The Scepticist

Small-cap, special situations, long only, oil & gas
The Scepticist
Small-cap, special situations, long only, oil & gas
Contributor since: 2013

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SBM Offshore is pleased to announce that Technip SA (Technip) has awarded the Company the Front-End Engineering and Design (FEED) contract for three, large-scale turret mooring systems associated with the proposed Browse Floating Liquefied Natural Gas (FLNG) Development in Australia.
The contract awarded to SBM Offshore covers the FEED elements of the proposed Browse FLNG Development’s turret work. The three, large-scale turrets are expected to be designs similar to and slightly larger in size than the Shell Prelude FLNG turret that SBM Offshore was awarded in 2011 and whose last module was recently successfully delivered from the construction yard in Dubai. Integration with the Prelude facility in Korea is currently ongoing.
The Browse project will incorporate the lessons learned by Shell, Technip Samsung Consortium and SBM Offshore in the design and construction of Shell’s Prelude FLNG project in order to maximize efficiencies in replicating the Prelude FLNG solutions for the three Browse FLNG facilities.
The proposed Browse project, operated by Woodside Energy Ltd., is located 425 kilometers north of Broome in Western Australia. The project’s reference case is based on three FLNG facilities to develop the Brecknock, Calliance and Torosa fields in the Browse Basin and is subject to final investment decision targeted for the end of the FEED in the second half of 2016.
My point was that uptil now there is no FLNG operational. The project closest to operating conditions is the Exmar Carribian FLNG. This one will commence in Q42015 (so very close tough).
And yes, FLNG's are not profitable right now. Offshore exploitation with an FLNG (gas) or FPSO (oil) is more expensive than onshore exploitation. The biggest cost is however not the processing itself, it's the upfront capital investment that is heavy. So it will offcourse be profitable to run an FLNG once its build. However only because the biggest costs are already sunk. Operational profit will not cover capital expenses and amortization.
Analoguous to the FPSO business, these FLNG companies work with long term lease contracts that provide FIXED incomes. It is important to notice that these contracts will be offcourse very lucrative. Just don't expect to much new contracting activities any time soon.
Hoegh also uses turret mooring systems. But comparing these turrets to the one that SBM is building for the Prelude (wich will be the LARGEST offshore vessel in the world) that can resist a hurricane is comparing David and Goliath. http://bit.ly/1GgFG5G
SBM has a huge potential in FLNG. The biggest challenge in FLNG is to reduce the influence of wave motion. SBM Offshore's strength is exactly in this field: it's a world leader in Turret mooring technology. For the moment, FLNG's are still fiction. The first FLNG is Shell's prelude FLNG project. Guess who's delivering the turret?
Unfortunately FLNG's are not profitable at this time. Natural gass price was almost double from what is was today in January 2014.
Here's a quote from wikipedia: ....
"Once a facility is in operation, wave motion will present another major challenge.[20] LNG containment systems need to be capable of withstanding the damage that can occur when the sea’s wave and current motions cause sloshing in the partly filled tanks. Product transfers also need to deal with the effects of winds, waves and currents in the open seas.[3]
Solutions to reduce the effect of motion and weather are addressed in the design, which must be capable of withstanding – and even reducing – the impact of waves. In this area, technological development has been mainly evolutionary rather than revolutionary, leveraging and adapting technologies that are currently applied to offshore oil production or onshore liquefaction. For example, traditional LNG loading arms[clarification needed] have been adapted to enable LNG transfers in open water, and hose-based solutions for both side-by-side transfers in calmer seas and tandem transfers in rougher conditions are nearing[when?] fruition.[21]"
Yes, the drop is related to the Sao Mateus, I can't really see what else the reason could be. In the same time period (since 11/02/15) SBM Offshore has risen 5% while BW Offshore is down 52%. Both companies are offcourse subjected to the same reality of a declining oil price.
Q2 EBITDA was impacted by the accident but Q3 should be normal again....
"BW Offshore carries insurance cover on a fleet wide basis, for its crew and support staff, pollution and clean up and any damage to
vessels. In addition, the FPSO Cidade de São Mateus is also covered
by a loss of hire insurance. The accident and its consequences will
to a large extent be covered by these policies and BW Offshore is working closely with insurers and their loss adjusters in the recovery operations." - Q1 report
"Lastly EBITDA is negatively impacted by the accident on Cidade de São Mateus,as the Company only started recognising loss of hire insurance from mid-May." - Q2 report
It's correct to state that the engineering departments of FPSO's are not running at a 100% of their maximum speeds.
I wouldn't feel to bad for those engineers tough. If there's any profile fameous for it's flexibility and general employability it's the engineer. Engineering does not only happen during the tendering and design, it also happens during construction and production in the form of optimization projects. For example: SBM Offshore has several large projects running to streamline its construction process (lowering future capex), but also to speed up the projects. Furthermore there's also the life extention programs that need engineering support.
The problem you mention is way bigger for offshore drillers. Most of them have their own engineering to manage maintenance and repairs projects. Guess where offshore drillers are cutting back on nowadays? (It's kind of scary when you think of the consequences an equipment failure can have... It's like the Macondo blowout never happened?)
Thank you
This remark tends to come back. The truth is that they were loaded with loans to the Comercial Real estate and Construction & Development sectors in 2008. Other banks reported monster losses, while Parke had an extremely risky loan portfolio. Still they reported a profit in 2008. So did they pull a rabit out of their sleeve? Well....
One and a half year later their balance sheet gets fueled with NPA's and Texas ratio quickly rose to almost double of the national average. As explained above an NPA is an unrealized loss waiting to happen. If that wasn't enough, Texas Ratio kept on rising until Q32012 while national average was trending downward. So they were taking the hit later.
So did they dodge a bullet in 2008? I don't think so. The pain got delayed as NPA's/Texas ratio started rising very fast in Q12011. Parke has booked very high provision expenses in subsequent years so in my eyes they just spread that monster loss over the coming years . As explained in the article the 2008 heritage is far from completely digested as the bank still has a Texas ratio of >50%.
The real question is: "why the delay?". NPA's came flooding in at Q42011. The fact is that the bank took TARP way before that in 2009. Would you sign up for very expensive
TARP, equity if your balance sheet is all sunshine and hapiness (especially since management has a very high stake)? My guess is that they kept appearences high deliberatly, while waiting for the economic environment to improve, because lets face it... they very close to a melt down.
For some reason it was in my head that average peer efficiency ratio was around 50% while it is more like 77%. I think my brain switched of here for a second. So yes, I'm wrong here!
In my defense, the angle of the article was the asset quality rather than the income statement. But I felt I had to mention something about it anyway, and probably went too fast over it.Thnx for clearing that out.
Blackhawk Bancorp:
Less risky: better asset quality
1.Significantly less Oreo
2.Significantly less NPL's
3.Texas ratio =16 % (compared to Parke's 58%)
4. Loan portfolio has better spread, less risky sectors
Poor profitability
1. Low net interest margin (supported by less risky loan portfolio)
2. Low ROA (0,5% vs Parke's 1,1 %) -> low ROE
3. High efficiency (= peer average).
they fixed it! :)
All graphs I made with Excel got lost in publishing.
This really takes away the point of the article!
Great job Seeking Alpha!
Define "not very good". The company has a Net Debt/EBITDA of 1.2!
That's pretty solid in my books!
Dieter, thnx for the article. Can you give your opinion on the following?
1) Operating margin in Belgium took a hit in Q3. Why was that?
2) How do you think future revenue and operating margin are going to evolve for bolth key markets (Belgium and US)?
3) You correctly point out that Delhaize operates in the mid-high cost segment. How do you think the company will respond to competitors like Eldi and Albert Hein, who gain market share in this segment.
4) What will be new managements angle? (will they go on the acquisition tour? sell segments? )
I agree with the authors view that the company is very reasonably priced: P/FCF<10 and 4x EV/EBITDA.
I'll quote Charlie Munger: “At Berkshire we have three buckets: yes, no and too hard. We just throw some decisions into the ‘too hard’ file and go onto the others.” .... guess what bucket I'm gonna throw this one in ;-) ?
Interesting posts guys ... I appreaciate your concerns so here's mine:
How reliable are the statements as every company presentation says their numbers are unaudited. Are the annual reports audited or am I missing something here?
Highly entertaining post! GJ
Low P/B, yet equity can get serious hits over the next years while restructuring debt. I do agree MT has value in the long term, but like most here I'm cautious for the short/mid term.
I suggest a hedged exposure: Long on MT, while going short on Thyssenkrupp. Just a tought!
@rubicon59
No-one can tell you what their OREO is worth. All I can tell you is that they started inheriting OREO since 2010 (see balance sheet). If you look at the following link, the average house prices actually rose since Q1 2010. So who says OREO isn't worth more than on the balance sheet? My guess is recent growth of house prices will prevent losses (not accounted for the lawyer cost wich are calculated in their quarterly reportings) and accelerate a further decrease in OREO. http://econ.st/16iVHlW
About the provisions:
You are right, they can understate provisions, but they can't understate % allowance for loan losses/NPL's. (Provisions go in the allowance saving jar). If they can keep % allowance/NPL constant and let OREO decrease at the same time while decreasing provisions.... then it can only mean provisions are NOT understated. My guess is they use a reactive approach to determine provisions: they book provisions to exactly (or almost exactly) compensate for new NPL's in latest quarter !
This approach does not reflect the LT-risk of new loans. But I doubt they will be placing a LT-bomb under their feet for ST-profit if management's shareholdership is about 40%
Great article! Was thinking of writing an update on Parke but you beat me to it.
Some toughts:
Don't see why you should discount deferred tax assets from the its net tangible assets? Unless they will never make a profit again, these assets will soon be converted to cash.
What you didn't mention in your article is the evolution of the allowance for loan losses. The evolution of NPA's (bolth OREO and NPL) is stabilizing (even slightly decreasing). They are also reporting a profit increase mainly due to the decrease in provisions costs. This while % allowance over NPL's is stable (even slightly increasing). Booking less provisions while maintaining a constant % allowance clearly indicates a positive trend in the quality of its loan portfolio. This trend was notable in last 2 quarters and will almost certainly be continued the next two quarters. The reason is the improvement of the US housing market and the recovery of the US economy. Parke remains a great play on the recovering housing market in the US
Does anyone else has the feeling he's sitting at the side of a legendary texas holdem poker game with alot of chips on the table?
I'm watching bolth remaining players but I can't see wich one is bluffing. The stack on the table is growing larger and larger as neither party is giving up bidding. I guess we're gonna have to wait for the show down.
One thing is certain... I folded a long time ago... seems like the smartest thing to do. I comitted to investing rather then gambling!
Undoubtfully the illiquidity plays an important role but this can't be the only reason for the enormeous discount. I've seen holdings (even when liquidity is limited) go at a discount of max 20% peak.
I stand by my argument that discount is most likely caused by the limited transparency:
1. The consolidated report the three subsidiaries makes it harder to interpret. The earnings statements are pretty clear but the contribution of assets on the balance sheet are not traceable.
2. The reporting language of Burelle is in French, while French investors are bearish on any stock related to car manufacturence. Plastic Omnium does not share this problem: it reports in English and can rely on foreign investors demand for the stock to keep price at a reasonable levels.
Anyways
Even after the 80% stock increase I'm not hasty to sell ...
Based on the price of plastic omnium: the stock is worth 560€ at the moment.
Based on a conservative DCF model (12% discount rate; growth rate of 14% for the next 4 years; 0 % growth after) the stock is worth 650€
Based on a technical analysis price could go to 440€
Seems like you are right: (I wasn't 100% sure for UK, for the other countries tax rates also depend on double dividend treaties)
UK holds 0 % taxes on dividends of UK companies:
UK does hold 20% taxes on dividends of REITS
http://bit.ly/Zni1qn
Thnx for correcting me
Yes, you're right: gross margins of Pepsico and Coca (for their orange juice manufacturance) are around 50% and are larger.
But you're missing the point here: if your company is a virtual nobody without any branding, retailers will give you just enough to cover operational costs. You think retailers don't do research about margins when they negotiate a price? Gross margins of 28% don't make sence when you're claiming you're dealing with large retailers like Wallmart. This is how retailers do business!
Hehe, in a comment above you stated: " To be cautious and skeptical is good"
Well, I just raised 8 very straight forward points and you simply throw them off the table by saying you already rebutted them. Well, if you stated it be4, it should be just copy and paste wouldn't it?
Please enlighten me!
There is a huge serie of red flags on this company. I would write an article about it, but I don't want to get sued like the last guy. I'm not stating this company is fraudulaus, I'm just giving my opinion.
1. Audit firm has changed 3 times over short time span
2. Audit firms are unknown: Last audit firm also (Paritz&company) received a very negative review from PCAOB in 2009 (http://bit.ly/Wqs2UX)
3. Gross margins: margins are coming close to these of PepsiCo and Coca. This means that company is very efficient and well positioned at the same time. Pretty impressive for a small business without any branding. Especially when it claims it does business with Wallmart, a retailer notorious for its (profit squeezing) supply chain power. In fact the whole picture seems weird to me: an unknown, unbranded product positioning itself as a high quality product.
4. Sales growth is driving itself? Sales costs are pretty low and it seems like growth is growing on trees.
5. Capex is very low: FCF is higher then profit. This company claims to work with ultra modern equipment. If you have some industrial experience you'll find out that everything breaks down after a while and you have to keep investing in maintenance of equipment in order to keep things running. This company is amazingly efficient in extracting cash from business.
6. CEO is also owner of China Tianren Organic Food Holding. China Tianren Organic Food already got delisted for being a fraudulaus shell company.
7.Ghost product: I've searched Chinese websites for hours with a fellow investor, hoping to find some customer review on their product. I found nothing but stock related info... (I suggest you try it yourself: also do the test with any other product in your fridge.) I also can't find any info of stores selling the product.
8. R&D and patents are a joke?: Company filed some patents in China. Intelectual property rights in China are virtually worthless. If they were really on to something they would file patent in EU or US.
You are right: rent is practically zero (apart from the 7 flagship stores) and this can be easily understood when you look at their business (distributor) model. Revenu is mainly received trough sales to distributors. Distributors in fact do the selling and the renting of the outlet stores.
Q4 results (besides profit increase) revealed that non-performing assets decreased significantly without booking substantial losses.
This shows that value in their books does not deviate much from market value (as I stated in a comment below: market discounts this stock like the non-performing assets are wortless while they are clearly not).
Far more important, this could indicate that we've seen the top in non-performing assets and they will begin to stabilize or hopefully even decrease.
Market reaction to latest results wasn't exagirated. I think there's plenty of potential left as P/B is still 0,6 (40% discount)
Future senior analist in spe!
Great article!
Thank you for giving a detailed image of the related risks.
I agree Texas ratio isn't encouraging. But much of the downside is already calculated in the stock price: I don't believe NAL and OREO are completely worthless either. As long as texas ratio isn't >100 % the bank can absorb the shock (if the growth trend doesn't continue)
I strongly believe this one has massive potential once the asset disposal process is progressing.
Time will tell:
Non performing assets increased in 2010, 2011 and 2012.
This is still a back log effect of the economic crisis and the collapse of the real estate market.
Three trends are emerging:
1.It gets harder and harder to get controle over troubled assets. Legal processes take up to 900 days.
2. Economie shows signs of a slow recovery and less business go bankrupt: http://bit.ly/Uo2mqD
3. Real estate prices recover and interest in "illiquid" troubled assets start to increase.