Pressure Continues On MMA Offshore

This story features MMA OFFSHORE LIMITED. For more info SHARE ANALYSIS: MRM

-Poor visibility on customer capex plans
-Questions over debt covenants
-Production support underpins long term
 

By Eva Brocklehurst

The pressure continues on marine services business, MMA Offshore ((MRM)).  The company has confirmed brokers' worst fears with a further downgrade to the FY16 outlook at its AGM, guiding to earnings of $75-85m, well below the $221m achieved in FY15.

Visibility regarding customer expenditure plans remains poor as a low oil prices put pressure on day rates and margins are squeezed, Morgans observes. The broker believes, as a number of high volume contracts roll off in the second half, the balance sheet is coming under renewed stress.

These contracts include services to Technip for the Wheatstone LNG project and the high-revenue Silja Europa accommodation vessel for Gorgon. While the company has been awarded a new contract by Woodside Petroleum ((WPL)) for three vessels to support production at the North West Shelf, Pluto and AusOil assets, Morgans does not believe this will be enough to lift the company's domestic utilisation rates meaningfully from the current 61%.

The company has not disclosed specific metrics around covenants but Morgans suspects that while MMA Offshore is trading within its banking covenants currently, further earnings deterioration without asset sales to reduce debt could instigate a breach.

The company has flagged $22m in asset sales but this figure has not changed since August and, therefore, does not provide the broker with much confidence. Rating is downgraded to Reduce from Hold.

Deutsche Bank agrees margins are being affected and contracts fiercely contested in the current environment. At the mid point of the new guidance, this represents a downgrade of 31% to prior estimates. The broker also notes the high gearing but expects this to fall sharply over FY17 as substantial new vessel capital expenditure is wound up.

Morgan Stanley goes against the grain, believing there is medium-term value given the company's asset backing. The broker cites the award of the $50m project from Woodside as a sign the company can still secure important long-term contracts. The assets sales are also expected to provide some relief.

Morgan Stanley also understands the company is working on a number of actions to reduce debt levels, potentially increasing the net debt to earnings covenant to levels similar to its US counterparts.

The broker acknowledges end markets have deteriorated to a greater extent and at a faster rate than previously envisaged but considers the company remains reasonably well positioned, with known capex needs and sustaining cash flow.

While accepting that the market will have little conviction in the earnings profile and continue to question the underpinning assets, given the outlook for the oil & gas services industry, Morgan Stanley remains content with an Overweight rating. The capital investment the company is making in FY16 underpins the broker's FY17 forecasts and a stronger medium-term outlook.

Macquarie is Neutral on the stock. The downgrade to forecasts is large and the fall in the oil price does not help the medium-term outlook. The broker's FY16 earnings forecast is 36% of FY15 and 53% of its prior forecast.

Beyond FY15 Macquarie expects that, as the Western Australian LNG project spending declines, the company's Australian earnings and revenue will decline too. That said, MMA Offshore's revenue will probably hold up better than the decline in production capex indicates because of its high level of long-term production support services.

All the above four brokers, including the more positive Morgan Stanley, have reduced dividend forecasts for FY16 to nil. On FY17 Deutsche Bank is the one retaining a 2c forecast.

FNArena's database has two Buy ratings, three Hold and one Sell for MMA Offshore. Two brokers included in that range – one Buy, one Hold – are yet to update on this latest guidance. The consensus target is 41c, suggesting 72.3% upside to the last share price. This compares with 59c ahead of the update.
 

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