Value Investors Club / GulfMark Offshore, Inc. (GLF)

Description

of debt. Currently there are 10 million shares outstanding and $27.8 mm of net debt. Enterprise

value of the company is $291 mm. We believe that at current prices the stock is a cheap option

on the recovery of offshore drilling.

Investment highlights

1. Current price creates a young fleet at substantial discount to historical cost and recent

appraisal value

The fleet had carrying value of $1 bn and was recently appraised at $591 mm. The current TEV

represents 70% and 50% discount to recent carrying and appraisal values, respectively.

The fleet is young. Average age is 10 years old, and average age weighted by DWTs is 9.4 years

old. Only 15% of the fleet by DWTs are older than 15 years old.

A younger fleet is advantageous as the OSV industry rebalances by scrapping older boats. There

are currently about 420 rigs working worldwide, and the industry expects the number to

increase to 550 rigs in the next year or two. At a healthier 4.5 OSV/Rig ratio (currently 8.3),

worldwide demand for OSVs is roughly 2,500 boats, compared to 3,500 boats on the market

today plus 150 new boats to be delivered. However, 1,000 boats are older than 15 years old and

have already been stacked for a couple of years. Excluding boats older than 15 years old,

worldwide OSV supply roughly equals projected demand.

An idled boat costs $1.5~2.5 mm to reactivate. GLF and TDW recently emerged from bankruptcy

and may have the capital to reactive idled boats, but most players in this industry are cash

strapped and over-leveraged. Idled boats cost $500~$700 per day just sitting there. As the hope

of returning idled boats to the market diminishes while low industry utilization drags on, the

currently stacked boats have little chance of being returned to the market, which whill move

the market to equilibrium.

2. Strong liquidity provides self-sustaining runway

GLF has $90 mm of liquidity, consisting of $65 mm of cash and $25 mm available under its

revolver.

GLF will work towards cash flow breakeven post-bankruptcy. G&A is expected to be $25 mm

post-emergence and revenue net of direct operating expenses is running at about $20 mm.

There will be minimal capex going forward. GLF expenses its drydocking expenses as they are

incurred. In addition, GLF took delivery of its last newbuild boat in 2017. As a result, capex is

going to be minimal at $1~2 mm.

3. Exposure to stronger North Sea market

More than 60% of GLF’s revenues are generated in the North Sea, where there have been visible

signs of recovery. In 2017, GLF’s North Sea operation generated $8 mm of EBITDA – and that

was at day rates of $10k compared to $23k in 2014. In 2014, the North Sea business generated

$81 mm of EBITDA.

Day rates have been strongly recovering in North Sea amid a flurry of tenders:

Drilling contractors have provided confirming color on the North Sea market. On its Q4 2017

call, Noble said:

[T]he North Sea jackup market experienced a flurry of activity in the fourth quarter with multiple

new tenders for programs in 2018 and 2019. While the majority of the opportunities are shorter

in duration, improvement in the region is likely. We are pleased to see the increase in operator

interest generally but are especially encouraged that operators are seeking to secure jackup rigs

for work starting more than a year out.

On its Q3 2017 call, Transocean pointed out the tightening North Sea market and increasing day

rates for its rigs there:

Okay, so your first question was around the North Sea and Norway. So specifically to dayrates, so

while we can't speculate on what we would bid, I can certainly tell you what happened recently.

So what we've had in Q2, we saw rates around the 200 mark for the high-specification units. And

that's increased in Q3 to – the latest fixture, that was at 250. So will we see an increase in Q4?

We believe you will because you're simply seeing a tightening of the availability of the high-

specification units.

4. Meaningful cash flow generation is possible if market condition improves

GLF’s utilization rates have been stabilizing across geographies. We believe that if this trend

continues, the company will be able push day rates higher, which will materially increase its

earnings power. Below is a sensitivity table showing EBITDA at different day rates. Note that

blended day rates peaked in 2014 at $22k.

5. Industry consolidation is likely

We believe that there will be consolidation among the three US listed players (GLF, TDW and

HOS) and possibly other private players. Consolidation will create meaningful synergies and

facilitate more rational stacking and scrapping decisions. HOS management has been vocal on

the need for industry consolidation. On its Q3 2017 call, HOS commented:

Look, I think we've always said through the beginning of this downturn and as this market goes

through this fundamental shift, there's going to have to be consolidation of the market, not just

domestically but worldwide. There's just way too many players, way too much excess capacity

out there, and as these reorganizations happen, I think there will have to be at some point

consolidation. You saw our first-lien deal that we did this year. We made provisions in that deal

to be able to participate in consolidation. That's how we will set up the balance sheet in our

financial structure to be able to do that. We feel that Hornbeck is in the position to be the

consolidator, and we're preparing the company for that to happen.

On its Q4 2017 call, HOS said:

Given where we are in this cycle, we have seen opportunities for strategic growth and revenue

diversification that could make sense in the long run. Obviously, the turnover in ownership and

management of several of our peers also provides an opportunity for fresh conversations that

soberly consider valuation and the reality of market conditions. We will keep you apprised of

developments on these two strategic fronts as they unfold.

TDW has been equally vocal about consolidating the industry. On its recent earnings call, TDW’s

CEO said:

During my time as CEO, Tidewater will remain committed to safe and compliant operations and

to globally supporting our customers with a young, modern fleet and with high-quality service in

all water depths in which they operate. These core principles will always remain our highest

priorities, as we execute our post-restructuring business plan. These attributes will also position

the company as the possible consolidator if and when the right opportunities present

themselves.

GLF is not yet hosting earnings calls but said in its March 2018 presentation that it will continue

to review all strategic options.

A recent three-way merger in Norway’s OSV market demonstrates the synergy opportunities if

the industry were to consolidate. In February 2017, Solstad Offshore ASA, Farstad Shipping ASA

and Deep Sea Supply Plc announced that they would merge into one company and announced

that it would target 450 ~ 600 mm NOK of cost savings. In December 2017, the merged Solstad

Farstad ASA announced that it already achieved 400 mm NOK of cost savings and increased the

synergy target to 700 ~ 800 mm NOK. The savings come from three areas that are equally

applicable for the US players: (1) global onshore administration, (2) offshore crew, and (3)

procurement/logistics economy of scale. For reference, these are the three companies’ EBITDA

prior to the merger (LTM ended March 2017):

Solstad Offshore: 752 mm NOK

Farstad Shipping: 232 mm NOK

Deep Sea Supply: 32 mm NOK

Currently, GLF’s shareholders consist primarily of investors who owned its bonds. This active

shareholder base and need for/benefits of consolidation are strong indicators to us that GLF will

pursue an agenda to maximize shareholder value.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Industry consolidation

Sell-side coverage

Earnings growth & FCF generation

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			2018	2019
Price:	26.35	EPS	0	0
Shares Out. (in M):	10	P/E	0	0
Market Cap (in $M):	264	P/FCF	0	0
Net Debt (in $M):	28	EBIT	0	0
TEV (in $M):	291	TEV/EBIT	0	0