MMA Offshore Ltd: A high-risk, high-reward play on higher oil prices?

Small-cap oil services stock MMA Offshore Ltd (ASX:MRM) has significant upside potential…IF oil prices recover.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Crude oil prices have recovered somewhat in recent weeks, matched by rising share prices at the likes of BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), and even services companies like Worleyparsons Limited (ASX: WOR).

Yet one small-cap oil services stock has been surprisingly unmoved by higher oil prices – yet. MMA Offshore Ltd (ASX: MRM) provides marine and slipway services to the oil industry in south-east Asia. Its profits have been smashed by lower oil prices, as oil and gas producers have cut expenditure and renegotiated contracts with lower prices. This has hurt the profitability of the industry and services companies now compete fiercely for the limited pool of available work, in an effort to keep crews employed and cover costs. It's not a good time to be in the industry and margins are razor-thin.

Yet if oil prices rise significantly further and stay there, MMA Offshore stands to reap big rewards. Currently its vessel utilisation is around 60%, meaning it has significant excess capacity should demand pick up. Make no mistake, this excess capacity is like an anchor around the company's neck at the moment. Yet if oil prices recover and there's a sudden lift in demand for services as producers race to resume production, utilisation should improve dramatically and prices paid for work may even increase.

There are a couple of other elements to consider, such as Mermaid Marine's Net Tangible Assets (NTA) of $1.70 per share, including $50 million in cash. If the company was wound up, it's unlikely to realise the full book value of its assets, given the current market environment. Yet the whole company is only valued at one quarter of its NTA, which is quite a margin of safety.

Should I buy it?

I personally don't expect oil prices to rise sustainably higher for some time yet, due to excess global production capacity. If prices did rise, I expect there will be a lag between prices rising and company expenditure increasing (as it takes time for companies to realise higher prices are sustainable). Following this, I think there could be a further lag between increased expenditure and an uplift in MMA Offshore's earnings, due to significant excess capacity in the marine supply industry.

For those reasons, I'm not buying MMA Offshore right now – but it's definitely one to watch if oil prices rise.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »