Description

 Gulf Marine Services

A transfer of value from debt holders to equity holders offering >80% upside within the next 2 years.

Gulf Marine Services provides support vessels to the oil & gas industry primarily in the middle east, operating out of Abu Dhabi since 1977, and listed on the London Stock Exchange.

GMS has 13 self-elevating and self-propelled support vessels, with useful lives of 40 years that are amongst the youngest in the industry. The vessels mainly serve the oil & gas industry for; oil & gas platform refurbishment and maintenance, oil & gas platform installation and decommissioning, well intervention work and crew accommodation. They also have contracts in the renewables sector for offshore wind turbine installation & maintenance. Clients include ADNOC, ARAMCO and Quatar Petroleum. With the Chairman of the Board having good connections with ADNOC having worked there for 15 years in senior roles.

Self-propelled/self-elevating vessels are considered the most cost-effective and time-efficient type of support vessel as they do not require tug boats to move them from location to location. Therefore, they are first choice support vessels for clients due to their significant cost & efficiency savings over other support vessels.

Thesis

After an IPO at £1.35 in 2014 the period after saw the share price collapse under previous management, as debt was not paid down and day rates dropped. During the good times (2014-2017) when day rates were high pervious management did not fully utilise the fleet nor allocate capital prudently. Once day rates and utilisation dropped, in this volatile business, the bottom fell out. Burdened with debt, the post COVID rate increases struck a final blow bringing into question the survival of the business. A major shareholder Seafox International (29%) who is a jack-up company based in the middle east got involved. They first offered to buy the company at the depressed valuation, which was rejected by the previous management. So they turned activist and bought up shares in the open market at levels as high as 22p a share.  After a further battle, Seafox managed to gain 3 Board seats and then replaced the CEO, CFO and the then the rest of the management in late 2020. This has been successful as the company has gone from a insolvency risk, to generating close to peak EBITDA by next year. The share price has also grown during that period from less than 4p to 17p today and a peak of 24p last year.

The new management took over in September 2020 and has been doing exactly what they said they would. They have been laser focused on debt and have paid it down rapidly. They have also been very transparent, making regular updates to the market on financial position, contract backlog, average day rates and utilisation. Importantly their guidance thus far has been accurate. Which adds confidence to the outlook. Currently utilisation rates are up close to peak 2015 levels due to a number or NOC’s such as ADNOC having delayed projects during COVID and now implementing them, with the projects running over the next few years. This has resulted in management guiding to a tight market with utilisation and average day rates for next few years remaining high. Their secure backlog should be enough to pay down more than 70% of outstanding debt in the next 2 years and looks to offer >80% upside within the next 2 years as Net Debt decreases and transfers value to book.

 The firm contract backlog stood at $459m in April 2024(blow) and at HY 2024 update this month it stands at $464m with management stating additional new contracts are in the pipeline.

The below graphic shows the backlog and vessel utilisation. Looking back over the period 2021-2023 the “Option” contracts have been extended and new contracts have been added. Thus, the revenue into 2026 looks derisked.

Share structure
There are 2 major shareholders, one is Seafox and the other is Mazrui Investments. Seafox increased its shares in the company as part of the shareholder activism. Once the new management took over, to stop a debt default they had to agree with lenders that the company would deleverage via equity raise. Seafox then had to participated in this equity raise, further increasing its holdings.

The company and shareholders recognise the low free float as an issue and to this end Seafox has sold and distributed shares this year.

• This year Seafox sold 5% of shares in a placing to institutional shareholders at 17p
• Of the remaining 25% shares, on the 15^th of September 2024, Seafox will begin distributing 10% of shares outstanding as a specie dividends (i.e. a dividend in the form of shares rather than cash) to Seafox-shareholders which include “prominent family offices” 
• After the Speice dividends Seafox will now own 9.69% of shares and has no plans to reduce its holdings further
• Mazrui Investments has another 25%
• Leaving 35% of shares are in the hands of Seafox and Mazrui
• I'd expect Mazrui to follow suit and look to increase free float if they want to maximise their value

Warrants (13.5% dilution)

When the company was at liquidity risk as part of the debt covenants and to avoid default it agreed with lenders that it had to deleverage and that would be via an equity raise of $50mm. But as things got better, they managed to agree that they would instead issue the lenders warrants for 137,075,773 shares at 5.75p for exercise by June 30 2025. This amounts to a dilution of 13.5%.

On June 30 2023 the lenders exercised 34,218,700 warrants (10.4 million fair value) which resulted in a 5.3% dilution. So, they have 53,403,247 warrants outstanding that would further dilute the share by 7.5% for exercise by June 30 2025.

This comes at a cost and the exercise resulted in FH2024 non-cash loss of $7.4 million as a result of the increase in the fair value of the warrants (due to the rise in the company's share price).

• Fair Value of Warrants (December 31, 2023): $14.3 million for 87,621,947 warrants. Total potential dilution in shares is 13.5%
• Fair Value of Exercised Warrants (June 30, 2024): $10.4 million for 34,218,700 warrants. Resulted in a 5.3% dilution.
• Fair Value of Remaining Warrants (June 30, 2024): $11.3 million for 53,403,247 warrants. Remaining further dilution 7.5% if exercised

That said, despite the remaining expected 7.5 % dilution, there is a better quality upside here!

Valuation

In 2023 GMS paid $84m in interest expenses including $56m in debt paydown. Similarly in 2022 interest payments were $69m and debt paydown was $51.5m. The next 2 years paydown should increase further. And of course any rate cut cycle should provide a tailwind too.

Given the large secure contract backlog with locked in higher day rates and utilisation, the NAV will grow significantly in the next two years by further debt repayments and/or cash accumulation. This will be a catalyst for the share price. Furthermore, management has guided to a dividend being paid once the debt levels are manageable.
Within 2 years there will be very little debt or considerably more cash, a dividends should be being paid and potential for increasing the fleet or raise dividends on the horizon. As such I think this level of derisking makes trading at 85% NAV (probably more) possible within the next 2 years.

I value GMS at 85% NAV in 2 years for at least an 80% upside from today.

 (The drop in utilisation in H1 2024 was due to scheduled maintenance)

I take a conservative view and moderately increase revenue and EBITDA over the next 2 years and allow the Net debt to be paid down moderately faster as the interest expense falls and frees up cash for paydown.

 Risks

• They currently have a concentrated customer base in terms of NOC's in the Middle East
• Contracts are not renewed and utilisation rates drop
• More ships come online and day rates drop

Catalyst

• Rapid Debt paydown within the next 2 years