The key take for me was news that the company will shortly achieve profitability and expects to report profits for the full year as a whole. In the first half, underlying operating losses narrowed dramatically from £263,000 at this stage last year to just £55,000 after stripping out one-off charges.
True, a restructuring at the company’s highly profitable and fast growing R2S business resulted in a £100,000 charge being incurred which dented the reported numbers, but this was well worth carrying out as these costs are expected to be fully recouped within the next 12 months. Moreover, the reorganisation is already reaping benefits by exposing SeaEnergy’s consultancy business, Max & Co, to higher value business opportunities and has created a potential new income stream in offshore, marine and industrial forensic investigation.
The move towards profitability largely reflects the growth at R2S's core service which offers a Visual Asset Management (VAM) technology that involves taking 360 degree spherical photographs of locations and then building up three-dimensional (3D) models. 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.
Contract wins underpin profit growth
It is proving popular too because following the opening of an office in Houston, Texas, SeaEnergy won a $1m (£600,000) contract from Mexican national oil company Petróleos Mexicanos to complete the spherical photographic capture 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 complete by the year-end. In fact, the technology is now being used by 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. The contract with Total has just been extended until July 2018, highlighting the value of the technology to the oil giant.
Furthermore, with the second half seasonally stronger for R2S, SeaEnergy’s directors expect a further ramp up in revenues and profits. In the first half alone, R2S’s revenues shot up 11 per cent to £1.8m to drive operating profits up over 20 per cent to £961,000. That’s significant because the profits made from R2S now cover all of SeaEnergy’s corporate overheads of around £155,000 per month which means that with the benefit of a second half weighting we are virtually ensured a bumper second half performance and a move into profits for the company as a whole.
The other key take for me is the progress being made by SeaEnergy’s consultancy division. Operating profits in this business increased by more than 40 per cent to £151,000 on revenues up by a third to £722,000. Following the reorganisation, the consulting division is building on its expertise in the through-life management of offshore energy, shipping and marine assets by integrating its consulting activities with Max and Co's digital media expertise and the forensic use of digital imagery which were previously operating within R2S.
It’s paying off as new contracts are being won and existing ones are increasing in scope and duration. Indeed, Max and Co has continued to deliver high quality work for its client base, both in the UK and further afield, and has now identified opportunities where its skills may be integrated with SeaEnergy’s other consulting offerings to deliver a higher value service to clients. This is helping support growth in SeaEnergy's consulting activities since the June half-year end which augurs well for the full-year and beyond.
Land and profits ahoy
As I have previously reported the company's ship management business is making waves, having 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. This partnership makes good use of SeaEnergy's high performance walk-to-work designs, but also combines SeaEnergy's detailed knowledge of offshore wind and specialised vessel design expertise with the Singapore partner’s operational experience and financial strength.
In addition, SeaEnergy is now looking to earn broking fees and associated ship management fees by utilising existing vessels for "walk-to-work" inspection and maintenance support in both offshore wind and oil and gas operations.
So with three vessels already under management, and the joint venture now up and running, I would expect a significant narrowing of the first half losses of £133,000 from the marine business in the second half.
Hidden value in legacy assets
Another key take for me in the results release is news that SeaEnergy plans to return to shareholders a proportion of the value of its legacy holding in Aim-traded North Celtic Sea-focused oil and gas explorer Lansdowne Oil & Gas (LOGP: 13p). SeaEnergy owns a 21.4 per cent stake worth £3.5m in the company.
True, this sum will only be realisable when we finally get some action on the farm-out deal for the Barryroe licence in which Lansdowne has a 20 per cent holding and Providence Resources (PVR: 125p) 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.
We could get some news on this front shortly because at the company’s annual meeting three weeks ago Providence’s chief executive Tony O’Reilly noted that the Barryroe farm-out process is now “nearing completion”. On the basis Landsdowne has invested £12m, a sum equating to three quarters of its market value of £16m, then I would expect both Landsdowne and Providence Resources be reimbursed for their costs incurred to date in exchange for cutting their stakes in the Barryroe license. If this turns out to be the case, then any positive news on the farm-out is likely to lead to a re-rating of shares in both Providence Resources and Lansdowne.
Clearly, this would have positive implications for SeaEnergy given its 21.4 per cent stake in Lansdowne. This shareholding is currently worth £3.5m, and undoubtedly significantly more if a farm-out is successful. To put this into perspective, SeaEnergy’s own market capitalisation is £21m.
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) and again at 33p ahead of last week’s half year results (‘Navigating a profitable course’, 13 August 2014).
However, with the company firmly on course to turn profitable, and with £675,000 net funds on its balance sheet and a £500,000 overdraft facility in place with HSBC, then I feel investors will now start to focus on the value in its separate business units when calculating the value of the company. That’s exactly what I have been doing to arrive at my target price of 60p a share.
I have based this valuation on the assumption that R2S acquisition is 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 SeaEnergy’s UK royalty interest in Block 21/8a (located adjacent to the Forties field in the Central North Sea which contains the Scolty discovery) and all the company’s other businesses interests account for the balance of the valuation.
Offering 60 per cent to my fair value target price, I continue to rate SeaEnergy's shares a value buy on a bid-offer spread of 36p to 37.5p.
■ 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'
