|Shares Out. (in M):||271||P/E||0||0|
|Market Cap (in $M):||3,715||P/FCF||0||0|
|Net Debt (in $M):||660||EBIT||0||0|
Akastor (“AKA”) is a materially undervalued oilfield services investment company. I believe the crown jewel of the portfolio, MHWirth, is alone worth meaningfully in excess of the current enterprise value. With management’s consistent track record of prudently divesting portfolio companies at attractive valuations, I believe the intrinsic value of the portfolio will be unlocked through continued monetization events.
Akastor’s origins can be traced back to its spin-off from Aker Solutions in late 2014. At the time Aker Solutions was trading at a substantial discount to its subsea peers FMC and Cameron. Aker Solutions decided to divest a hodgepodge of non-core assets into Akastor to highlight the value of their subsea business. Akastor’s main assets included an IT services provider, a surface wellhead manufacturer, non-core real estate, subsea intervention vessels, a process systems OEM, and a manufacturer of offshore rig equipment. Over the past ~3 years, the Company has executed on operational improvement plans for each portfolio company. Since the spin, management has sold all but two of the main businesses at very attractive valuations. Besides a few odds and ends, the remaining portfolio consists of MHWirth – the offshore rig equipment provider and AKOFS – the owner of three offshore vessels. I believe that management will continue to monetize the remainder of the portfolio over time, realizing valuations far in excess of what is implied by the current share price.
The largest value driver of Akastor’s remaining portfolio is MHWirth (“MH”). MH is the only competitor to NOV in the manufacture of complete topside packages for offshore drilling rigs (jack-ups, semi-subs, and floaters). While the newbuild market for offshore rigs has virtually come to a halt given the oversupply of rigs, MHWirth continues to generate an attractive, high margin, protected income stream from its sale of aftermarket parts and services to its current installed base. This is a growing annuity as long as the rigs continue to operate, since the aftermarket requirements of a rig increase with age. Given the very high costs of downtime (drilling rigs have day rates in the hundreds of thousands of dollars per day) and the heightened safety requirements post Macondo, operators generally don’t purchase aftermarket parts and services from a third party. I believe MH’s aftermarket business generates EBITDA margins in the mid-20s with very limited capex requirements.
Likewise, I believe MH has tremendous strategic value to an acquirer. While MH and NOV are the two providers of the topside drilling package, there are three main providers of the other main component of the drilling package – the Blow-Out Preventer (“BOP”). The BOP market is dominated by NOV, Cameron, and GE. The BOP is a subsea valve that is used to regulate pressure within the wellbore and prevents blowouts by closing the valve if the driller loses pressure control of the well. Given the importance of the BOP within the drilling process, a lot of integration between the BOP and topside package is required.
NOV has gained significant market share due to its ability to provide a fully integrated topside / BOP offering. By selling a full turnkey solution, NOV has complete control of the design and delivery schedule of the entire package, while also consolidating manufacturing and having a lower all-in cost. Shipyards love buying a fully integrated solution because it results in less integration work and risk for them. A turnkey solution allows the OEM to go to market with more specialized technology / components than they would if they had to standardize their solution to fit the requirements of another OEM’s BOP / topside. When you consider all these factors, it is clear that owning the topside drill package should be strategically valuable to GE or Cameron. A senior former employee at one of these companies told me their firm could achieve 30-40% market share if they owned the MH topside along with their BOP (MH’s market share in the most recent newbuild cycle was in the mid-teens).
Besides the obvious go to market synergies, I believe that very meaningful cost synergies could be achieved in an MH sale to Cameron or GE. MHWirth outsources a lot of its manufacturing - bringing this in house could result in substantial savings for GE / Cameron and also help cover facility utilization issues in the downturn. Many duplicative service centers, warehouses, and general offices could be shuttered given the large footprint overlap between their respective operations. Likewise, there would be synergies within the aftermarket services organization – in many instances there is significant engineer downtime. By servicing both the BOP and the topside, a combined company could increase service team utilization and reduce the total number of service engineers required. For example, if an engineer is required to go onboard a drillship to perform maintenance on the BOP, he can also provide service on the topside package. In an extreme example, I have heard that some rig operators keep a BOP service employee on the rig at all times since BOP downtime is so costly. This service guy may only perform work on the BOP one day out of every six weeks.
Besides GE and Cameron, I think there may be strategic interest in MH from the Chinese shipyards, who would like a way to differentiate themselves from the Korean shipyards to gain market share in the next newbuild cycle.
In summary, I believe that MH has a tremendous amount of value to a strategic acquirer and while the market is near a cyclical low today, the highly cash flow generative aftermarket business provides downside protection.
Akastor’s other main asset is AKOFS Offshore (“AKOFS”). AKOFS consists of three subsea intervention / construction vessels. The first, Skandi Santos is currently on a five year contract with Petrobras which expires in Q1 ‘20. Skandi Santos is owned by a 50/50 JV between Akastor and Mitsui after Akastor sold the vessel into the JV in late 2016. The JV leases the boat to AKOFS who in turn services the Petrobras contract. The second vessel, Aker Wayfarer is scheduled to commence a five year contract with Petrobras in Q4 ‘17. AKOFS leases the bareboat from Ocean Yield through a contract that runs through Q4 ‘20. In 2021, AKOFS has a purchase option on the bareboat or the option to renew the lease at a much lower dayrate. The final vessel is the AKOFS Seafarer (formerly called Skandi Aker). AKOFS has spent over 3 bln NOK on the well intervention topside equipment on this vessel. After factoring in the purchase price of the bareboat, in total AKA has invested more than $500mm USD into the Seafarer. The vessel had originally secured a two year contract with Total but some technical issues with the subsea package of the vessel allowed Total to terminate the contract early. The vessel is currently cold stacked. While I believe the issues experienced under the Total contract are not structural, it is hard to tell when the vessel will return to work given the oversupplied market.
The following table outlines my NAV build for Akastor. The “low case” utilizes what I believe to be very conservative assumptions. This build-up implicitly assumes that the offshore oilfield services market doesn’t rebound from current levels. For example, in the low case, I put a multiple on the currently depressed run-rate aftermarket earnings, assign negative value to the newbuild business of MH excluding the net working capital, assume the Seafarer is worth 15 cents on the dollar, etc. Even with all of these pessimistic assumptions, I arrive at a valuation in line with the current share price.
The “base case” assumes some rebound in the utilization of existing offshore assets but gives zero value to MH’s newbuild business and does not assign any strategic value to the company. Given the revenue and cost synergies discussed above, I believe a sale of MH could result in an NAV realization meaningfully above what is laid out in the base case. Likewise, all scenarios include a liability for capitalized overhead. To the extent this becomes a complete liquidation, the overhead goes away, increasing NAV by 2.5 – 3 NOK / share. I believe that a more “blue sky” scenario for MHWirth could result in a 40+ NOK / share NAV.
(Note: the NAV table is in USD, with a conversion to NOK at the end)
- Sale of MHWirth or AKOFS
- AKOFS Seafarer contract award
|Entry||07/11/2017 05:00 PM|
Thank you for the write up. Can you elaborate a little more at how you arrive at $47M (~400 NOK) in normalized EBIT in the low case for MHWirth? In 2015 and 2016, even after adding back impairments and restructuring expenses, the adjusted EBIT is -10 and 21 NOK which is far lower than your implying is possible at current conditions.
|Subject||Re: Re: Normalized Earnings|
|Entry||07/12/2017 12:19 PM|
fizz808 - thank you very much for the response.
1) I am only beginning to look at Akastor, but could you provide a little detail on how you reach the conclusion that they are buring $18mm in the OE portion of the business. The AR doesn't even appear to breakdown OE and aftermarket revenue, let alone earnings or cost structures.
2) What leads you to believe that 28mm NOK is a sustainbale capex number? I dont see PPE by segment, but non-current assets (ex. goodwill) are 1,718 NOK for MHWirth.