Here’s why the MMA Offshore Ltd share price plunged today

Credit: drpepperscott

Plummeting oil prices have taken their toll on companies operating within the sector over the last 18 months or so, and that was certainly evident in MMA Offshore Ltd’s (ASX: MRM) interim earnings results, which were released today.

The shares fell 11.5% to 29.2 cents, although they did trade even lower at just 28.5 cents earlier.

What happened?

For the six-month period ended 31 December 2015, the company, which offers fleet services to companies such as oil and gas explorers and producers, saw its revenue decline by nearly a third to $309.3 million, compared to the prior corresponding period (pcp).

Unfortunately for investors, the results only got worse the further down the income statement you read. Earnings before interest, tax, depreciation and amortisation, or EBITDA, fell 49.8% to $66.3 million, while net profit after tax, or NPAT, was down 82.8% to $6.5 million.

Still, the company said the results were in line with expectations with oil prices languishing around 12-year-low levels. While it cannot control the price of oil, it is instead focusing its attention toward reducing costs wherever possible and improving operating efficiencies. It also noted:

We are also strongly focused on our asset sales programme to reduce debt. MMA has recently renegotiated the terms and conditions of its banking facilities and is committed to reducing its debt levels to better match the Company’s earnings in the current market.”

The company also highlighted that although “conditions are as challenging as we have seen”, it continues to win “important new contracts” which will provide investors with at least a little bit of hope.

What happens now?

As we noted back in November, MMA Offshore’s shares looked remarkably cheap based on a number of measures, including a dividend yield of 21%. However, we also noted that investors shouldn’t base their investment decisions on those measures given the headwinds facing the business. We also said that those headwinds would likely render MMA Offshore unable to maintain those dividend payments.

Sure enough, the company’s board of directors has decided to suspend the payment of dividends in order to retain cash and to support business operations until trading conditions improve. Although the oil price has bounced in recent weeks, there is no guarantee that rebound will be sustained with some pundits suggesting oil prices could fall as low as US$20 a barrel before bottoming out.

What’s more, MMA Offshore stated that it expects second-half earnings to be “significantly lower” than the first-half, which it attributes to lower Australian construction activity and ongoing depressed market conditions.

Although the company’s shares are trading at just 29.2 cents, down 72% over the last 12 months, conditions could still get worse for investors before they get better. In my opinion, investors would be wise to avoid this stock, and many others in the energy sector, for now.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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