Gulf Marine Services – a cheap share in the profits of the booming Middle Eastern oil and gas sector
As we go into the Autumn and Winter seasons, the population of the UK is fearing the continuing escalation in energy prices.
It is apparently inevitable, despite Government energy price cap controls, that we will all suffer cost pressures.
If you already have your own ‘solar farm’ or a ‘forest of wind-turbines’ then you will not want to know about my penny stock suggestion to build up your capital protection.
But if you do want to know what I am ‘plugging’ now, then take a look at this £68m capitalised group that is scoring well working in the booming oil and gas sector out in the Middle East.
Established some 45 years ago in Abu Dhabi, Gulf Marine Services (LON:GMS) is today one of the world’s leading providers of advanced self-propelled self-elevating support vessels.
With around 550 employees and operating from its offices in the United Arab Emirates, Saudi Arabia and Qatar, the group’s fleet provides an invaluable service for the oil, gas and renewable energy industries.
It has one of the world’s newest fleets of these vessels, on average no older than 11 years, while they have an expected life-use of up to 40 years.
The versatility of its vessel’s meets the demand of the group’s clients, to provide cost-effective solutions, in a safe and efficient service, while minimising the environmental footprint.
With a current fleet of some 13 self-elevating support vessels, they are used in offshore oil and gas platform refurbishment and maintenance work, on well intervention activities, as well as on offshore wind turbine installation and maintenance duty.
They are also effective for offshore oil and gas platform installation and decommissioning.
Ranging in size - K-Class (Small), S-Class (Mid) and E-Class (Large) – the four-legged vessels are capable of operating in water depths of 45m to 80m, depending upon the leg length.
Four legs are certainly better than the prevalent three-leg vessels which are not considered to be as safe or versatile.
The vessel’s four legs give such structures weather tolerance, location versatility and operational stability.
Being self-propelled means that they do not require tugs or other support vessels to help in moves from one location to elsewhere in a particular field – that time-efficiency is more cost-effective than those vessels without such propulsion.
The very-large desk space creates ability for accommodation facilities for up to 300 people and big crane capacity, sufficient for each client’s requirements.
Top Global Clients
The group has a global clientele, including Aramco, Total, StatOil, ADNOC, Shell, McDermott, Occidental Petroleum, Orsted, Spirit Energy, ABB, Dubai Petroleum, Fugro, Subsea 7, Siemens, Conoco Phillips, Larsen & Toubro, Ithaca Energy, National Petroleum Construction, Hyundai Heavy Industries, Vestas, NT Offshore, Saipem, Cooec, and Heerama amongst many others on its lists.
The Middle East and North Africa region (MENA) continues to be the largest geographical market representing 89% (2020: 88%) of total Group revenue. The remaining 11% (2020: 12%) of revenue was earned from Offshore Windfarms in the renewables market in Europe.
National Oil Companies continued to be the Group's principal client representing 70% of 2021 total revenue (2020: 68%).
The UAE remains the largest revenue contributor in the MENA region, generating 50% of total revenue last year (2020: 52%). The remainder is split between Saudi Arabia and Qatar at 19% and 20% respectively (2020: 17% and 19%).
The group has fractionally over 1bn shares in issue.
Mazrui Investments has the biggest holding (25.6%), while other larger holders include Seafox International (15.6%), Castro Investments (4.85%), Qatar Insurance (4.53%), and Horizon Energy (3.14%).
Related Party Transactions
In April 2020 Seafox International announced a possible cash Offer for the group.
Seafox is a leading global offshore jack-up company, providing services to support the oil and gas and renewable industry. It owns and exclusively manages eleven self-elevating jack-up units.
The two groups came to an understanding earlier last year ahead of the reorganisation and fund-raising.
The Group has never had transactions with Seafox International and has agreed with its banks, in its latest agreement signed in March 2021, restrictions on any future transactions with them or their affiliates.
During the last trading year, the Group received catering services totalling $0.5m (2020: nil) on-board one of its vessels provided by the National Catering Company, an affiliate of Mazrui International LLC.
Reorganised and back to profit
Very shortly we should be seeing the group updating shareholders about the first half-year’s trading up to the end of June.
There were indications of higher utilisation rates earlier in the year, which are expected to have continued in the subsequent months. Also, higher day rates could well become evident for the year as a whole to end December.
There will, no doubt, have been continued improvement on the group’s day rates due to demand in the Middle East outstripping supply.
The Executive Chairman, Mansour Al Alami, recently stated that:
"The primary aims of last year included reorganising the Company, to regain the trust of stakeholders and to build a business able to consistently provide value to its shareholders. These aims have been delivered on and we are proud of having made such significant progress in such a short period of time. GMS today is back to profitability, it is back to being on a growth path and continuing to deleverage.”
Leverage decreasing fast
Net bank debt reduced to US$ 371.2m ($ 406.3m). A combination of reduced debt and improved adjusted EBITDA led to a 28% reduction in the net leverage ratio reducing from 8.0 times in 2020 to 5.8 times at the end of 2021. The Group will continue its focus on organically reducing leverage going forward. Its target is now 4.0 times, which is a massive turn around and extremely positive.
The Group is currently operating as ‘a Going Concern’ without any material uncertainties. This is the first time the Group has been operating as ‘a Going Concern’ without any material uncertainties since 2017.
With reduced debt and much improved terms, the Company will be well placed to benefit from the improving market cycle in oil and gas in the Middle East and inrenewables in Europe and the potential for increases in day rates as the market continues to tighten. This will build on the significant progress made to-date, which includes a much-reduced costs base, a strengthening of the order book and far better levels of vessel utilisation.
Analyst Opinion – 20p Target Price
Daniel Slater, at Arden Partners, the group’s corporate broker, rates the shares as a Buy, with a Target Price of 20p a share.
Following last year’s fund raising and corporate reorganisation the net debt figure is accelerating downwards.
He considers that the company’s market is increasingly tightening as customers ramp up activity, which will put upward pressure on GMS vessel utilisation and day rates to the benefit of the group.
For the current year Slater is estimating group sales to rise to $135.3m ($115.1m), while adjusted pre-tax profits will rise to $32.8m ($20.7m).
For the coming year he has pencilled in $143.6m revenues, $39.7m profits, worth 3.1c in earnings per share against an estimated 2.5c this year.
Conclusion – Trading Update Due Soon
The net debt position might well put off many investors, however, looking at the way that leverage ratio has dropped in the last two years, there is a much more positive feeling about that situation.
As far as the group’s business pipeline is going, there are suggestions that a substantial uplift may soon become visible as the boom out in the Middle East increases.
A recent report infers that the area’s oil producers are in line for an extra $1.3trn as higher energy prices continue to flood through. Additional income is anticipated over the next four years as Russia’s war in Ukraine continues to send prices into overdrive.
Bigger oil revenues in the region will drive even higher the demand for new production sources and GMS will be a natural beneficiary as discovery expenditure increases.
We are only a few weeks away from the group declaring its Interim Trading Update.
Looking at Arden Partners estimates for this year and next, it occurs to me that this group’s shares are substantially undervalued at the current 6.75p, at which level they are trading on a sterling equivalent of 2.17p earnings for 2022 and 2.69p for 2023, putting them on just 3.11 times and only 2.51 times price-to earnings ratios respectively.
Now that is a very cheap way to participate in the booming energy sector, giving UK investors an interesting way to reduce their own energy expenditure!