The company is Aim-traded and British Virgin Island registered Thalassa Holdings (THAL: 135p), a company that was founded in September 2007 by executive chairman and former banker Duncan Soukup to acquire marine seismic equipment and, in particular, a technology called Portable Modular Source System (PMSS™). This equipment is installed on vessels to provide a seismic source to enable oil and gas exploration and production companies to perform life of field seismic studies or permanent reservoir monitoring.
A year later the company floated on Aim, raising £4.2m at 50p a share, and it is fair to say that progress has been pretty uneventful in the interim as highlighted by a share price gyrating either side of that float price in the following four years, trading as low as 26p at one point before recovering this year to around 73p. That was until the end of last month when the share price rocketed from 73p to 167p in a single day, hitting an intra-day high of 191p on 27 February, with 1.55m shares traded in almost 800 bargains. To put that into some perspective, Thalassa only has 11.85m shares in issue, excluding the 1.46m held in Treasury, so turnover represented 13 per cent of the issued share capital. And there was heavy trading volumes on both Thursday 28 February and Friday 1 March with a further 785,000 shares traded in around 400 bargains. So in the space of three days almost 20 per cent of the share capital went through the market which is some going when you consider that around three-quarters of the share capital is not in public hands and 84 per cent is held by the top six shareholders. Mr Soukup holds 29.1 per cent of the company's equity.
Transformational deals
The reason for the share price surge and massive buying activity was the announcement that Thalassa has received and executed a letter of intent with Statoil ASA (NO: STL), the Norwegian energy company listed on the Oslo and New York Stock Exchanges, to provide long-term seismic acquisition services for permanent reservoir monitoring of the Snorre and Grane oil fields in the Norwegian sector of the North Sea.
The seismic acquisition contract is for an initial fixed term until the end of 2017 and Statoil has the option to extend the contract by two further terms of two years each. Subject to contracts being signed, the first survey is scheduled to commence on 1 October this year over the Snorre field. The total contract value, excluding any extensions, is $32m (£21m) and this could double to $65m if Statoil exercises options to extend the contract by a further four years.
The letter of intent also covers Statoil's purchase of a bespoke dual portable modular source system (D-PMSS™), which Thalassa's WGP subsidiary will maintain and operate throughout the duration of the contract. The proposed value of this contract is $19.8m (£13.2m) and delivery of the system is expected by 1 October 2013.
The procurement process for the D-PMSS™ has already started and Statoil has agreed to meet all costs incurred by Thalassa in the event that final contracts are not executed. Mr Soukup notes that "this is truly a game changing development for Thalassa", which is not without foundation when you consider that in the half year to the end of June 2012 Thalassa reported revenues of only $4m, although analyst John Cummins at house broker WH Ireland expects turnover of $9.8m in the second half. So a $32m four-year seismic acquisition contract and a $19.8m contract for the D-PMSS™ is material to say the least.
Earnings forecasts
WH Ireland is holding fire with its earnings estimates until the Statoil contract is signed, but it is obvious that substantial earnings upgrades would follow assuming the deal completes. To give you some idea of the earnings potential, in the half year to the end of June 2012, Thalassa reported pre-tax profits of $351,000 on revenues of $4m to produce six monthly adjusted EPS of 4¢. Mr Cummins expects Thalassa to have made pre-tax profit of $1.3m on revenue of $13.8m for the year as a whole and was previously forecasting profits of $1.8m on revenue of $15.3m in 2013 (excluding the Statoil contract). On that basis, EPS rises from 10.1¢ in 2012 to 12.9¢ in 2013, at the current share price of 135p, Thalassa is being valued on 15 times current year earnings estimates before substantial earning upgrades to factor in the Statoil contract.
Moreover, it's not as if the current forecasts are off the mark because Thalassa announced in mid-January that it had signed a contract with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company, to provide and operate Thalassa's Portable Modular Source System as part of seismic data acquisition surveys being conducted in Ecuador by SMG Ecuador. This contract runs between February and June this year and has an initial value of $4.17m, or almost 30 per cent of Thalassa's current year revenue estimate.
It is also clear from the newsflow that there is growing demand for the company's expertise and services, so importantly current year revenue and earnings forecasts look well underpinned. WH Ireland calculates that the wider seismic data acquisition market is growing at between 10 to 15 per cent a year, which supports the 28 per cent growth in adjusted EPS this year (excluding Statoil). Moreover, in my view, earnings upgrades in the order of at least 60 per cent could be on the cards if the Statoil letter of intent turns into a firm contract.
True, there is always the risk that the Norwegian company doesn't close on the deal and, with Thalassa's share price currently around 135p, or almost double the 73p level it was trading on ahead of the contract news, there would be a number of stale bulls heading swiftly for the exit. In this scenario I could easily see Thalassa's shares heading back towards 100p, wiping out a quarter of its market value.
Blue-sky share price gains
But this is all about Thalassa confirming in the coming weeks that it has signed a contract with Statoil, which would undoubtedly put a rocket under its share price again. That's because after factoring in a 60 per cent earnings upgrade to 2014 estimates of around 9.3p a share I can see Thalassa producing EPS of 22.5¢, or 15p at current exchange rates. That assumes Thalassa's turnover rises to almost $25m to generate pre-tax profits of $3.2m in 2014, almost double the $13.8m revenue forecast for 2012. So, at 135p, the shares are in effect trading on a modest nine times my estimate of prospective earnings post likely upgrades - a massive discount to much larger peers such as Hunting, which trades on 15 times 2013 earnings estimates.
In fact, I can see Thalassa's share price rising well above 200p on news of any formal contract with Statoil, offering us over 50 per cent share price upside. True, a low free float means the small cap shares are volatile and any investment in Thalassa has to come with a wealth warning given that after recent gains the share price already factor in some, but clearly not all of the earnings upgrades that could follow confirmation of the Statoil contract.
That said, I believe the risk-reward favours a modest investment and rate Thalassa shares a speculative buy on a spread of 130p to 135p.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written 49 online articles, all of which are available on my homepage. These include articles on the following companies this week:
Greenko (Buy signal flashing green, 18 March 2013)
Communisis, Polo Resources, Randall & Quilter, Terrace Hill, Fairpoint (Bumper small cap gains, 18 March 2013)
Sanderson ('Jumping the gun: take three', 14 March 2013)
Spark Ventures ('Spark a re-rating', 13 March 2013)
Netplay TV ('Another roll of the dice', 12 March 2013)
Global Energy Development ('Patiently waiting', 12 March 2013)
US equity market trade ('Profit from St Patrick's day', 11 March 2013)
