Downside? What downside!

The industry MRM services is the offshore exploration and production of (primarily) LNG for use in power stations. The projects are multi-billion $$$ underpinned by long term (10 to 30 years) supply/price contracts. LNG is a preferred fuel, particularly in Japan, because it is relatively environmentally clean. There are petroleum liquids and LPG but the main game is methane. Furthermore the long term LNG supply agreement prices do not refer to the daily spot oil price (but I understand the LPG/liquids do).

The issue for MRM is that exploration has practically ceased; primarily because the companies doing the exploration also produce oil and have had their profits and cashflows smashed by an element of another part of their business – the oil price. Ceasing exploration to conserve cash is a fast and effective short term strategy. To put some more context I am talking about Exxon/Mobil, Shell, Chevron, PTTEP, Petronas, Pertamina etc. The cessation of exploration has put a large number of vessels out of work thereby increasing the competition for the remaining available construction, production and platform maintenance work.

I believe that offshore exploration will resume over the next 12 months irrespective of the oil price as these companies absorb both the context and content of the crude oil market and rejig the cost base of their businesses to the new reality. My logic is simple – they have to…exploration is what they do; without successful exploration these companies cease to be relevant.

So what for MRM… The first half will be a loss and the second half will be a worse loss. There will be no dividends and there will be further impairment charges, most likely with the FY result. The business will be cash flow neutral in FY 2015-16.

Offshore exploration will pick up by the start of 2016-17; MRM will be there in a leaner state and will begin to rebuild its business.

A couple of other issues…

Jaya as an issue is dead; management blew $546 Million on the acquisition. It dramatically weakened the company and they would be much better off without it (less debt, lower asset base etc etc). Weber and Howarth should pay by losing their jobs but they won’t admit the mistake, rather blaming the “commodity cycle”.

The crude oil price is only relevant in the case of MRM to the extent that a sharp rise could spook the “machines”; indeed the prospect of a sharp rise could have the same effect.

Downside? What downside!! There is less that $0.25 cents per share left??!!

Have a great weekend!!