Gulf Marine Services – even with bad weather the use rates are higher and day rates better 

Despite some unfavourable weather conditions and options on contracts not having been exercised, in its latest Trading Update the Abu Dhabi based provider of advanced self-propelled self-elevating support vessels is projecting higher utilisation rates for this year.

Young flexible fleet

The group’s fleet of 13 SESV’s serves the oil, gas and renewable energy industries in the Middle East, West Africa, Europe, South-East Asia, the Gulf of Mexico and North America. The fleet is amongst the youngest in the industry.

The vessels are four‐legged and are self‐propelled, which means they do not require tugs or similar support vessels for moves between locations in the field, making them significantly more cost‐effective and time‐efficient than conventional offshore support vessels without self‐propulsion.

The vessels support GMS’s clients in a broad range of offshore oil and gas platform refurbishment and maintenance activities, well-intervention work and offshore wind turbine maintenance work, as well as offshore oil and gas platform installation and decommissioning and offshore wind turbine installation.

Higher utilisation and better day rates

For the year to the end of this month the group is guiding that its use rate will be 2% higher this year at 87%, against 85% last year.

Better still the group’s day rates on average are up 7% on last year’s figures.

Demand is stronger

The group’s Executive Chairman Mansour Al Alami stated that:

“Our markets continue to improve, and demand remains strong, as reflected by the increase in utilisation and day rates seen in recent contract wins. These contracts, for work in the Gulf and North Sea (Firm + Options), increased our backlog to US$378 million. Our focus remains on deleveraging and on delivering Operational effectiveness for the remainder of this year and into 2023.”

In early November the group announced that it had been awarded two new contracts and one contract extension, equating to 78 months of utilisation, increasing both its overall fleet backlog and its secured revenue.

Analyst opinion

Daniel Slater at Arden Capital has rated the group’s shares as a Buy.

He is looking at a 20p Target Price compared to the current 5.8p.

The Arden Capital estimates for the current year to end December suggest $135.4m of revenues ($115.1m), while adjusted pre-tax profits could come in at $32.8m ($20.7m), with earnings of 2.5c (2.7c) per share.

The analyst suggests that his estimates for the coming year figures are for $143.6m sales, $39.6m profits and 3.1c earnings per share.

Conclusion

The recent contract awards will solidify the GMS financial position going into 2023 and reflect positively on its future prospects.

The group’s shares, now just 5.8p, were trading at around the 7p level in mid-August and could well be very much higher than that within the next year.

The FTSE 100 has been driven by events in China over the past month as the anticipation of a reopening buoyed markets.

With Chinese equities surging overnight as China relax restrictions, one would have assumed the FTSE 100 follows suit.

“The Hang Seng is once again at the centre of all the action on the stock market with a 2.3% jump to 19,900. Much of the gains were down to ongoing optimism around more relaxed Covid restrictions which might lead to greater economic activity,” said Russ Mould, investment director at AJ Bell.

However, the optimism in China didn’t spill over into the European session to the extent investors may have hoped for, with the FTSE 100 flat at the time of writing. The China-exposed companies swept up in optimism around an economic reopening were instead influenced by industry-specific developments on Friday.

Anglo American caution

The positive news in China has been most pronounced in the FTSE 100’s miners but the sector was today held back by a cautious tone struck in an Anglo American investor update.

“As we have built operational momentum in the second half, we have also moderated our near term production growth plans with a clear priority to deliver a stable platform from which to build strengthened and repeatable performance,” said Duncan Wanblad, Chief Executive of Anglo American.

Anglo American’s comments suggested they foresee softer conditions in the market, sending their shares 2% lower. Glencore and Antofagasta also fell.

Oil weaker

The FTSE 100 oil majors were also a major drag as oil finished a tough week in the red as traders positioned for lower demand in the coming months. BP and Shell were down 1.7% and 1.2% respectively.

“The oil price is set for sharp weekly losses as Brent crude futures stabilise around $77 a barrel, as renewed recession fears take hold. The concerns around a global slowdown are outshining optimism from the relaxation of zero-Covid policies and China,” said Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown.

“The international Brent benchmark is down around 10% this week, which also reflects a slew of comments from US top executives about the incoming recession.”

Ocado

Ocado was one of the FTSE 100’s top risers as investors prepared for a trading update from the retail technology next week. Ocado shares have been on a rollercoaster ride of late and the trading statement could add to the choppiness.

BP shares are up 43% in 2022 after the tragedy in Ukraine saw oil prices smash through $100 and provide oil majors such as BP with extraordinary profits.

BP experienced a huge jump in their margins as revenue surged in the second and third quarter of 2022. Margins started to decline in Q3 in line with oil prices, and this has capped BP shares.

Nonetheless, BP shares are 38% higher in 2022 and are considerably higher than 2020 lows.

The BP share price pandemic lows around 190p seem a distant memory with shares now trading at 456p. So, after such a strong rally over the past 18 months, are BP shares a buy for 2023?

BP RC Profit

To better represent the costs and profitability of holding and managing oil inventories, BP uses Underlying Replacement Cost (RC) Profit as a gauge of operating activity. BP’s Underlying RC profit surged to $22.8bn in the first nine months of 2022, compared to $8.8bn in the same period a year prior.

This reflects higher oil prices, but does not provide a full picture of BP’s finances in 2022.

BP Profit Efficiency

BP have enjoyed windfall profits as a result of external factors. Their higher operating profitability was achieved not by BP’s design, but the geopolitical landscape in Europe. To judge how efficiently these profits were generated, we’ll look at the group return on capital employed (ROCE) and compare to BP’s peers and previous periods. This measure will consider profit before interest and tax as opposed to BP’s Underlying Replacement Cost Profit.

In 2021 FY, BP had a ROCE of 7 after posting losses in 2020. This compares to Shell’s ROCE of 8.6 in 2021. This suggests Shell more efficiently regenerated profit than BP before this year’s rally in oil prices.

And BP is unlikely to improve its profitability efficiency versus its closest London-listed peer this year. The write down of their stake in Russian oil company Rosneft will hit full year profits to the tune of $25bn. The write down will reduce their asset base, but the proportion of BPs assets to profits means it will have a negative impact on their ROCE.

BP’s profit before interest and tax for the first nine months of 2022 was just $319m, compared to $13bn in the same period a year prior.

BP’s cash position

Although BP’s profit will suffer as a result of the Roseneft write down, BP’s operating cash generation has surged $10bn to $27bn in the first nine months of 2022.

This will provide significant cash for reinvestment and distributions to shareholders. This makes BP shares attractive on any weakness but the bumper returns of the last two years is unlikely to replicated next year.

British American Tobacco are fighting off falling combustible volumes by taking big strides forward in their new categories units which includes vapes and other no-tobacco products.

The FTSE 100 stalwart said revenues for FY 2022 would increase 2% to 4% on a constant currency basis, despite the global tobacco industry contracting 2%.

The increase in revenue pays testament to the ‘A Better Tomorrow ^TM‘ transformation strategy that has positioned the company for increased use of less harmful nicotine products.

Analysts have highlighted British American Tobacco’s ‘resilience’ as the company enjoys a dominant market share in new categories with their brands including Velo, Vuse and glo.

“British American Tobacco is again proving its resilience, with strong pricing and a pivot to new products driving revenue growth, even as cigarette volumes fall,” said Derren Nathan, Head of Equity Research at Hargreaves Lansdown.

“It’s also managing to eek out underlying profit growth. Outside of the United States volumes are holding up, but across the pond a prolonged period of inflation is starting to impact consumer behaviour, with early signs of accelerated downtrading in the industry in the second half of the year.

“BATS will be upping its marketing efforts here but it’s too early to say if it can slow this trend.  But BATS is well spread across global markets and remains highly cash generative, all of which is supportive of a forward dividend yield of over 7%”.

Cadence Minerals flagship asset, the Amapa iron ore project in Brazil, is moving towards key milestones in its development.

The Amapa iron ore project was previously valued at $660 million by mining giant Anglo American. Cadence Minerals has a 27% stake in the project and first right of refusal to increase their stake to 49%.

In October this year, Cadence released a mineral resource upgrade that predicts the project will have a mine life of 15 years. The resource was upgraded to Measured and Indicated Resource of 229.48 Mt at 38.76% Fe, up from 176.7 Mt at 39.75% Fe. There was a step change in the Inferred Mineral Resource which increased to 46.76 Mt at 36.20% Fe, up from 8.7Mt at 36.9% Fe.

The resource encompasses mineralisation that extends around 6.5km in length and 1.5km in width. The mineralisation is encountered at depths of 100m in some places.

“The results clearly indicate the robustness and consistency of the Amapá resource,” said Cadence Minerals CEO Kiran Morzaria when the results were released.

Amapa PFS

The upgraded resource will be instrumental in the pre-feasibility study (PFS) which is currently ongoing. The PFS is a crucial step in moving Amapa towards production and cashflows to support shareholder value creation.

Pre-feasibility studies typically provide an indication of mining costs and production levels and are highly anticipated by investors. Amapa’s PFS and any subsequent definitive feasibility study (DFS) will attach a Net Present Value to the project based on Ore Reserves and other factors specific to the project.

A PFS and DFS will confirm the economics of a project and can attract larger scale investors to mining projects to provide funding for the final stages of development before production.

These events are now on Amapa’s horizon.