Earlier this year, the author suggested that Odyssey Marine's (NASDAQ:OMEX) poor track record for profitability in directing underwater intervention technologies at contingent salvage projects made OMEX better to read about than to own. Since the publication of that article, the Eleventh Circuit Court of Appeals' decision was let stand by the Supreme Court, concluding Odyssey's appeals in the so-called Black Swan case. Despite promising titles suggesting Odyssey would yield "nothing" to its adversaries, the shareholder equity expended to locate and take possession of valuables from the Mercedes was lost when the recovery was ultimately returned to the King of Spain. This article reviews Odyssey's share valuation and considers the scale of the per-share impact of the next wreck Odyssey's fans expect to save the company.
Valuing Odyssey Marine
Valuing Odyssey Marine according to its price-to-earnings ratio ("P/E") is implausible because the company has never had positive earnings; applying a hypothetically appropriate P/E ratio would produce a negative price, suggesting a company rational investors would pay to avoid. Obviously this is not how the market values the common stock, which recently closed near $4. Effort to plot share price against revenues or book value comes to naught (book value per share has gone negative). YCharts offers a more helpful view of the company's metrics that suggest a relation between the firm's per-share value and its cash and cash equivalents:
As shown in the above chart, the history of Odyssey Marine has been that it raises cash by issuing common shares, improving the firm's per-share value temporarily while it burns the equity raised in the last offering. Note that the scale of the cash graph shows that the company currently has about $5 million left of the more than $15 million raised last June when the Company issued 5.52 million shares of common stock at $3.05.
Hopeful observers occasionally proclaim that the end of losses is nigh, and that the rushing in our ears is the sound of the fair ship Odyssey being raised aloft on wings of profit. Lest fans of the shares uncritically accept that "[f]uture dilution will be a thing of the past" following the last equity injection, the company's management late in June filed a registration statement to raise another $24 million at $2.80 per share (that's about 8.7 million shares' worth of dilution). The $2.80 price suggested in the registration statement is below last-year's dilutive issuance at $3.05 per share. It's also worth noting that the threatened dilution is atop the "regular" dilution caused by management's share-based compensation (worth about $390K in the quarter ended in March), which historically has carried a significant fraction of its officers' annual compensaton (disclosure of which was shuffled off the last annual report, perhaps from embarrassment, to be hidden in a proxy statement). Just this January, the CEO alone was granted several hundred thousand shares' worth of restricted stock and stock options (with a $2.73 exercise), for example, atop a stock-based compensation element in an "incentive award" that included enough cash to dwarf the national median income plus tens of thousands of unrestricted shares of the common stock. That's not the base compensation, that's part of the incentive award; the company pays an incentive to generate Odyssey's ongoing losses. That rushing sound in shareholders' ears may not be the wings of victory, but the amplified rustle of millions of dollars swirling down the vortex of a hungry toilet in a new High-Definition production featuring Odyssey Marine.
Odyssey Marine has no profit, and is valued apparently on the basis of cash it requests from new investors each year as it burns old cash compensating management and cruising the world to participate in documentaries about the sexiness of finding treasure at the bottom of the sea. Share price seems to move with rumors that fuel hope for eventually profitable operations, the latest of which is the steam merchant Gairsoppa, sunk in deep water west of the U.K. To recover this wreck, Odyssey has engaged JBR Recovery Ltd. to support the secure transport, storage, refining, and monetization of any recovery had from the Gairsoppa. Odyssey has also chartered a 291-foot vessel from Swire Seabed to support recovery operations. Under Odyssey's contract with the government of the United Kingdom, it must bear the expenses of these rentals and services. Based on the apparent need to issue another 8.7 million shares and the share count of 73.224 million on April 17, 2012, a recovery from the Gairsoppa will evidently be split 81,933,999 ways after expenses. Assuming the vessel has $280 million in recoverable specie, the cash before expenses would amount to nearly $3.42 per share. However, 20% of the after-expense profit belongs to the crown, so the actual value of an expense-free recovery of a $280 million find would be closer to $2.73 - perhaps enough to maintain current prices for a time, but nowhere near the level needed to give each share the $6 or more suggested by some authors.
Reality And The Treasure Hunt
The gross isn't the net, however: there are expenses to cover. JBR Recovery, Swire Seabed, and the hefty management overhead at Odyssey itself must be satisfied. Then, there is the risk of sharing the net with partners choosing to exercise their contracted-for options to participate in the proceeds of an Odyssey recovery. If Galt Resources LLC has selected the Gairsoppa as its project in which to participate, it would receive half the net until it recoups four times its investment and a fixed percentage thereafter. The scope of the recovery expenses remains unclear, so estimating the net available to shareholders - particularly while the vessel remains unrecovered - is an exercise in speculation.
In August, another article reviewed OMEX' announced salvage target list and predicted OMEX would reach $6 within a year. If OMEX were to recover one of its targets, it could easily generate sufficient excitement through media announcements to move the stock independently of its assets - and even independently of the company's prospects. The wreck of the Gairsoppa has previously moved the stock's shares without even appearing in a press release. If OMEX were finally to threaten a positive quarter, the entire valuation of the company could be up-ended in favor of speculation regarding the multiple to be given the firm's income based on wild guesses regarding the speed and accuracy with which future wrecks might be salvaged. However, Odyssey has little likelihood of converting even a successful find into cash so quickly, and its contractors - well aware of Odyssey's track record - will want cash deposits before they will mobilize equipment and personnel in support of a treasure hunt. Odyssey has burned last year's equity proceeds, and if it succeeds in the Gairsoppa recovery will get to start all over again with some further wreck.
The idea that OMEX can focus on a small number of profitable, research-supported, high-value recovery targets is undermined by the fact that the company has slid into bed with some partners that require that it provide services on their unproven salvage projects. And Odyssey is having trouble enough with its own.
Odyssey may finally catch a find it can keep (mostly). The same technology and expertise is readily available from other vendors - like Oceaneering International (NYSE:OII) - who have a business plan that calls for shareholders to enjoy quarterly profits supported by regularly paid service fees.
Oceaneering can project future revenues from its work backlog and its going rates. It gets paid on an invoice by its solvent customers so its shareholders get regular revenue and income. A chart of Oceaneering's stock price against its sales and profits suggests that the market values the stock based on performance, as represented by such metrics as its revenues and earnings:
Until the post-Deepwater Horizon drilling ban in the Gulf of Mexico (since lifted), Oceaneering's price appeared to maintain a stable relationship with its per-share revenues and earnings. The lifting of the ban leaves uncertainty as to what conduct will comply with new regulations governing offshore energy industry activities, but both maintenance services and services calculated to comply with new regulations are billable services capable of being supplied by Oceaneering. Perhaps inspired by the post-ban share price collapse, Oceaneering instituted a dividend that has since been raised to 18¢ per quarter, or about 1.5% of the current share price. Despite the impact of the Deepwater Horizon, the company continues to deliver double-digit return on assets:
Oceaneering has a stock price valuation that appears historically related to its per-share financial performance, despite that its share price has been impacted in the last few years by worries raised by regulatory risk. Assuming the regulatory risk does not in fact halt maintenance of deepwater wells, Oceaneering may be an attractive buy compared to historic per-share valuation ratios.
The sudden departure from the pre-ban relationship of price to performance (whether measured by sales, earnings, or return on assets) offers a bargain opportunity that seems rather clearer than the one on offer at Odyssey. Given the history of Odyssey in turning finds into profits, the ongoing profit of commercial service providers seems a much more attractive bet.