Prosafe: Big Dividend, Small Cap
Board: Value Hounds
Prosafe currently owns 11 of 18 semi-submersible accommodation rigs (floatels) after divesting their one accommodation jack-up. They will take delivery of a new harsh environment semi-sub be delivered in the second quarter of 2014. That will increase the worldwide fleet of harsh water semi-subs to 8 (Floatel will add one more to its fleet in 2014). It’s a small market and even with only 18 semi-subs available there is still downtime and less than 100% utilization. Prosafe rig utilization in 2011 was 80% (75% in 2010). Q2 utilization for 2012 was 78% (85% Q2 2011).
Accommodation rigs are used when there is a need for more living space than the drilling rig allows. Prosafe’s rigs have accommodation capacity for 139-812 people and offer nice rooms and catering facilities, storage, workshops, offices, medical services, deck cranes, lifesaving and fire fighting equipment.
The rigs are positioned alongside the clients rig and connected by a telescopic gangway so that personnel can walk to work.
Most of Prosafe’s operations are related to maintenance and modification of installations on fields already in production, with some activity in commissioning and decommissioning.
They have six dynamically positioned units and five anchored rigs. That makes Prosafe’s fleet capable of operating in nearly all offshore environments. At present, Prosafe has the largest fleet of offshore accommodation rigs in harsh and semi-harsh environments and in hurricane regions such as the Gulf of Mexico.
In December 2011, they ordered the Safe Boreas. It will be the most advanced and efficient harsh environment accommodation rig in the world and constructed to comply with Norwegian regulations enabling it to be utilized worldwide. It will be capable of operating in harsh environments with both in dynamic positioning (DP) and anchored mode. Capacity is 450 persons in single man cabins. Delivery is scheduled for the second quarter of 2014 and all-in cost is estimated at $350 million. The contract also includes options for two additional units, expiring in December 2012 and June 2013, respectively.
The number of offshore installations has increased continuously since the 1970s, and many of the installations have exceeded their original design life. New recovery technologies in combination with the high oil price have created a market for improved oil recovery and tie-ins of satellite fields generating business for Prosafe. Large discoveries in the North Sea and other deepwater fields also create a pool potential clients.
With the Floatel and Prosafe 2014 deliveries of two semi-subs, the number of harsh water cabable rigs increases from six to eight.Prosafe expects the semi-sub market to be tight in the near future. Visibility beyond the next two years is less clear and the two new North Sea rigs in 2014 will affect the demand/supply balance. Demand will continue to grow long-term driven by field life extensions, ageing infrastructure and new large discoveries.
Dayrates are less for accommodation rigs than drilling semi-subs and there are not a lot of high-spec expensive harsh environment rigs built – only 8 will be available in 2014. Prosafe gets between $200K-$340K for a time charter. Bareboat (without supplies or crew) are cheaper at $45K to $85K per day. Semi-subs for drilling go for over $400K per day. Flotels are not a high-growth industry, but there does seem to be steady demand.
Why look at Prosafe?
In 2011, a dividend was proposed to be quarterly and up to 75% of net profits from the previous year could be used. In 2011 they paid 48¢ per share on $198.5 million in net profit. Total dividend paid was $107.1 million – 54% of net. For 2012, they are paying 13.3¢ per quarter. The next payment is September 13 and ex-dividend was 8/30. If they stay with the quarterly disbursement, they will pay again in December.
The company has paid a dividend since 2002 according to their website. It is reported in Norwegian only crone up to 2011 when the restructured the dividend amount and timing. Payment schedules varied between two to three times per year and the payouts were different every year.
Is the dividend sustainable?
Yes—at least at some level.
On 21 August 2012 the board declared an interim dividend equivalent of 13.3¢ per share ex-dividend August 30, 2012. The dividend will be paid in the form of NOK 0.78 per share on 13 September 2012. Norway has a 15% tax treaty for US dividend payments.
There has to be net profit yearly for investors to be paid. Having net profit is no guarantee. They need cash flow to make the payouts after debt and capex are taken care of.
In 2011, the company started paying on the new semi-sub incurring the $58 million new build cost that shows up infrequently. Debt was used and the dividend was maintained even though free cash flow did not cover the payout.
[See Post for Tables]
Dividends to be paid in 2012 on average shares of 222 million at $118 million and 75% of the 2011 net profit of $158 million.
There is no guarantee dividends can remain 13.3¢ per share per quarter since it is based on payment up to 75% of net income. The forward yield is 6.7% and at $118 million total payout, that is 75% of 2011 net income. First half net income is $83.4 million.
The net income has consistently been turned into cash flow from operations at greater than a 1X ratio giving investors some confidence it will be available for distribution if capital spending and debt are held in check.
That has been the case over the past few years. They do not grow precipitously and out of proportion to their market. Debt levels are higher with the new build but they are within covenants and not in danger of defaulting. The debt at $760.5 million is less than the $959 million in 2008.
Financial covenants credit facility
• As of 31 December 2011, the Group was in compliance with all covenants on interest-bearing debt.
• Value adjusted equity ratio: Minimum 35 per cent
• Leverage ratio: Total debt/EBITDA must not exceed 5.0---
• Liquidity: Minimum USD 65 million (including up to USD 25 million of total commitments available for utilization)--cash $93 million
• Collateral maintenance: Market value vessels/total commitments above 150 per cent --$893/$350=255%
Prosafe is financed by a credit facility and three bond loans.
In August 2011, Prosafe entered into a credit facility of $1.1 billion -- a $620 million revolver and a $480 million term loan. Debt repayment is $70 million twice a year and a balloon of $260 million. Loan repayment has been successfully balanced with dividends over the past 5 years. At times they repay and refinance. I would expect the balloon to be refinanced.
The bond debt is divided into three loans
• NOK 500 million (PRS06 PRO) maturing October 2013,
• NOK 500 million (PRS07) maturing February 2016
• NOK 500 million (PRS08) maturing February 2017
Around $262 million
Some growth possible
Prosafe is never going to set the on fire and realize much in the way of capital gains for the investor. Growth will be through higher utilization, newbuilds, and rising day rates.
One out of the three will be realized with the Safe Boreas Q2 2014 delivery and its 6 month firm contract + options in 2015. This is the only recent newbuild. The rest of the fleet is about 30 years old. The company does not grow the fleet fast and there is no reason to. It’s not a high demand market, but it is steady. The 18 total semi-subs seem to be adequate. The last, biggest growth in company rigs was in 2006 when Prosafe acquired Consafe Offshore. They increased from 8 to 12 rigs. This acquisition was an important step in consolidating the market for semi-submersible accommodation/ service rigs and it made Prosafe the leading provider. They now have 11 rigs after recent divestment of a jackup for $55 million.
Day rates are inching up. The increase over 4 years for a time charter is around 50%.
Utilization could be improved. The Q2 78% is slightly below the average 80% they usually see. Higher demand may help that. The company expects new deepwater discoveries and reworking older fields (increased oil recovery) is going to increase business. The age of the fleet is a smallish concern. Caledonia is currently out of commission and being overhauled. The good news is the one overhaul will add 20 years to the life of the rig. Cost is $100 million—a deal compared to $350 million for a new build. It will be back under contract at the end of 2012.
A few numbers
Revenue growth has slowed in 2012-2011 and margins are shrinking with a resulting decrease in operating income and net. A weak dollar against local currency expense hurt margins and sent expenses higher. Revenue is weak on lower day rates offset only partially by higher utilization. In 2008, the company hit an all-time high revenue of $491.1 with the bubble in oil prices. As oil prices have corrected from the 2008 $140 per barrel, demand (utilization 92% in 2008) and day rates for some of the rigs are down from the 2008 highs. As with all things energy, the business is cyclical.
In 2010 Prosafe divested the production segment and other financial income benefited by $23.7 million. If this is adjusted out, growth in net and EPS do not show such big swings over 2010-2011.
Other one-time events
Prosafe acquired 4 rigs in June 2006, increasing revenue through acquisition in the back half of 2006 vs. 2005. The 2007 growth benefits from four quarters of additional fleet.
There was a spin-off of the floating production storage units in May 2008. All figures are proforma and do not include the discontinued operation. The spin-off is represented as a dividend was in specie (shares not cash).
Growth and profit
Growth in 2009 was negative as the recession took hold and oil dropped to the mid-$30’s. Following the oil price slump in the autumn of 2008, oil companies cut back on spending and a number of planned maintenance and upgrade projects was postponed. This resulted in a period with low tendering activity. In the first quarter of 2008, the order backlog peaked at 933 million, while the trough was seen in second quarter of 2010 at USD 421 million. A handful of contracts were awarded during the second half of 2010 and the first couple of months of 2011. The order backlog stood at USD 592 million as at 31 December 2010.
They managed growth in 2010 largely due to the company’s ability to maintain rates and raise them in some instances on new contracts.
Operating profit for 2011 came to $192.3 million ($221.1 million in 2010). Utilization was 80% (75% in 2010). The lower numbers are due to the Safe Bristolia contracted as bareboat charter in the Gulf of Mexico since May 2011. The previous day rate was time charter at $325,000 for six months up through September 2010. In May 2011, it went out bareboat for $66,000 and is contracted through March 2013 at that rate.
Safe Astoria was docked through April with $2 million in non-reimbursable expenses for prep work done.
These effects have been partly compensated by higher contribution from Safe Caledonia, Safe Concordia and Safe Scandinavia. Safe Astoria had a 150-days contract with Woodside in Australia commencing May 2012 and two one-month options.
Six of Prosafe’s rigs are on bareboat charters in Mexico for end-user Pemex. The six rigs have firm contracts as follows:
1) Safe Hibernia ($53K) until December 2013
2) Safe Lancia ($66K) until end-December 2012
3) Jasminia ($45K) until end-December 2012
4) Safe Britannia $85K) until mid-January 2013
5) Safe Bristolia ($66K) until end-March 2013
6) Safe Regency ($75K) until beginning of August 2013.
Regalia operated for Talisman at the Yme field in Norway until end of August 2012.Next time charter contract is April 2013 for 5 months at $340K.
In May 2012 Safe Scandinavia commenced operation for ConocoPhillips in Norway and thereafter the rig is scheduled to move to the UK North Sea with a firm contract until end-October 2012 and options until December 2012. The day rate is $300K. In April 2013, it starts a 187-day job in the North Sea (no day rate quoted) In March 2014 there is a 9-month contract with a 3-month extension for $270K.
Safe Concordia is working on a three- year contract with Petrobras in Brazil. The contract expires in May 2014. The average day rate is $145K.
Safe Astoria has a 150-day contract with Woodside in Australia that started in May 2012. They were allowed two one-month extension options. Day rate is $195.5K
Safe Caledonia is at the yard undergoing a life extension project due for completion in the fourth quarter of 2012. Thereafter the rig has a firm contract with BP in the UK North Sea until March 2014 for a total of $116 million.
Safe Esbjerg is sold.
There are a couple of gaps for Regalia and Scandinavia. Astoria has a contract coming up in Q2 2014 and that is one of the longest stretches without firm commitments.
Contracts are often shorter than those we see in drilling rigs and gaps in service are common. Visibility is a little patchy. Those gaps may be filled. The backlog and contracts update and change quarterly. Out of service days are a profit eating necessity for both drilling and accommodation rigs. Accommodation seems to require less intrusive scheduling and at times can co-ordinate maintenance with a period on no scheduled contracted work. None of the fleet has been scheduled for extended overhauling as of August 7.
The current backlog is around $900 million (up from a little over $600 million in Q1) with 4% due through 2015, 44% of contracts through 2014, 39% in 2013, and 13% in 2012. This is the highest backlog since Q1 2009.
In 2008-2009 backlog was $600-$950 million. It dropped to 5 year low of just under $500 in Q2 2010. There are some gaps in the work but these are subject to change. It may be these rigs will see their schedules filled or extended. The backlog has been slowly increasing after four quarters of stagnation around $600 million Q2 2011-Q1 2012.
Fleet expenses kill margins
Utilization was 78%(80% 2011 Q2) in the second quarter. Operating profit amounted to $49.8 million ($57.4 million Q2 2011). The average effective day rate was $141,000.
Margins were lower and operating income growth was negative due to higher expenses in Q2.
Concordia, working on a long-term contract in Brazil, is subject to monthly adjustments based on currency exchange movements. In the second quarter, the average effective day rate was USD 141,000. Cost inflation continues to be high in Brazil, and operating expenses are now in the range of $80,000 to $90,000 per day.
Scandinavia was in full operation in May and June. The operating expenses were $1 to $1.5 million higher than normal in the second quarter due to a shorter yard stay in April and extraordinary maintenance spending.
Astoria remained at the yard during the beginning of the quarter and at the end of May started work for the full day rate. Prior to contract commencement, approximately USD $2 million of non-reimbursable expenses were incurred in connection with yard and preparation work.
Safe Esbjerg was idle in the second quarter during which some additional maintenance and repair work was carried out. Operating expenses totaled around $3.5 million before it was sold.
Safe Caledonia was at the yard throughout the quarter -- a life extension upgrade.
Net financial costs increased due to an unrealized gain on currency forwards in the second quarter 2011 and net profit decreased 13% to $35.9 million.
[See Post for Tables]
Even with a mediocre year in 2011 and a slow second quarter in 2012 with rising expenses, there is some visibility into future revenue with the $900 million backlog. Most of these contracts are firm commitments with some options —- 96% of the $900 million to be paid over the next 30 months. Higher utilization and increased dayrates will increase annual revenue figures. That does depend on a favorable macro-economic environment and stable to rising oil prices.
The worldwide demand for high-end accommodation rigs appears robust according to Prosafe. The order inflow in the North Sea has been strong so far this year, with relatively low activity in other regions. This picture is expected to change somewhat going forward, with several new non-North Sea tenders in the pipeline.
With the Caledonia back on the job and not consuming cash in a rebuild, revenue should benefit. The Caledonia gets $300K in dayrates. Margins may improve as expenses decrease.
Looking forward to 2014, Prosafe has the Boreas delivery in Q2 and a contract starting Q2 2015. They may be able to get it out before then for a short job.
Revenue and net look steady for the next two years and as the expense of the Caledonia work disappears and it begins to bring in high dayrates again, margins should improve. Since Prosafe is conservative with capex expenditure and growth, unless they go crazy and use the options for two more newbuilds, cash flow should cover some level dividend payout. While the amount can’t be predicted as it relies on a percentage of net, it is encouraging that they paid a decent yield over a difficult 18 months.
This is not a high-growth opportunity but there does seem to be predictable steady revenue. Management makes a convincing case for current and future demand with increased recovery projects and more deepwater exploration. It’s still a small niche and likely to remain so with the number of available rigs growing slowly and no evidence of market saturation yet. There is at least a medium to large moat. The company appears to be conservatively managed, not growing beyond its means and not taking on leverage for capital investments that will sit in dry-dock for extended periods. Management’s new objective is to reward shareholders by paying a dividend quarterly rather than pay interim dividends and to work diligently towards share price appreciation.