I wrote briefly here and here about the potential of MMA Offshore Ltd (ASX: MRM) as a turnaround stock, before concluding that the company was too risky. Yet as my harassed freelancer colleagues could tell you, I haven’t been able to get over the company’s $1.70 in Net Tangible Assets from a $0.30 cents share price, and I have been researching MMA extensively in recent days.

The value case

In simple terms, at June 30 MMA Offshore carried ~$1,000 million in assets, including $950 million in ships, $50 million in cash, and ~$400 million in liabilities which is all debt. The company must pay $75 million in principal to its bankers each year (including $37.5 million by December 2016), and its debt comes due in 2019.

If I was to buy the company, my thesis would read something like this:

“MMA is undervalued. It can sell ships to pay down debt while remaining in operation, and then it’s like getting the vessel business for free. Its shipbuilding program finishes very soon and it will have no more capital expenditure, which means it can earn steady cash for debt repayment. It also provides basically a ‘free option’ on higher oil prices or an improvement in the vessel supply market.”

There are three key premises in that thesis however, and not all of them are in working order:

‘It can sell ships’

I’ve spent the morning browsing ships for sale websites and I think MMA will have real trouble getting book value for its vessels. When there’s a stack of 2015 and 2016 (brand new!) Anchor Handling Tugs (AHTS) for sale in China and Korea, MMA Offshore will have to offer cheap prices for its own 2007-2014 model fleet. It appears to be a similar situation in the Platform Supply Vessel (PSV) market.

MMA’s fleet is valued on its books using the premise that the company is not a forced seller. Except now that it has to raise $75 million per annum for its bankers, I think it is closer to a forced seller than not. My own guess at book value for MRM’s AHT and PSV fleet (it also has other vessels) is around $450 million if it had to sell them now.

What do I know about ships? Next to nothing. Yet MMA recently sold 17 vessels for $40 million, which was half of the $78 million it wanted to raise. I think investors would be prudent to factor in a significant discount to book value.

‘…it can earn’

Recent contract wins at Woodside Petroleum Limited (ASX: WPL) and ConocoPhillips show the company can continue to win work, but a number of other contracts are coming to an end and/or being cancelled or otherwise renegotiated, which will continue to hurt. With the vessel market so oversupplied and many of its vessels doing either term work or laid up in the shipyards (unable to find work), MMA will struggle to find work in the near term.

‘…cash for debt repayment’

Full-year Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) in 2017 is expected to be around $20 million to $25 million after the loss of recent contracts. This compares to $75 million in EBITDA in 2016. EBITDA is often used as a proxy for cash flow and although it’s not perfect, expecting a significant drop in cash earnings this year would also be wise. This reduces the value of MMA’s vessel business as well as its ability to repay debt.

Foolish takeaway

Debt will be the real killer for MMA Offshore. With lower debt, the company might have had time to work out its problems. As it stands, an oversupplied vessel and vessel sale market will see the company both struggling to earn a buck and struggling to sell its $900 million in assets to pay the bankers.

I do have an eye on the company, but for now I think I’d like to see a few more cards on the table.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.