I had the opportunity to speak with Managing Director Jeff Weber of Mermaid Marine (ASX: MRM) recently, to learn how the marine services company works and what growth prospects it has in the oil and gas industry in WA and internationally.
The mining services industry has really taken some hard hits recently, with even strong performing companies like WorleyParsons (ASX: WOR) and Monadelphous (ASX: MND) trending down. But in marine services to major oil and gas developments, there are quite a number of opportunities in the construction and production-support phases of the Gorgon, Browse, Wheatstone, Prelude and Ichthys projects.
Mermaid Marine is the largest marine services provider in Australia, and works with major energy producers like Woodside Petroleum (ASX; WPL), Santos (ASX: STO), BHP Billiton (ASX: BHP) and the US Apache Energy (NYSE: APA). When describing the differences between work contracts, Weber said that in the initial construction phase of a project, contracts are usually shorter-term, possibly 3-5 years, yet the return on capital is better due to the higher risk.
Long-term, production-support contracts may last 10 years, with possible extensions throughout the life of the project, though they offer lower rates of return. He added that the company looks for a return of at least 10% – 15%, and a combination of shorter construction contracts and longer production-support contracts are needed to have smooth, growing earnings.
Revenue can be "lumpy": "Because the construction phase of a project is the driver of overall performance, so depending on how much construction is going on in one-half, that half could be up or down," he explained.
Its current work on the Chevron (NYSE: CVX) Gorgon project, probably the biggest single marine project ever, will be active for the next five years. Although, the construction phase will taper down over time.
According to Weber, the development of floating LNG plants (FLNG) will create more business within the production support phase, with 3-4 FLNG projects in the Browse basin being proposed. Such as the Shell Oil (LSE: RDSA) Prelude project. Weber said there is less construction at the site, since the FLNG ships are built in other areas, but the production-support they will need could last 10-20 years.
The company sees expansion opportunities in Southeast Asia, and its current fleet of five international ships will be growing substantially in the future. In addition, they are starting a new company in Malaysia, to gain exposure to longer-term contracts in an area seen as having further oil and gas development projects.
Weber said there are several riders for this to be successful: "We have to compete on the quality end of the market and build a client base that has the whole cost of value." Dependable, reliable service that customers need to ensure steady production and service must be its goal. Quality service also has better profit margins for the business.
The company delivered an 18.1% increase in 2013 NPAT of $60.3 million on revenue of $449 million. Over the past five and three-year periods, it has been growing earnings after tax by a compound annual rate of 27.5% and 16.75% respectively.
In his final thoughts, Weber said that as the Gorgon project construction work begins to taper off, it will be bidding for the contracts for Wheatstone, Prelude and Ichthys projects, in an attempt to get as much of the production-support work as it can. It is expanding its platform support-vehicle (PSV) fleet in preparation for this. This should make for a smooth transition in business growth.
Foolish takeaway
As investors, only concentrating on the half-year reports and updates can give us a short-sighted view of a company's prospects. Business conditions and sometimes even the timing of work and contracts can make earnings fluctuate, so you must know what cycles a company works within.
Also, as with Mermaid Marine, capital expenditures to build up a business division, or in this case, a fleet of new ships for overseas expansion, will at first be costs until the investment pays for itself through increased business. You need to know the total story over time to appreciate the company's impressive past performance, and how it will project into the future.
