What to do when your core business is floundering, when your terrible results for the July to December 2017 period were surpassed only by your truly dreadful results for the same period in July to December 2018, and when, despite a million Aussie dollar package for your managing director, his cost cutting drive has resulted in an actual increase in administrative costs?
You turn to innovation! Faced with another six months of red ink to report, a $300,000 rise in administration expenses, yet more impairments on assets to the tune of $13 million, and a share-price languishing at levels not seen since 2002, MMA Offshore has decided to wave some Apple-style techno-pixie dust over its efforts to transform itself into a collaborative solutions provider to the offshore industry.
Looking at the company’s website, an investor or lender is hard pressed to find out about the recent results announcement issued in the last week of February. This bad news is handily hidden several clicks away behind several small and hard-to-read buttons.
Instead, visitors are greeted by a video for MMA’s new “iHub” platform, which the company boasts will enable it to “start solving tomorrow’s problems today.” Long-suffering shareholders might want MMA’s Managing Director Jeff Weber to start tackling today’s problems today, damn well fix them properly, and perhaps draw a line under all of yesterday’s problems too, before he bravely ventures into the realms of Silicon Valley parody.
It is easy to mock the platitudes such as, “we know from experience that when we all work together, we create solutions,” and clichés like, “innovation has always been embedded in our culture,” and I fully intend to do so, especially when the company’s cash at bank fell, net tangible assets fell, and interest-bearing debt rose.
The results presentation showed MMA really was “propelling innovation” but not perhaps in the way the iHub initiative had intended. Most of the innovative solutions offered to investors seemed to revolve around creative ways to camouflage bad news.
The charts in the presentation flatter the company because they contain a small disclaimer at the bottom. “All charts exclude the impact of discontinued operations” which means you are not comparing the results to MMA as it actually performed in the past.
Dangerous times for the laggards of the offshore industry
The financial metrics came with the note that all results were shown “normalised” and “pre-impairment,” highlighting that once again the six months to December 2018 saw more of MMA’s thirty ships written down in value. So, the loss for the most recent half year was actually $27 million, much worse than in the preceding period a year ago.
But all the techno-pixie dust in the world can’t hide one ugly fact. The clock at the MMA offices in Fremantle are ticking. The presentation ominously warned that the covenant holiday extended by the company’s banks runs out in June 2019. The loan term expires on September 30, 2021, and will need to be repaid or renegotiated.
The company is loaded with $270 million of debt, paying interest of over six per cent a year. Free cash flow generated by operations was apparently $7.2 million for the six months, which won’t make a dent in that debt.
The cash flow reconciliation was further complicated by a hitherto unmentioned “deferred crane capex,” which was apparently a capital expense for a crane incurred at some time in the past, but only paid for recently.
This crane deal involved spending $7.3 million, but then the same table revealed that there was also an asset sale for $7.3 million, and a debt repayment, also suspiciously of exactly the same amount of $7.3 million, which makes it appear that the company somehow managed to both buy and sell the cranes off the deck of its ships, and perhaps pay back the loan from the original seller, perhaps in a complex sale and leaseback arrangement. Who knows? Without proper audited accounts on hand and decent footnotes, it is hard to tell. But the loan deadline remains there, plain to see.
But then these are dangerous times for the laggards of the offshore industry, as investors lose patience, asset prices continue to stagnate, and what little signs of recovery there are simply don’t generate the free cash flow required to pay the massive quantities of debt outstanding.
“The vultures continue to circle”
The close of the year brought no relief. Emas Offshore was thrown into disarray when its second so-called white knight investor walked away, leaving the dangerously indebted company without the new equity capital it so desperately needs.
Udenna Corp of the Philippines had been planning to invest US$73 million in Emas to recapitalise the troubled Singaporean company. But after due diligence, the directors decided not to go ahead, just as Emas’ first white knight, Baker Tech, had walked away in 2018.
Bumi Armada in Malaysia reported another stonking loss of two billion Ringgit for the full year 2018, due to more asset writedowns and problems with its Kraken FPSO in the North Sea. CEO Leon Harland was promptly given the heave-ho by the board, announcing in a terse note that he would be returning to his home country in May, upon the completion of his present contract with Bumi.
And no surprises that Borr Drilling also reported huge losses as its fleet of premium jack ups struggled to find gainful employment. Then there was McDermott, the American construction company, which showed that they really do do things bigger in the States, and not in a good way. McDermott reported a US$2.8 billion write down from its singularly ill-conceived acquisition of onshore construction company CB&I, and its portfolio of cash-hungry, loss-making contracts.
After reporting that it lost $27 million for the last six months of calendar 2018, it seems ironic that the tag at the top of the iHub information page declares that, “At MMA Offshore, we are firm believers you are only as good as your last performance and you can’t rest with success.”
Based on its last published financial performance, it seems that MMA Offshore has a serious amount of work to do. But so do many others in the sector, too. The vultures continue to circle.
Disclaimer: The superannuation fund of a Baird Maritime proprietor owns shares in MMA Offshore
This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.