Cal Dive International Inc. (DVR) is an interesting play on the offshore oil and gas service industry. It was trading through a cyclical and seasonal low before the Macondo well blowout. The blowout has had a significant impact on the offshore oil and natural gas industry, and saw DVR suffer one of its worst quarters in several years. As a result, DVR’s stock price has recently dropped to a new 52-week low. With Earl and several other hurricanes bearing down on the US, and the offshore oil and gas industry close to long-term lows, DVR looks like a bargain to me.
DVR is a marine contractor providing manned diving, pipelay and pipe burial, platform installation and platform salvage services to a diverse customer base in the offshore oil and natural gas industry. It has operations in the Gulf of Mexico Outer Continental Shelf, the Northeastern U.S., Latin America, Southeast Asia, China, Australia, the Middle East, India and the Mediterranean. It owns and operates a diverse fleet of 29 vessels, including 19 surface and saturation diving support vessels, six pipelay/pipebury barges, one dedicated pipebury barge, one combination derrick/pipelay barge and two derrick barges.
Prior to December 2006, DVR was a wholly-owned by Helix Energy Solutions Group, Inc.. In December 2006, Helix transferred to DVR all of the assets and liabilities of its shallow water marine contracting business, including 23 surface and diving support vessels capable of operating in water depths of up to 1,000 feet and three shallow water pipelay vessels. DVR, through an initial public offering, became a separate company. Helix now owns less than 1% of DVR’s common stock.
Hurricanes, winter and energy prices
DVR is cyclical. It does well when oil and gas drillers drill. It’s also seasonal. The first quarter of the year is typically a slower period due to winter in the Gulf of Mexico. DVR’s 2010 “off-season” was particularly poor. Customer spending levels were significantly less during the first half of 2010 compared to the first half of 2009. The decline in demand for DVR’s services in the first half of 2010 was due to a reduction in hurricane repair work, the lag effect of decreased offshore drilling in 2009, and uncertainty regarding energy prices, specifically natural gas prices for Gulf of Mexico customers. Demand for DVR’s services generally lags behind successful drilling activity by a period of six to 18 months. Vessel utilization for its saturation diving vessels and construction barges – its two most profitable asset classes – declined significantly during 2010 as compared to the same period in 2009 (from the June 30 10Q):
The onset of the global recession in the fall of 2008 and the resulting decrease in worldwide demand for hydrocarbons caused many oil and natural gas companies to curtail capital spending for exploration and development. Despite this financial market and economic environment, we experienced steady demand for our services during the first three quarters of 2009. This demand was driven in part by the need for inspection, repair and salvage of damaged platforms and infrastructure following hurricanes Gustav and Ike, which passed through the Gulf of Mexico in the third quarter 2008, and increased domestic and international new construction activities, the capital budgets for many of which had already been committed prior to the end of 2008. However, demand for our services during the fourth quarter of 2009 and the first six months of 2010 was reduced for the following main reasons:Vessel utilization
· reduced urgency by customers in completing the remaining hurricane repair and salvage work in the Gulf of Mexico;
· reduced new construction work due to significantly less drilling activity in 2009 and the first half of 2010; and
· fewer large integrated construction projects utilizing multiple vessels planned for 2010 as compared to the projects that were ongoing during the first six months of 2009.
Although there is some evidence that the worldwide economy is emerging from recession and we began to see signs of recovery in the market as we moved into the improved weather months, we still expect challenging market conditions for the remainder of 2010 compared to 2009. The Macondo well accident has significantly and adversely disrupted oil and gas exploration activities in the Gulf of Mexico and there is increased uncertainty in the market and regulatory environment for our industry which will likely have a negative effect on our customer’s spending levels for some time. The duration that this disruption will continue is currently unknown. Generally, we believe the long-term outlook for our business remains favorable in both domestic and international markets as capital spending will be required to replenish oil and natural gas production, which should drive long-term demand for our services.
Vessel utilization is a key metric. From the June 30 10Q:
We believe vessel utilization is one of the most important performance measurements for our business. Utilization provides a good indication of demand for our vessels and, as a result, the contract rates we may charge for our services. As a marine contractor, our vessel utilization is typically lower during the winter and early spring due to weather conditions in the Gulf of Mexico. Accordingly, we attempt to schedule our drydock inspections and routine and preventive maintenance programs during this period. The seasonal trend for vessel utilization can be disrupted by hurricanes, which have the ability to cause severe offshore damage and generate significant demand for our services from oil and natural gas companies to restore shut-in production. This production restoration focus has led to increased demand for our services for prolonged periods following hurricanes, as was the case in the first half of 2009 following hurricanes Gustav and Ike in 2008. Beginning in the fourth quarter of 2009, and reflected in our results for the first half of 2010, we once again returned to more customary seasonal conditions in the Gulf of Mexico. The effect of this return to customary seasonal conditions on our utilization in these already historically slow periods was exacerbated by particularly weak demand for our services in the first half of 2010, resulting in a 27% decrease in vessel utilization across the entire fleet for the first half of 2010 as compared to the same period of 2009.A small increase in vessel utilization will see a huge increase in revenues, profitability and cash flow.
DVR’s $4.63 close yesterday gives it a market capitalization of $436M and an enterprize value of around $574M (long-term debt net of cash is $138M). DVR’s most recent quarter was a difficult one. Free cash flow turned negative for the first quarter since the same quarter in 2008. Through very difficult business conditions, DVR has still managed to generate over $100M in FCF over the last twelve months, which means it trades on a EV/FCF ratio of 5.7, and a P/CF ratio of 2.8.
This post is intended only to be a quick look at DVR. The key points are thus:
- DVR was trading through a cyclical and seasonal low before the Macondo well blowout turned what would have been a bad quarter into a disastrous quarter.
- The stock has been unduly punished, and now trades at a EV/FCF ratio of 5.7, and a P/CF ratio of 2.8, which is cheap, especially so given the difficult trading conditions it is presently enduring.
- A small improvement in vessel utilization will have an outsized impact on revenues, profitability and cash flow.