Clients will have noticed a building position in Mermaid Marine, with a re-entry into the company’s shares in November and December 2017 (at $0.20cps), followed with a further purchase in April this year (at $0.22cps). It remains a modest holding.
Mermaid is an Australian marine services provider, operating through Australia (its main operation – the North West Shelf), South East Asia, India, Africa and the Middle East. It has 28 young vessels (average age 5 years) which undertake a range of offshore activities, including supporting rigs and offshore operations, drilling programs, construction, dive and subsea installation, maintenance and repair. The key source of work is for the oil and gas industry.
In the most recent oil price downturn, the emergence of US shale oil significantly reduced the amount of activity occurring in this space. There has been virtually no new Oil and Gas exploration (which can be up to 30% of the work available) since the end of 2014, where you can see that the oil price slumped, and all unnecessary work (including maintenance) was cut right back as the industry went into a period of survival.
As a result of this utilisation of Mermaids fleet dived (albeit less than others, due to its strong relationships and service), and charter rates with it.
Fast forward to today. Mermaid has now been recapitalised (we participated in this action in November 2017) and its debt is no longer life threatening (to equity holders). The industry whilst still “soggy” is showing signs of picking up.
Mermaid is an asset-heavy business. Its most recent Net Asset Value (its boats value less the debt and obligations it has) is $0.47cps. This is a written down value of what the board (and its Auditors) believe the value of the assets are, and as is always the case will reflect caution, due to the conditions immediately in front and behind the business. We believe the long term value of the assets is more like >$0.65cps which is based on a recovery in earnings in the industry (and therefore for the business) over the next three years. Using past earnings achieved on its current boats, we expect underlying earnings to lift by greater than three times its current level over the next few years (gradually).
As a result of this, Mermaid presents a classic low downside (this was taken away via the recapitalisation, and that the business is cash flow positive at the bottom of the industry cycle) and high upside (as conditions return). What is required will be patience. As with most good investments, they take time.
First Samuel clients will recognise these type of return profile as being similar (but perhaps less stellar) as the Emeco industry and business dynamics of a couple of years ago.