My interest was initially sparked almost two years ago when SeaEnergy acquired R2S, a profitable, cash generative and growing business. In hindsight, it looks a well timed purchase as I now understand that R2S generated cash profits of £2.8m in the 12-month trading period to end-February 2014. This was well in excess of the £2.5m target to trigger a final earn-out payment of £4.6m to the vendors. It also means that SeaEnergy has purchased a fast growing and highly profitable business for a bargain basement total consideration of £10.1m, or only 3.6 times annual cash profits. SeaEnergy is still in a small cash positive position after making the earn-out payment.
To recap, R2S's core service is a Visual Asset Management (VAM) technology that involves taking 360 degree spherical photographs of locations and then building up three-dimensional (3D) models. Data can then be embedded, indexed and managed. It is proving highly popular in the oil and gas sector because VAM enables oil rig operators to keep a visual record of all key parts of an oil rig, monitor its condition and any changes to the fabric, with a view to carrying out maintenance. Importantly, the technology can be used remotely, so it cuts overheads and reduces the need for trips out to the oil rigs.
Revenues are generated from both the asset capture project of setting up the 3D models and from ongoing software licensing fees charged to the operators of assets. Since entering the oil & gas sector market, R2S has developed a strong market presence in the North Sea. Oil majors Chevron, BP and Nexen are among SeaEnergy's clients in the UK, and given the potential to target overseas markets the company has set up an office in Houston, Texas to win business in the Gulf of Mexico.
As I have pointed out previously, the growing revenues stream from R2S should mean that SeaEnergy turns profitable this year. In terms of the income generated, a fifth of the £4.7m revenues earned by R2S last year came from software sales and the balance from data capture. Earnings forecasts from Edison Investment Research are currently under review, but analysts at the firm were previously predicting pre-tax profits of £1.8m and EPS of 3.1p for 2014.
New contract wins
SeaEnergy is not a one trick pony either as in recent weeks the company has made two important announcements, the latest of which is in relation to its ship management business which has just formed a joint venture with a Singapore-based shipping company to manage its vessels in the UK and Europe. The business is also targeting contracts for the construction and operation of accommodation and maintenance vessels for offshore wind farm and oil & gas support using SeaEnergy's high performance walk-to-work designs. The two partners are “actively tendering” for the provision of such vessels to clients, combining SeaEnergy's detailed knowledge of offshore wind and specialised vessel design expertise with the Singapore partner’s operational experience and financial strength. The new contracts certainly justify the £222,000 start-up costs SeaEnergy incurred last year for its ship management business.
It's also worth pointing out that SeaEnergy's consulting business secured its first project last year, working with an overseas operator of European offshore wind farms, to develop and implement an approach for the inspection and maintenance of operating assets.
Deep value in SeaEnergy's assets
The progress made by R2S, and the marine and consulting divisions, should drive the company into profitability this year and make for some positive newsflow when SeaEnergy reports its half-year results in a few month's time.
Moreover, the investment risk is mitigated by SeaEnergy's valuable legacy assets which include a UK royalty interest in Block 21/8a, located adjacent to the Forties field in the Central North Sea and which contains the Scolty discovery. In March this year, EnQuest (ENQ) completed the acquisition of a 50 per cent interest and operatorship in the Greater Kittiwake Area fields and agreed a contingent consideration to be paid in the event of the Scolty field achieving Field Development approval. EnQuest aims to develop the Scolty and Crathes fields and this has increased the likelihood of these discoveries moving to production. In my view, SeaEnergy's royalty interest is well underpinned by the Enquest transaction and is likely to increase in value once the Field Development Plan is approved.
In addition, SeaEnergy owns a 21.4 per cent stake worth £5m in Aim-traded North Celtic Sea-focused oil and gas explorer Lansdowne Oil & Gas (LOGP: 16.75p), a company with a market value of £23.5m and one that has a 20 per cent holding in the Barryroe licence, where Providence Resources (PVR: 163p) is the operator with an 80 per cent interest. The Barryroe license area is located in 100 metre deep water in the North Celtic Sea Basin around 50 km off County Cork, Ireland. The field has a massive 346m barrels of oil equivalent of recoverable 2C resources, so Providence Resources is seeking a farm-out deal on behalf of its partners.
Bearing this in mind, Providence confirmed in mid-April that it is in commercial discussions with a number of interested third parties in relation to the Barryroe asset. The nature of these discussions involve the evaluation of the field on a phased development basis, with plans to establish an early production phase, to be followed by further phases of field appraisal and development, designed to steadily increase production rates to maximise the returns from the field.
True, there is no guarantee of a farm-out deal being concluded, but in the event of one, you would expect both Landsdowne and Providence Resources to be reimbursed for their costs incurred in exchange for reducing their stakes in the Barryroe license. Landsdowne has so far invested £12m, a sum equating to around half of its market value. Moreover, if any farm-out deal is concluded then shares in both Providence Resources and Lansdowne will undoubtedly re-rate sharply. Clearly, this will have positive implications for SeaEnergy given its 21.4 per cent stake in Lansdowne.
In this scenario, I would then expect SeaEnergy to offload this legacy asset given the holding accounts for a quarter of the company’s market value of £21m.
Target price
It’s my considered opinion that the fair value of SeaEnergy should be around £33m rather than the current market capitalisation of £21m. I have based this on the assumption that R2S acquisition is worth around £22.5m (or the equivalent of 40p per SeaEnergy share), or a multiple of eight times last year’s cash profits; the stake in Lansdowne Oil is worth at least the open market value of £5m (8p a share), and considerably more in the event of a successful farm-out of Barryroe; and the UK royalty interest in Block 21/8a and all SeaEnergy's other businesses interests account for the balance of the valuation.
Needless to say, I continue to rate SeaEnergy's shares a buy on a bid-offer spread of 36p to 37.5p and have a medium-term target price of 60p.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
