SMHI: Owned Not for Timing but Time Arbitrage

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(Published on 8/31/2017) In the June 2017 Newsletter, I had written about SEACOR Marine (SMHI), an owner/operator of offshore support vessels (OSVs) that provides services to the global oil and gas E&P sector.  SMHI was spun off by SEACOR Holdings (CKH) on June 1, 2017.  At the time of my previous writing, SMHI stock was trading at $20.26.  Since then, it has declined 38% to $12.48 without any apparent or significant change in company or macro fundamentals.  This has prompted me to take another look.

Seacor Marine Holdings (SMHI; 12.48; Market cap $220 M)

As a reminder, SMHI was spun off from parent company CKH on June 1, 2017.  The company, through its 186 vessels that are located all over the world, provides transportation and other services to offshore oil and gas companies.  SMHI’s business has had a rough going due to a drop in oil prices that have, in turn, lowered demand and pricing for its services.  As a result, SMHI’s adjusted OIBDA has declined from a high of $297 million in 2006 to ($35 million) in the first half of 2017.  The average Adjusted OIBDA was $133 million over this 11 ½ year period compared to SMHI’s current enterprise value of $363 million.

Now why would CKH spinoff this business at a time when its fundamentals are in such poor shape?  Certainly not to showcase it to unlock value.  Here’s what happened.  In 2015, PE Fund Carlyle made a $175 million investment in SMHI via 7-year convertible notes that have a conversion price of $43 per share and pay a cash coupon of 3.75%.  The strategic rationale for Carlyle investment and SMHI’s subsequent spin off was described by Chairman/CEO of CKH as follows: “This transaction provides additional capital for our offshore group to seek opportunities in the energy sector to acquire discrete assets and pursue strategic transactions that complement our existing businesses.”  Charles Fabrikant has a wide following in the investment community and has a reputation as a shrewd “market timer” for buying and selling assets.  I have also heard him described as a “bottom-feeder”.

Stock is a long-dated call option on oil recovery:  As of June 30, 2017, the Company held balances of cash, cash equivalents, restricted cash, marketable securities and construction reserve funds totaling $221.3 million.  Total debt outstanding was $315.5 million, net of debt discount and issue costs, outstanding letters of credit of $16.7 million issued by SEACOR Holdings on the Company’s behalf and other labor and performance guarantees of $0.9 million.

The company’s debt maturities as of June 30, 2017 were as follows:

Remainder of 2017           $25.3 million

2018                                       $62.0

2019                                       $40.9

2020                                       $4.1

2021                                       $27.6

After 2021                           $191.3 million

In the first half of 2017, cash flow generated by operating activities (by my calculation) was $2 million.  The company’s Q2-17 form 10-Q shows CFO of $53.7 million but that includes $51.9 million of cash generated through proceeds from sale of marketable securities which I excluded from CFO calculation.  Also, the company states in its presentations that it expenses all of its maintenance capital expenditure and that being the case, CFO should be same or very close to free cash flow.  So unless SMHI starts to burn through its cash at a rapid pace, the company seems to have a decent runway to wait out the current depressed environment in the energy services sector.

Another way to look at intrinsic value is by comparing market price of the business to its tangible book value.  As of June 30, 2017, SMHI had a tangible book value of $519 million and the company’s market cap is $220 million or 42%.  Some of this is discounting SMHI’s future cash burn and the potential for further asset impairments, if fundamentals of energy sector deteriorate from here.  I spoke with management a couple of months ago and it was their view, at the time, that PP&E had been written down adequately.  But I don’t know management or these assets well enough to be in a position to argue or have a strong opinion on the matter.  It’s something though.

The long-term view to own SMHI might be this: I am buying these assets at 42 cents on the dollar which provides sufficient downside protection to my investment.  Plus I have the benefit of having this investment in capable and experienced hands.  If and when oil prices recover, SMHI stock, which resembles a reasonably levered, long-dated call option, could generate an extremely high return on my investment.

But why buy the stock now? Who knows when oil price might recover, if ever?

Short-Term View: Because a very good case can be made (and I am making it here) that the recent 38% decline in the stock price is largely due to spin-off related technical selling (and relentless selling) rather than a breakdown in fundamentals.  Once this “forced-selling” subsides, the stock has a decent chance of bouncing back without any help from fundamental improvement, in my view.  Look at it this way.  17.7 million shares of SMHI were distributed to holders of CKH on June1.  Of these, approximately 8% are owned by Charles Fabrikant.  That leaves 16.3 million in the float.  So far, 14.1 million shares have already traded and caused the stock to fall from $20 in June to $12.48.  Oil price during this period has been flat so that doesn’t really explain the decline in the stock price.  My take is that once the selling pressure from recipients of the stock in the spin-off, who likely had little interest in owning SMHI and discarded their shares soon after the spin-off, subsides, value buyers will come in and lift the stock price.


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