Profit from the oil price recovery

This is good news for Gulf Marine Services (GMS:13p), a leading operator of advanced self-propelled self-elevating support vessels (SESVs). Gulf Marine’s fleet is focused on providing liftboat services to the oil, gas and renewable energy industries in the Middle East and to members of the Gulf Cooperation Council (GCC). The group has pre-qualified status with key regional national oil companies (NOCs), including Abu Dhabi National Oil Company in the United Arab Emirates, Saudi Aramco and Qatar Petroleum.

The fleet of 13 SESVs is amongst the youngest in the industry, with an average age of 12.8 years and an expected useful life of up to 40 years. The vessels support Gulf Marine's clients across a broad range of offshore oil and gas platform refurbishment and maintenance activities, well intervention and offshore wind turbine maintenance work, offshore oil and gas platform installation and decommissioning, and offshore wind turbine installation.

The vessels are four-legged and self-propelled, which means they do not require tugs or similar support vessels for moves between locations in the field. This makes them more cost-effective than using conventional offshore support vessels operating without self-propulsion. Demand is booming, so much so that Gulf Marine has announced three major contract awards so far this month, which boosts its revenue backlog to $326mn, up from $271mn in September 2023.

Tight market is driving hire and utilisation rates

• Major contract awards
• Earnings guidance increased
• Utilisation rates improving

The tightness in the market is driving up hire rates. In the first half of 2023, Gulf Marine's average day rates were 11 per cent higher than in the first half of 2022, and 18 per cent higher than in 2021. Contract durations vary depending on client and work scope, but generally NOC charters are for three to five years; engineering, procurement and construction (EPC) charters are three to 24 months; and renewable sector charters are three to 12 months.

Bearing this in mind, NOC-based operating expenditure, including well and platform maintenance and enhanced oil recovery, accounts for 50 to 70 per cent of group revenue. So, as these longer-duration contracts mature, Gulf Marine can charge substantially more to re-hire out its vessels while at the same time increasing utilisation rates. In turn, the combination of rising end-user demand, higher utilisation rates (up from 88 to 93 per cent in the first half of 2023) and day rates for a business with a relatively fixed cost base is propelling a strong recovery in both Gulf Marine's cash profits and margins.

Indeed, the board has just increased current year cash profit guidance to $83mn-$86mn (from $77mn-$85mn), or 20 per cent higher than in 2022, and forecast cash profit of $87mn-$95mn in 2024.

Deleveraging process to accelerate

All this means that the board can recycle the group’s improving free cash flow (FCF) to deleverage the balance sheet after Gulf Marine became over-geared under previous management. Net debt has already been cut from $371mn (2021) to $316mn (2022) and fell further to $294mn in the latest interim results. Analysts at brokerage Zeus Capital forecast further reductions in net borrowings to $276mn (2023), $220mn (2024) and $156mn (2025) based on cumulative FCF of $120mn for the 2024-25 forecast period.

To put this into perspective, and following the guidance upgrades, gearing could fall from 85 per cent of shareholders’ funds at the year-end to 60 per cent (2024) and 37 per cent (2025). In other words, $120mn (9.5p a share) of economic interest could be transferred from debt holders to equity holders by the end of 2025.

The deleveraging process is also having a positive impact on net asset value (NAV). Zeus predicts NAV will increase 13 per cent to $325mn (25.8p) in 2023, rising to $367mn (29.1p) in 2024 and $417mn (33p) in 2025, or 154 per cent higher than Gulf Marine's market capitalisation of £130mn. Or put it another way, the current 50 per cent share price discount to NAV could widen to 55 per cent by the end of next year when Gulf Marine would be valued on a miserly multiple of four times cash profit estimates to enterprise valuation.

A more likely scenario is that the shares will continue their re-rating to narrow the share price discount to NAV, having risen 39 per cent in value since I highlighted the investment case (Alpha Research: ‘The niche oil services provider on a recovery uptrend’, 18 September 2023). Sector peers trade in line with NAV. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.