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 MARKET REPORTS |
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Stock picks
Stock of the week – Mermaid Marine Australia
July 21, 2008
Tim Morris, wise-owl.com analyst
Company: Mermaid Marine Australia Limited
Code: MRM
Recommendation: Update
Market Cap: $289m
A few months ago, oil at $100/bl was regarded as expensive. However, with light sweet crude surging to over $140/bl in recent weeks, snatching a barrel for $100 would now seem like a bargain! For the oil producers however, these prices are great, both potentially generating wads of free cash flow.
So how will these ‘petrodollars’ be used?
The onus on oil companies to make new discoveries is huge. Once an oil field starts producing, the rate of oil flow typically follows a declining pattern, as do revenues from the field in the absence of higher prices. Therefore, for an oil company to grow, it must constantly have a strong exploration pipeline to accompany any discoveries. And with oil at current levels, there is sure to be plenty of cash available for such activity.
Oil services companies are clear beneficiaries from a broad increase in exploration spending, but are free from the risks associated with drilling ‘dry wells’. Higher oil prices are also encouraging increased exploration in more remote and technically challenging locations, especially as conventional land based reserves deplete. Capitalising on these trends has been Mermaid Marine, provider of a range of marine related services to major oil and gas exploration and production companies.
We first profiled Mermaid Marine in the CompareShares column in August last year. Most small capitalisation companies have been severely punished since this time; however Mermaid has performed very well by comparison. Its share price is only down around 9%, which is very favourable in comparison to the 25% drubbing suffered by the Australian market’s small-cap benchmark, the Small Ordinaries Index. Mermaid’s performance also outstrips the big end of town, shedding less than half the 21% loss posted by the blue chip ASX200.
Such relative strength in what have been very challenging times, is a good indicator that the company’s growth outlook remains robust. For those unfamiliar with the story, Mermaid Marine is a diversified operator of tug services, workboats, barges and labour hire, operating in the buoyant North West shelf and Browse basin regions off the West Australian coast. The company also hosts supply bases in Dampier and Broome that offer private wharf and ship repair facilities capable of servicing the range of vessels engaged in offshore support activities.
Mermaid has been operating for a quarter of a century, however earnings have begun to take off over the last few years, with net profit rising from $2.5m in 2005 to $12.5m last year. This most recent full year result was strong on all fronts, with revenue’s rising 54% to $103m, net profit up 35.9% to $12.5m, and diluted EPS up 33% to 8.78c. Current year earnings are also set to be strong, as the company recently upgraded guidance, forecasting pre tax profit to rise 40% to $25m.
In other recent developments, the company has raised $36.3m via a placement to institutions. Proceeds will be used to fund a proposed expansion of the Dampier Supply Base and to support the company’s future growth plans. The expansion at Dampier comes following an agreement with US oil major Chevron to use Mermaid’s supply base as a key staging point for the Gorgon project.
The Gorgon project involves development of the Greater Gorgon gas field, located between 130km and 200km off the north-west coast of Western Australia. The Greater Gorgon gas fields contain resources of about 40 trillion cubic feet of gas, Australia’s largest known gas resource. The agreement with Chevron will see the oil major sublease around 40% of Dampier over an initial 5 year period, and lease payments are expected to commence immediately.
The deal with Chevron is a testament to the strong opportunities available to Mermaid Marine as activity on the North West Shelf heats up. Although the share price has yet to reflect this fact, we expect the company’s strong fundamentals to eventually ‘win the day’ and are advising our members to keep holding the stock.
The company’s fortunes are linked to long term trends in oil and gas prices. Although the long term outlook for these commodities remains bullish in an energy constrained world, an unexpected slump could dampen development activity in the sector, affecting Mermaid’s earnings potential. Another key risk recently highlighted by management comes from the tight WA labour market, which has created a challenge in recruiting the personnel needed to facilitate the company’s expansion ambitions. These risk factors are currently far outweighed by the company’s growth potential; however, as per all our recommendations we will be keeping a close eye on them and advising wise-owl.com members if the outlook changes.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
More articles from this edition of CompareShares:
Share tips: Broker Stock Recommendations 21 July – 6 to BUY, 6 to SELL and 6 to HOLD
Managed funds: How to pick a champion managed fund
Stock picks: Stock of the week – Mermaid Marine Australia
Expert panel: Why do futures prices converge on spot prices during the delivery month?
Superannuation: SMSFs – Negative returns not required
US markets: The worst is yet to come
Economy: Export rise buffets Aussie economy
Takeover: Eagle Boys devours Pizza Haven
Finance: Monitoring of super funds stepped up
US Banking: Treasury chief says US banking is sound
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