Swiber Holdings

Swiber Holdings Limited, through its subsidiaries, offers integrated offshore engineering, procurement, construction, installation, and commission (EPCIC) services to oil and gas companies. Its services include launching and/or installation of jackets in an offshore production platform at offshore production sites; engineering design and laying of offshore pipelines; Engineering design and mooring of FSOs and FPSOs on the seabed; engineering design, fabrication, and installation of single point mooring buoys; and maintenance, servicing and refurbishment of existing single point mooring buoys and their mooring systems. The company also offers a range of offshore marine engineering services, as well as owns and charters vessels. As of February 28, 2007, it operated a fleet of 13 operating vessels, comprising six tug boats and seven barges. Swiber Holdings Limited has operations primarily in Singapore, Malaysia, and Indonesia, as well as in Thailand, India, China, Australia, the United Kingdom, and the United States. The company was founded in 1996 and is based in Singapore.

Strategy Overview

The fortunes of oil services companies are tied to overall supply and demand issues as well as to prices. Not coincidentally, based on these factors the oil industry has experienced several cycles over the years. Changes in oil prices have different effects on different sectors. For example, while high oil prices benefit upstream exploration and production companies, they hurt down-stream refiners and marketers in the form of higher raw materials costs. Conversely, lower oil prices help refiners and marketers while hurting producers’ earnings. Integrated oil companies realize both sides of oil price fluctuations, but they generally benefit from higher oil prices, as they are usually more leveraged to the upstream. Swiber’s position in the upstream section of the value chain means that it has benefited from the recent surge in global oil prices.


For oil drilling & exploration services companies, the location of their operations is of prime importance. At any given time, some geographic areas might be experiencing a surge in drilling activity, while activity in other areas may be stagnant or declining. Offshore areas that have been leading the resurgence in offshore drilling over the past three years include the Gulf of Mexico, the North Sea, Southeast Asia, and West Africa; drilling contractors are paid more for their work in these areas than elsewhere.

Swiber’s Performance

Swiber’s operations are focused in Indonesia & Malaysia, which have seen a healthy growth in offshore exploration & production operations in recent years. The company has been on a rapid growth trajectory over the last two years, with revenues and net profits following a parabolic upward trajectory.

Accordingly, the stock price has also risen meteorically since its listing, hitting a high of about $3.50 late in 2007. However, the recent dip in the stock markets and bloodletting has seen Swiber’s stock price follow the general market trends and dip accordingly:

Recent Developments

Musicwhiz is a current shareholder of Swiber and has been faithfully keeping up with the company. He has written very detailed and insightful analysis of the company’s strategy going forward so I shall refrain from my own analysis and refer you to his blog.

Valuation

I have done a simple valuation using the abnormal earnings growth (AEG) model, so I have not forecast full balance sheets for this valuation.

The assumptions I have used for the valuation are as follows:

Which gives the following valuation (click for full image):

The valuation of $1.29 is still far below the recent traded price of about $2.20, and this may be because the revenue growth rates I have used, despite being quite aggressive relative to other companies, may be conservative.

In terms of relative multiples analysis:

The price appears to be about 17x FY08E earnings and about 6x book value.

Conclusions

By conventional standards, Swiber is not priced conservatively. The market appears to have assumed massive growth rates in the next few years as oil & gas offshore exploration activity continues to grow to meet global demand for oil and as onshore resources decline. High energy prices also mean strong margins for the exploration services companies and Swiber seems poised for benefit.

I personally would like to wait a while to see if the recent market shock will continue and if Swiber's share price will drop further as i like to have a better margin of safety.

Mermaid Maritime: IPO Summary and Valuation

Business Overview

Mermaid Maritime (MM) is a leading provider of drilling and sub-sea engineering services for the oil and gas industry in South East Asia. Over the last five years, MM has grown significantly in the areas of sub-sea engineering, and, more recently, drilling services for the offshore oil and gas industry as well as in training and technical services. MM has established ourselves as a company recognized by the industry for high quality services, delivered safely and efficiently. MM has developed a strong blue chip client base that includes some of the world’s largest oil and gas-related companies. Clients such as Chevron, CUEL and PTT Exploration and Production PCL each accounted for 5.0% or more of MM’s sales in any one of the periods under review. Some of MM’s other clients include BP, Shell, ExxonMobil, Saipem, Transocean, Petronas and Amerada Hess. MM operates throughout South East Asia, primarily in Thailand, Indonesia, Malaysia and Vietnam.
MM provides drilling services through its majority-owned (95.0%) subsidiary, Mermaid Drilling Ltd. (“MDL”), which currently has two tender rigs. MM provides sub-sea engineering services through its wholly owned subsidiary, Mermaid Offshore Services Ltd. (“MOS”). MOS provides sub-sea inspection, repair and maintenance services, light construction services and emergency repair and call out services in South East Asia. MOS’ fleet consists of four vessels which it owns, in addition to one DP construction vessel and one ROV/air dive support vessel, both of which it charters. The flagship vessel in its fleet is the DP DSV Mermaid Commander, which has an in-built saturation diving system and rough weather capabilities. In addition, MOS owns one portable saturation diving system, seven air diving systems and seven ROVs.

MM has built and now operate a world class facility at our operational base in Chonburi, Thailand. This facility allows MM to control its own maintenance and refurbishment requirements of equipment and, more importantly, the facility’s geographical location allows us to mobilize expeditiously and efficiently to MM clients’ locations. MM has also established shore base support functions in (i) Kuala Lumpur, Malaysia; (ii) Songkhla, Thailand; and (iii) Jakarta, Indonesia to support our geographical expansion. To support MM’s mobile operations, these shore base support functions can be moved at short notice.

Major Risk – Tiny Fleet

MM only has two tender rigs, and downtime of one or both of these rigs could adversely affect MM’s results of operations. For example, MTR-2 is experiencing a period of downtime that commenced in July 2007 as a result of an agreement with Chevron Thailand Exploration and Production Ltd (“Chevron Thailand”) to meet certain technical specifications upon the transfer of MTR-2 from its previous client. To meet these specifications, MM relocated MTR-2 to inland facilities in July 2007. In addition to completing these specifications, MM also decided to commence the dry-docking and SPS for MTR-2. MTR-2 is expected to resume operations in November 2007. Further, MM’s tender rigs may experience downtime for other reasons, such as the crane boom incident on MTR-1 in September 2006 and the fire on MTR-1 in June 2007

Competition

The market segments and region in which MM operates are highly competitive. Pricing is often the primary factor in determining which contractor is awarded a contract. Some of MM’s competitors are larger than it is, have more diverse fleets or fleets with generally higher specifications, have greater resources, have greater brand recognition and greater geographic reach and/or lower capital costs than MM has. This allows them to withstand industry downturns better, compete on the basis of price or relocate, build and/or acquire additional assets, all of which may affect MM’s sales or profitability. If other companies in MM’s industry relocate or acquire vessels for operations in South East Asia, levels of competition in South East Asia may increase and MM’s business could be adversely affected. Local oil and gas services competitors in each country MM operates in may have more domestic experience and better relationships with clients.

Industry

MM’s business is dependent upon the conditions of the oil and gas industry, in particular the level of activity in oil and gas exploration, development and production and sub-sea inspection and maintenance programs in South East Asia where we are active. The level of capital expenditures for oil and gas exploration, development and production largely depends on prevailing oil and gas prices and our clients’ expectations of prices in the future, each of which is influenced by a variety of factors, including the actual and anticipated production, supply and demand for oil and gas, and worldwide economic conditions. Oil and gas prices are volatile, which have historically led to significant fluctuations in expenditures by clients for oil and gas drilling and related services. A sustained period of low drilling and production activity or the return of lower oil and gas prices could impact the level of oil and gas exploration, development and production, as well as result in the cancellation of current and planned projects and impact MM's business and results of operations.

The niche market in which MM operates is less sensitive to slowdowns in the industry as compared to oil and gas exploration activities. Even in the event of a slowdown in oil and gas exploration activities, MM clients’ planned projects may not be curtailed. Further, our sub-sea engineering services also perform inspection and maintenance services. MM anticipates that there would be a continued demand for such services even during periods of low drilling and production activity as many of MM’s clients would have to continue to meet their committed production levels under their supply contracts as well as comply with subsea infrastructure inspections requirements.

Accordingly, demand for services is subject to fluctuations that generally affect the oil and gas industry, with periods of high demand, short supply and high rates often followed by periods of low demand, excess supply and low rates. Further, the entry into the market of newly constructed, upgraded or reactivated tender rigs or vessels would increase market supply and may curtail the strengthening of rates or reduce them. Periods of low demand intensify the competition in the industry and often result in assets being idle for periods of time or being utilized at low rates. In addition, in depressed market conditions, a client may no longer need a tender rig or vessel that is currently under long-term contract or may be able to obtain a comparable service at a lower rate. Clients may then seek to renegotiate the terms of their contracts or avoid their obligations under those contracts.

Financials

The following information is extracted from the very detailed information provided in the prospectus, with the exception of FY2007E. Assuming the IPO priced at its maximum of $1.56:

(click for full image)

The projection and IPO pricing gives a pre-IPO trailing P/E pf 45.01 and P/B of 9.06. The extrapolation of HY07 results to FY07 gives the IPO a pricing a forward P/E of 18.52 and P/B of 8.18.

It should be noted that the 2H07 projection seems quite aggressive. This gives an ROE of about 44% and ROA of about 24%. I am not sure that this is sustainable in the long run. Even with this aggressive projection, the IPO pricing is not cheap at 18.5x forward earnings. The company's investment bankers seem to be extremely confident that Mermaid will continue to grow rapidly in the future.

To be sure, Mermaid is still a small company and has plenty of room for growth. The IPO valuation may come to look conservative in the future. However, significant risks abound for a company with only two drilling rigs.

This looks like a high risk/high reward IPO.