarterly / Interim Income Statement (US$ m)
taken from https://www.dbs.com.sg/treasures/aics/templatedata/article/recentdevelopment/data/en/DBSV/082016/MMT_SP_08162016.xml?sessioncheck=true?sessioncheck=true |
