Gulf Island Fabrication: Healthy Profit Plan

Investors looking to strike it rich with a play in oil have many avenues to explore, including the exploration sector itself, where they’ll find the likes of Gulf Island Fabrication Inc. (Nasdaq:GIFI).

Based in Houma, La., Gulf Island Fabrication is a leading builder of offshore drilling and production platforms, along with other structures needed to harvest oil and natural gas from deep under the sea.

Operating under four subsidiaries — Gulf Island LLC, Gulf Marine Fabricators, Dolphin Services LLC and Southport LLC — the company employs about 1,900, including 1,100 at its Louisiana facilities. Four of Gulf Island’s six fabrication yards are along the Houma Navigation Channel, about 30 miles from the Gulf of Mexico. The others are near Corpus Christi, Texas.

The company says demand for its goods and services is coming from operations in the Gulf, North and West Africa, Latin America, the Caribbean, the Middle East, offshore Canada and the North Sea. In 2007, deepwater projects accounted for 78% of revenue, and foreign destinations generated 24% of revenue.

Four analysts who follow Gulf Island Fabrication have a cautiously positive opinion, with three rating the stock a “hold” and another calling it a “strong buy,” according to Thomson Reuters. The 12-month median price target for Gulf Island is $39.50 — a level that the stock blasted through since its April 23 first-quarter earnings release. Shares closed Thursday at $43.46.

Gulf Island Fabrication posted blowout numbers for the three months ended March 31. Revenue climbed to $123.7 million, from $109.4 million a year earlier. Net income tripled to $13.4 million, compared with $4.4 million the year before, while earnings per share rose to $0.94, from $0.31. And the company pays quarterly dividends, now $0.10 a share.

The stock has seen a rapid rise since bottoming at a 52-week low of $24.88 on Feb. 1. Shares of Gulf Island Fabrication, which teased the $40 level in late 2006 and again last fall, have solidly crossed that threshold, hitting an all-time high of $44.80 on Wednesday.

For 2007, Gulf Island Fabrication reported a 51% revenue increase to $472.7 million, and similar growth in net income to $31.2 million. Earnings per share increased to $2.18 from $1.53 in 2006. In August, Gulf Island Fabrication was added to the S&P Small Cap 600.

Much of the gains can be credited to an emphasis on deepwater projects, which accompanied a late 2005 acquisition. With its deal for the unprofitable Texas-based Gulf Marine Fabricators, Gulf Island Fabrication committed to a deepwater push. It also inherited work on a big project — Chevron’s (NYSE:CVX) Tahiti, a $3.5-billion crude oil and natural gas complex that’s to burrow 4,000 feet under the Gulf of Mexico in the coming months.

Gulf Island’s Houma facilities also built the “topsides,” or platform, for BHP Billiton’s (NYSE:BHP) $850 million Neptune SeaStar, which is expected to produce 50,000 barrels of oil a day from the middle of the Gulf of Mexico.

The company has no debt. Robin Seibert, Gulf Island Fabrication’s chief financial officer, told The New Orleans Times-Picayune newspaper at an investors’ conference on April 25: “Everything we own, we’ve paid for.”

What’s also impressive is the company’s work backlog, which at the end of the first quarter amounted to a revenue backlog of $440.1 million and a labor backlog of 4.5 million man-hours. At the end of 2007, Gulf Coast Fabrication’s backlog was some $330 million in contracts and 3.7 million man-hours.

Kerry Chauvin, the chairman, CEO and president, told investors on an April 24 conference call that the company expects to recognize about $224.3 million in revenue from the backlog this year. The first-quarter numbers included a new contract for the construction of a second MinDOC T3 hull for ATP Oil and Gas Corp.’s (Nasdaq:ATPG) Telemark Hub deepwater project.

The business has its inherent risks. A crane operator for its Gulf Marine Fabricators subsidiary died in a Corpus Christi, Texas, boom collapse on April 29.

Gulf Island Fabrication also is facing increased costs for steel and other materials, along with a shortage of skilled-trades workers. In a sluggish U.S. economy, the company has also noted that the bidding environment remains slow, especially for shallow-water projects.

Even though Gulf Island Fabrication is based in Louisiana’s hurricane alley, the company sustained only minimal damage from Hurricane Katrina in 2005, and returned to full operation in about a week.

Following the Q1 numbers, Jefferies & Co. analyst Stephen Gengaro called the results “stellar” in an April 28 note to clients, yet he said “we remain cautious on the stock near-term as bidding continues to remain slow.” Gengaro maintained a “hold” rating, but raised his long-term price target to $39 from $34.

For the current quarter, according to the Thomson Reuters consensus estimate, Gulf Island Fabrication is expected to post $0.75 earnings per share, 36% better than the year-ago quarter. Revenue could slip to around $136 million, from last year’s $138 million.

Still, Gulf Island Fabrication has outlined a healthy profit path that could build a substantial return for its investors.

Disclosure: none