Thursday, 4 December 2014

Gulfmark Offshore Inc – Lower Offshore Capex Prized In?



Following my previous article on some possible investment ideas in the Energy sector, this article focuses on GLF.

 Investment Thesis

  • Strong cash generating company.
  • Capex expected to be lower in 2015, giving flexibility for further share repurchases.
  • Undemanding valuations – expected decline in offshore rig demand seems priced in.

Overview and Business

  • Currently owns 74 vessels and manages 6 other vessels in Gulf of Mexico, North Sea and South East Asia. Exposed to offshore rig demand.
  • Contracted to sell 2 vessels in 4Q14, so will end FY 14 with 72 vessels. At tail end of a 12 vessel new-build program that was initiated in 2011 – 4 more vessels to be delivered in FY15 for $87.5 million of remaining capital commitments.
  • Chart below on vessel age is illustrative as to how management added so many vessels during the peak of the cycle in 2007 and 2008. Something to watch for in the future to see if the company has learnt its lesson. 
  • Utilization has remained strong in 2014, though negative pressure on utilization can be expected in FY15 and FY16 as demand for offshore rigs is reduced. 

Source: Dec 14 Presentation

Source: Dec 14 Presentation


2009
2010
2011
2012
2013
TTM
Utilization - %
North Sea
88.8%
93.5%
92.4%
89.6%
90.1%
89.9%
SEA
90.0%
78.5%
85.1%
79.4%
77.3%
78.0%
Americas
73.3%
73.0%
80.5%
82.5%
91.2%
87.1%
Total
81.4%
81.0%
85.4%
84.2%
87.7%
86.4%
Average owned vessels
North Sea
24.8
25.0
24.8
24.2
25.8
30.4
SEA
11.5
14.0
14.0
14.9
16.0
15.7
Americas
35.0
35.0
35.0
31.9
28.7
28.6
Total
71.3
74.0
73.8
71.0
70.5
74.7

Financials


2009
2010
2011
2012
2013
TTM
Cash Flow from Operations
171
91.6
97.5
102.7
126.7
174.2
Cash Flow from Investing
-68.2
-53.9
-49.4
-198.8
-210.1
-162.3
Free Cash Flow
102.8
37.7
48.1
-96.1
-83.4
11.9
OCF/Share
6.80
3.59
3.77
3.92
4.84
6.61
FCF/Share
4.09
1.48
1.86
-3.67
-3.19
0.45
EPS
2.01
-1.36
1.93
0.74
2.70
3.06
BVPS
38.42
36.37
37.45
38.20
39.94
40.62
Net Debt
268
229
179
316
440
486
Net Debt / Equity
27.1%
24.2%
17.9%
30.7%
41.4%
45.5%
Dividend per share
10
0
0
100
100
100

 Source: Dec 14 Presentation
Source: Q314 10Q

  • Clearly not a growth stock. But strong cash flow generation ability – TTM operating cash flow per share of 6.61, meaning P/OCF ratio of just 3.94.
  • Company has plenty of financial flexibility - most of debt maturity in 2022. Company also has a $300 mil facility which has not been drawn down.
  • Expecting free cash flow situation to improve from 2012 and 2013 – new build program ending. 
  • Higher FCF would mean greater flexibility for buy back more shares (approx. 1.88 mil shares repurchased in 2014 so far)
  • Current dividend should be safe and reflects a yield of about 3.8%. 

Valuations 


GLF
Last Price
26.61
Shares outstanding - mil
26
Mkt Cap
701
Equity
1,070
Net Income (TTM)
82
Price to Book (MRQ)
0.65
BVPS
40.94
Payout Ratio
32.99
Return on Equity (TTM)
7.66
Return on Equity - 5 Yr. Avg.
3.14
Total Debt to Equity
48.51
Multiples

P/E Ratio (TTM)
8.51
Price to Tangible Book (MRQ)
0.67
Price to Cash Flow (TTM)
4.43
Price to Free Cash Flow (TTM)
0
Dividend Yield
3.84
Growth past 5 yrs (%)
18.38
Est Growth for next 5 yrs (%)
10.00
Analyst Forecasts

FY14 eps
2.37
FY15 eps
2.38


2009
2010
2011
2012
2013


P/B





Avg
TP
High
0.96
0.94
1.33
1.46
1.35
1.21
49.75
Low
0.40
0.61
0.80
0.70
0.84
0.67
Median
0.68
0.78
1.06
1.08
1.10
0.94
37.31

  • Valuations are not demanding
  • Slightly over 11X forward P/E
  • Current P/B of 0.67 reflects bottom of cycle valuations; low in 2009 was about 0.4X P/B
  • Target Prices – $37.30 (mid-cycle at 0.9X 2014e book value) and $50 (top of cycle at 1.2X 2014e book value) 


Risks
  • To monitor cash flow situation
  • Valuation, though undemanding, could fall further. But this is likely to provide an opportunity to add more shares


Disclosure: I am long GLF. This article should not be construed as investment advice. Investors are encouraged to do their own due diligence and research.  



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