Description

Trades at a discount to comps by about 30% based on current estimates. Due to the huge operating leverage and bright prospects, current estimates/expectations may prove to be low therefore making Global even cheaper. They missed last quarter and recently underwent a management restructuring which will help better capture profits in the booming offshore construction industry.

Although not a typical clean-cut VIC idea, GLBL is interesting because it has key assets in a market that is tightening worldwide, the stock is down recently due to operational issues that they have already addressed, and it trades cheap outright and versus comps at 5.6 EV/2006 EBITDA.

Description:
Global Industries, Ltd. provides marine construction and support services in the United States Gulf of Mexico, West Africa, Asia Pacific, Latin America, and the Middle East. It offers pipeline construction, platform installation and removal, and construction support and diving services. The company also operates construction vessels. As of December 31, 2004, its fleet consisted of 45 vessels, and 40 manned vessels (16 are construction barges). The company also leases or charters vessels and equipment, such as tugboats, cargo barges, utility boats, dive support vessels, and remotely operated vehicles.


Valuation and Target
Share Price 11.35
Shares Out 114.6
Market Cap 1,300mm
Net Cash 59mm
EV 1,241

Estimates
2006 Revenue 900mm
2006 EBITDA 220mm
2006 EPS .82/share

EV/2006 EBITDA 5.6X
PE 2006 13.8X

Based on comps described below and current estimates, GLBL should trade at $15/share or about 7.5X 2006 EBITDA which is at a discount to comps which trade at 7.8X and higher in multiples.

GLBL has the potential to earn as much as 270mm in EBITDA or higher (see rationale below) in 2006/2007, which at these levels would make the company trade at 4.6X EV/EBITDA, and at 7.5X multiple this would bring target price to about $19/share or 65% above current levels.


Comps
The closest public comp is Caldive’s (CDIS) Marine Contracting Segment. Analysts are assigning an 8-10X EBITDA multiple to Marine Contracting Segment. Caldive has recently issued guidance for 2006 where they expect gross margins to be in the range of 25-35%.

Another public Comp would be:
Stolt Offshore (SOSA) 18X PE and 7.8X EV/EBITDA

These comps have better deepwater construction capabilities and have a younger fleet of vessels than GLBL which is why I give GLBL a lower multiple.

Other competitors include Technip, Saipem, Subsea 7, J. Ray McDermott (division of MDR), Horizon Offshore, and OSFI.


Industry things to note:
-Marine Construction is a late cycle Oil and Gas play. Drilling activity is a leading indicator to the construction work that Global Industries does. The lead time is usually 12-18 months. Drilling activity has been thoroughly robust over the last 12 months and is expecting to continue over the next few years driven by higher oil and gas prices, and major oil companies trying to replace their reserves.
-The offshore construction industry has been spotty at best for almost 10 years, with very few new-builds of construction vessels. New vessels can run anywhere from $50mm to $300mm and would take 18-24 months to build.
-Currently there is tightness is in the global market for construction barges and diving and repair services. Pendulum is starting to swing in favor of construction companies. The tightness should continue as production from newly drilled wells commence over the next few years.
-Industry strength depends on capex budget of major oil companies which will be heading up over the next few years.
-Hurricanes and consolidation have created a much-improved pricing situation in the Gulf. There has been a lot of damage to pipelines and platforms from Hurricane Ivan (2004) and Hurricanes Katrina and Rita (2005). There is a shortage of qualified divers and construction barges that are capable of doing work in the gulf. Some analysts expect hurricane related work to last for years, and another hurricane could just exacerbate the situation.
-New contracts are shifting risks (e.g. weather and other delays) away from Global and onto customers.
-Visibility of future business (2006-2008) has improved dramatically and backlogs will continue to rise. 2006 is just the beginning for offshore construction companies. The amount of business RFPs for new work is accelerating.
-This is a capital intensive business that requires expensive equipment and experienced personnel. Barriers to entry are high.


GLBL things to note:
-The last several years have been extremely challenging for the company because there has been under-investment in offshore infrastructure and desperation pricing by weaker competitors some of which went bankrupt (e.g. Torch Offshore.)
-Marine construction is a lumpy bumpy business where results can be unpredictable due to construction delays, change orders and cost overruns.
-Huge operating leverage. Pricing and utilization drive margins. Cost of operating vessels relatively fixed. Both pricing and utilization are going up strongly worldwide. There is fixed supply of vessels and demand is increasing dramatically.
-Diversified global player in shallow and deepwater.
-Strong reputation in the industry.
-Insiders own about 23%.
-Bill Dore, the founder and CEO, who has stepped back from the day-to-day operations over the last few years has recently stepped back in to run operations. This is a positive as the company has been under performing this year.
-The recent management change better positions the company to take advantage of its position in the much improving industry.
-Replacement value of the fleet far exceeds book value. PPE is on the books at $330mm. My estimate is that current replacement value is around $1bln.


Why GLBL might surprise earnings on the upside (Revenues and Margins)

Margins
-There is a lot of earnings leverage to the business where pricing and utilization are the primary driving factors. Both factors are improving every day.
-GLBL has been working off lower margin work that was awarded in 2004. Newer bids are at significantly higher margins.
-Current estimates have GLBL doing about 220mm in EBITDA on 900mm in revenues for an EBITDA margin of 24%.
-Cal Dive has recently issued guidance for 2006 where they expect gross margins to be in the range of 25-35%. If GLBL achieves such margins you could see EBITDA anywhere from 225 to 315mm or 25% to 35%.
-GLBL has achieved EBITDA margins over 30% in previous peaks in 1997 and 1998.
-At 30% EBITDA margin, GLBL will do $270mm or $300mm in EBITDA at $900 and $1 billion in revenues respectively. This would bring respective EV/EBITDA multiples to 4.7X and 4.2X.
-While a 30% margin may not be achieved in calendar 2006, it is very possible in a 2006/2007 timeframe.

Revenues
-Current estimates have GLBL doing about $900mm in revenue in 2006. As of October 31st they expected to deliver $400mm of backlog into 2006. This does not include work in the Gulf of Mexico where contracts are shorter term and there is little backlog. GLBL will do about $200mm in the Gulf in 2005 and should do around $250mm in 2006. So with current backlog and expected Gulf work (which may be conservative) that brings revenues up to $650mm.
-In Q3 they received RFPs for over $1.2 billion of work, and they currently have bids outstanding and in-house of approximately $2bln for work to be completed in 2006 and beyond.
-So GLBL has plenty of opportunities to win new business and exceed revenue estimates.


Why the stock has sold off in recent weeks

GLBL has sold off over the last few weeks because they missed Q3 due to weather related delays and operational inefficiencies. Furthermore, the management change indicates that problems were significant enough for Bill Dore to step back in and run day-to-day operations. Q4 will most likely also be a quarter filled with charges and inefficiencies. Fortunately management has already addressed the operational issues, and weather is only a temporary phenomenon. A miss in the 4th quarter, while disappointing, is already reflected in the stock price. The key will be whether GLBL is operationally positioned to take advantage of all the business opportunities over the next few years.


Management

Bill Dore is the founder and CEO of the company. He founded the company in 1977 and still owns 23% of the company. Due to recent operational issues, last month he fired the COO and certain operations personnel and took over the operations role. There are other family members who work for the company. He appears to be a manager who demands a lot from his managers as there has been turnover of senior management over the years.


Risks

The company will take longer than expected to capture margins from the tightening market. The recent management shakeup hopefully addressed the operational issues that have been causing them problems. The CEO owns 23% of the company. Hopefully he realizes that this environment is strong and will fully realize GLBL’s potential.

The oil companies will not build pipelines and infrastructure after drilling wells. Analysts have said that oil companies still find it profitable to drill at $35/barrel. Furthermore, once drilling an offshore well, oil companies already have sunk costs where it is likely that they will build infrastructure in order to recoup their investment.

Some of GLBL’s vessels are old. They can be prone to more repair work than if they were built within the last several years.

Earnings are lumpy and are highly unpredictable.


Earnings Model

2006 Estimate 2006/2007 Potential

Revenues 900 1000
GM 24.1% 30%
GP 216.9 300
SGA 53.5 53.5
EBIT 163.4 246.5
Interest 5 5
EBT 158.4 241.5
Taxes 63.4 96.6
NI 95 144.9
FDS 116 116
EPS $0.82 $1.25
D&A 56 56
EBITDA 220 302
Capex* 35 35
FCF 116.6 165.4
*Capex includes growth capex


Catalysts

-Worldwide scarce supply of offshore construction barges, diving support vessels, and qualified personnel.
-Late cycle oil and gas play.
-Successful results following management reorganization.
Cal Dive IPO of Gulf Marine Assets in early 2006. This will drive attention to the industry and GLBL's relative cheapness.
-Significant improvement in margins.
-Long term charter of one or more of their major construction barges.

Catalyst

-Worldwide scarce supply of offshore construction barges, diving support vessels, and qualified personnel.
-Successful results following management reorganization.
-Demonstrate improvement in margins.
-Long term charter of one or more of their major construction barges.
-Cal Dive IPO of Gulf Marine Assets.