This month, my portfolio buy combines two of my favorite things: small caps and global opportunity. GulfMark Offshore (NYSE: GLF ) helps oil and gas companies not only find and extract new supplies, but also stay safe in the process.
Boats are cool
GulfMark provides offshore marine services to companies involved in the exploration and production of oil and natural gas. Jobs such as transporting materials, supplies, and personnel, as well as positioning drilling structures, play right into GulfMark's specialty.
Much like competitor Tidewater (NYSE: TDW ) , which I highlighted a few months back, GulfMark's fleet is one of the youngest in the market, with an average age of 7.4 years. Its fleet includes 88 OSVs (offshore support vessels), with 38 in the North Sea region, 13 in Southeast Asia, and 37 in the Americas. Of these vessels, GulfMark owns 73, and manages another 15 for third-party owners.
Aren't we going solar or wind or something?
While dayrates in all three segments have increased, utilization rates have gone down slightly because of lower activity. Add in the uncertainty in the Gulf of Mexico, and it's no surprise that the market isn't paying much attention to the stock. However, recent drilling success in areas such as East Africa, along with increasing activity in other areas like the Black Sea and Falklands give the company optimism.
I'm as big a proponent of alternative energy as the next guy, but as long as there's oil and gas in the ground, companies will be drilling to get to it. In fact, the industry anticipates spending close to half a trillion dollars on exploration and production in the coming year. And with companies like ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) leading the way, it's hard to believe that this is just a hunch.
This is a turnaround from the cautious spending of the past few years. And with more forecasts seeing the current price of oil as sustainable, if not increasing, deepwater drilling should become more profitable. Last year, shipyards produced 25 new deepwater rigs for the sector. That number is expected to increase 40% for 2011, to 35. That means additional demand for the support that companies like GulfMark provide.
CEO Bruce Streeter is a busy man, also holding the positions of COO and President. But insiders hold 11.5% of GulfMark's outstanding shares, and the company ties compensation to operating income, both of which ease my concerns about Streeter's multiple roles. Stock ownership guidelines require management to own a percentage of shares in the company, giving them a strong incentive to make good decisions. While I don't see guidelines like this very often, I like them.
Things that make you go hmmm...
Global oil and small caps present their fair share of risks. At GulfMark, there are a few things I will keep my eye on:
- Spin cycle: This is a cyclical industry, so I'm prepared for some volatility. However, any long-term pinch in demand would have me concerned.
- As the world turns: I love the global exposure GulfMark gives my portfolio, but that diversity also brings the inherent geopolitical risks of dealing in foreign economies.
- Uh oh, Mexico: 38% of GulfMark's 2009 revenue came from the Americas segment. Today, those vessels are either aiding in the Gulf cleanup effort, or relocating to places like Brazil. We want to see some action in the Gulf's deep waters sooner or later.
- Drydocking pay: Drydocking expenses are a cost of doing business in this line of work. More drydocking expenses means less work to be had, and less money to be earned.
A little today for a lot tomorrow
Valuing an oil services company based on cash flows is tricky at best, given the price of oil, sporadic capital expenditures, and -- ahem, BP -- unforeseen incidents. Capital expenditures should drop significantly going forward, adding a nice boost to cash flows. The stock trades today at 0.9 times its tangible book value, well below the 10-year average of 1.7. Any increase in demand for oil, combined with the bump up in free cash flow, give us a fair entry point today for a company with significant growth prospects ahead.
I like oil and natural gas for the long-term. They're finite resources that will serve a vital role in our global economy for many years to come, and GulfMark Offshore is a way for me to play on that outlook. I'm being bold with this small cap, giving it a 6% position with the belief that the stock will ship some serious gains to my portfolio for years to come. Agree? Disagree? Swing on by my discussion board and let's talk. You can also follow me on Twitter.