Company: Mermaid Marine Australia Limited 


Share Price: $2.92 (as at close of trade 18/09/09)

Market cap: $550m

Recommendation: ‘Accumulating’

Pumping out over 200 million barrels of oil equivalent last year, Woodside Petroleum’s North West Shelf Project off the coast of Western Australia is our nation’s leading energy production centre. Since inaugural LNG cargoes were shipped to Japan in 1989, it has stood as the largest single resource stgelopment in Australia’s history. But that mantle could soon fall to another LNG stgelopment in the region – Chevron’s $50bn Gorgon project.

So despite having produced for several decades, activity is still hotting up across the North West Shelf. The heavy pursuit of underwater treasures by oil and gas majors has been very bullish for service companies in the region, particularly for our stock in focus – Mermaid Marine.

Mermaid Marine started in 1982 with a single vessel and operations have expanded in line with offshore activity. Listing on the ASX in 1999, the company has become Australia’s largest marine services provider to the oil and gas industry. The company operates supply bases (docking, full-service yards) in Dampier and Broome, and a range of modern vessels. Mermaid’s marine logistics services cover all phases of the offshore oil and gas stgelopment cycle and already boasting a blue chip client base that includes the likes of Shell, BHP, Santos, Woodside, Chevron, and Conoco Phillips – there is no shortage of demand going forward.

Like almost every other mining services company out there, Mermaid came to grief at the hands of the worst financial meltdown since the Great Depression and the dramatic collapse in the oil price. Although its share price suggested otherwise, Mermaid didn’t even come close to “sinking”. Concerns were that the ‘deflated’ oil price would reduce incentives for offshore projects which typically carry higher stgelopment costs. However these fears have not rung true. Instead, blue chip oil producers (such as Woodside, BHP, Chevron and Santos) have maintained their focus on long term demand, and activity in Mermaid’s ‘playground’ on the North West Shelf has remained robust. With little competition and high barriers to entry, revenues are at an all time high and we expect this impressive track record to continue.

With earnings per share increasing in excess of 30% pa since 2006, management are well adept at capitalising on favourable market conditions. To reiterate – contrary to initial fears – the major oil & gas projects in the North West Shelf and Browse Basin have not wavered and expansions to Mermaid’s supply bases have actually been required. Vessel operations have been the primary earnings driver to date (80% in FY08), however we expect the mix to shift in favour of supply base operations over the coming years. Mermaid has invested heavily in upgrading its supply base operations. Wharf capacity at Dampier has doubled and Broome is undergoing a significant expansion via a joint venture with Toll Holdings. Together these initiatives should provide the necessary capacity to support ongoing demand growth.

Mermaid reported stellar FY09 results . The company continues to expand with revenue at $163.9m, up 10% from the pcp. NPAT reached $26.5m, up 48% from the pcp and EPS hit 14.5cps, up 23%. The balance sheet remains sturdy with $38.2m cash in the bank and gearing (debt to equity) of 36%. Debt levels did increase over the period which was due to higher expenditure at supply bases – ramping up facilities and expanding operating capacity. Interest repayments on debts of $98m remain easily serviceable with interest cover at 5.2 times due to healthy operating cashflows.

With additions to the current fleet always an option, there are several sources of earnings growth. Reasonable gearing levels and strong cashflows mean that funding is not an issue for fuelling share price drivers. Although the stock may not seem cheap at current levels – trading on a PE of 20 – upside to earnings justifies the investment proposition. Company fundamentals are being reflected in the share price which has shattered new all time highs. In light of Mermaid’s uninterrupted growth prospects our clients have been accumulating the stock in past months.

Joshua Terlich is an analyst at All views in this article are those of, not of and do not constitute advice.  


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