To recap, a couple of months ago the company's ship management business formed a joint venture, GOSEA, with a Singapore-based shipping company, Go Offshore (Asia) Ltd, 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 have been “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 partnership is clearly working. The first vessel contract, the newly built Go Pegasus, is a DP2 anchor handler owned by the Singapore based Otto Marine Limited. The Go Pegasus is flagged in the Marshall Islands and will shortly arrive in the U.K. where it will be operating under charter and deployed on ploughing activities in the western U.K. Continental Shelf. The vessel has a crew of 20. The joint venture, GOSEA, is responsible for the full management of the crew, provisions and technical support. The team has also taken over the operational management of the Go Electra, a DP2 multi-purpose support vessel operating under charter for Harkand ISS and carrying out ROV surveys and air diving operations, primarily in the North Sea. The vessel is flagged in the Marshall Islands and has a crew of 21.
R2S major contract win
And this is not the only positive news SeaEnergy has announced. The company’s highly profitable and fast growing R2S business has been winning contracts too. 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 has been 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.
In recent weeks, SeaEnergy has won a $1m (£0.6m) contract from Mexican national oil company Petróleos Mexicanos (PEMEX), following a competitive public international tender process. R2S will complete the spherical photographic capture of the Ku-S Central Processing Installation and its bridge-linked satellites, in the Ku-Maloob-Zaap oilfield located in the Bay of Campeche, Gulf of Mexico. The capturing of these images and their integration into the R2S visual management system will be completed by the fourth quarter this year.
PEMEX is the latest oil major to deploy the R2S system which is now being used by 14 operators in the UK Continental Shelf and US Gulf of Mexico, including BP (BP.), Chevron (US:CVX), Total and ConocoPhillips (US:COP), on a diverse range of projects. I would expect further deals too given that SeaEnergy has been working successfully with its local partner in the Gulf of Mexico, Petrotécnica S.A. DE C.V. (to whom R2S was contracted earlier this year to capture a new build drilling platform prior to float-out).
But even without more contract wins, R2S looks on course to exceed the £2.8m of cash profits earned for SeaEnergy in the 12-month trading period to end-February 2014. The company is also well on course to turn profitable at the pre-tax level in the current financial year having posted a small loss of £200,000 in the second half of 2013. To put the PEMEX contract into perspective, it equates to 16 per cent of the £4.7m of revenues R2S generated in its last fiscal year, so is clearly significant. It also makes the acquisition of R2S two years ago a bargain buy in my view, as the full consideration of £10.1m – including a £4.6m earn-out settled in April – equates to around 3.5 times cash profits.
Hidden value in legacy assets
The good news doesn’t end there either as SeaEnergy owns a 21.4 per cent stake worth £3.5m in Aim-traded North Celtic Sea-focused oil and gas explorer Lansdowne Oil & Gas (LOGP: 11.75p), a company with a market value of £16.5m and one that has a 20 per cent holding in the Barryroe licence, where Providence Resources (PVR: 103p) 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 346m barrels of oil equivalent of recoverable 2C resources, so Providence Resources is seeking a farm-out deal on behalf of its partners.
To this end, Providence has just announced that it has received a license extension. This is important as the company is in commercial discussions with a number of 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.
Admittedly, there is no guarantee of a farm-out deal being concluded. But on the basis Landsdowne has invested £12m, a sum equating to around three quarters of its market value, then it is reasonable to assume that both Landsdowne and Providence Resources would be reimbursed for their costs incurred to date in exchange for reducing their stakes in the Barryroe license.
It is also reasonable to assume that in the event of a farm-out deal being concluded then shares in both Providence Resources and Lansdowne will re-rate with positive implications for SeaEnergy given its 21.4 per cent stake in Lansdowne. To put that stake into some perspective, it is currently worth £3.5m, or almost 20 per cent of SeaEnergy’s own market capitalisation of £18m.
The investment risk is mitigated even further by another one of SeaEnergy's valuable legacy assets: a UK royalty interest in Block 21/8a, located adjacent to the Forties field in the Central North Sea which contains the Scolty discovery. Earlier this year, oil group 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 raised the probability of these discoveries moving to production. This can only be positive for SeaEnergy's royalty interest.
Target price
Admittedly, shares in SeaEnergy have been volatile since I recommended buying at 29p ('Making waves', 20 February 2014), hitting a high of 44p at one stage. I subsequently re-iterated my advice a couple of months ago when the price was 37.5p (‘A profitable passage’, 12 June 2014). True, the absence of analyst estimates doesn’t help investors get a grip on the profitability of the company’s operations, but what is clear to me is that if SeaEnergy continues to win new contracts and moves into profit then there is no way its shares should be trading only in line with net asset value as is the case right now.
Add to that the potential for realisations of the value in the stakes in Lansdowne Oil & Gas, and the royalty interest in Block 21/8a in the North Sea, and I firmly believe that the upside potential for more contract wins in both SeaEnergy’s ship management business and R2S is yet to be priced into the company's current valuation. In fact, assuming the earnings recovery continues, then I feel a target price of 60p a share is a realistic goal.
I have based this valuation on the assumption that R2S acquisition is now worth around £22.5m (or the equivalent of 40p per SeaEnergy share) after applying a multiple of eight times cash profits; the stake in Lansdowne Oil is worth at least the open market value of £3.5m (6p a share), and considerably more on 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, offering 80 per cent to my fair value target price, I continue to rate SeaEnergy's shares a value buy on a bid-offer spread of 31p to 33p.
■ 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'
