Gulfmark Offshore: Hated, Misunderstood And Ultimately Undervalued

| About: GulfMark Offshore, (GLF)
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Summary

Gulfmark's tender offer fell through.

Gulfmark's vessels are worth well in excess of its debt obligations.

Its shares are surrounded by pessimism offering contrarian investors a margin of safety at the current price.

Investment Thesis

Since my first article on Gulfmark Offshore (NYSEMKT:GLF) two months ago, the stock is up about 25% (at $1.20 on date of publication) and up 10% (at $1.35 on date of publication) since my second article on GLF. However, in spite of this small appreciation, the stock remains very far from what I believe is fair value of at least $3 per share.

Over the last several weeks, a lot has happened in GLF and before I layout the different nuances that have taken place in the company, the pessimism surrounding this stock has caused me to spend the Christmas holidays reading a lot about the 1930-1933 period. An infamous time in the stock market depression when one could buy 40% of listed companies for less than the cash on the balance sheet. To get to grips with the fear of investors, I read The Great Crash 1929, The Einstein of Money, Where Are the Customers' Yachts?, Investing the Templeton Way, Once in Golconda, Benjamin Graham The Father of Financial Analysis and while not really related to 1930-1933 period still very helpful in market psychology, Contrarian Investment Strategies (I am very happy to discuss any of these wonderful books in the comments below). And the most interesting aspect is that value investing still works. Investors become so carried away with their emotions and that is why one can make money in the stock market. Value investing does not always work but it works enough times that if one has the character, conviction and patience, it works wonderfully over time.

Latest Developments

The focus of this article is on explaining that Gulfmark has the liquidity and resources to survive this downturn. I do not feel it's necessary to spend a lot of time in this article highlighting the obvious dangers of investing in GLF as another author, Henrik Alex, has already dedicated a lot of energy to that. And while I think Mr. Alex is a very smart individual that is kind of right on GLF, I think that the difference between kind of right and actually right in the case of GLF is the difference between night and day.

GLF's operations will continue to struggle in the short term; the short term lasting as long as 2-3 years. But I genuinely believe that GLF will survive and reward patient shareholders. I must, at this juncture, put forward a warning. I have been wrong in the past and I will be wrong again and any investor that decides (after doing their appropriate due diligence) to follow me into GLF is doing so at their own peril.

The outcome for GLF is far from certain and will most likely involve a significant amount of shareholder dilution. But in spite of this, GLF is priced as if bankruptcy is a foregone certainty and my argument is, as it has always been, that GLF will survive and in spite of any shareholder dilution, investors, at the current price, will be rewarded with a satisfactory return. It will not be easy with very volatile periods but investors should invest and hold. In the same way as a property is bought with little concern for what the property next door is on sale for, either 10% more or less than our property, investors should buy GLF and be patient. One cannot buy a company when its outlook is good and expect to make a profitable return. One should only buy when the outlook is miserable and at the time of greatest pessimism.

Bonds 2022

At the time of writing, GLF's bonds trade at $53.10, at a small premium to the $52 offer that fell through only weeks ago. So in spite of the debtholders being offered $52 to trade their bonds in exchange for cash, the debtholders declined, preferring instead to hold out for either a better offer or 2022 when the debt would be due. Whatever debtholders thought is unimportant. What is important is that debtholders clearly felt that the company was not going to go bankrupt and they opted to hold out for full principal on their notes. The company said, "We are certainly encouraged by the long-term view demonstrated by our bondholders".

New Revolving Credit Facility

The company has successfully been able to negotiate with creditors on favorable terms and not only extended its Revolving Credit Facility from $100m to $115m, it has also been able to extend its Revolving Credit, defer the increase in the interest rate by two years as well as adjusting the liquidity covenants on both the Revolving Credit Facility and the Term Loan Facility.

This basically means that the creditors have not only allowed the company to borrow more money, they have also given the company breathing room to right the ship (no pun intended). Clearly, the creditors have faith in GLF as it appears to be knocking on death's door by giving it more capital and wiggle room. If anyone knows anything about Michael Price's company MFP is that Price is one of the world's greatest all-time investors, known for being a savvy contrarian. If his company has faith in GLF so do I. I obviously know that MFP took the bonds and not the equity, but MFP is way too big to invest in GLF's equity.

Valuation

So the question on all investors' minds is how much are the vessels on GLF's balance sheet worth? As I mentioned in my previous articles, I have been in touch with GLF's investor relations department, and while the company will not disclose how much the vessels are worth, it does say that its vessels are valued by an independent third party and that the $1B worth of vessels under vessels and equipment listed on the balance sheet is nearly all vessels, with only 5% of the fixed assets being allocated for "equipment and spares". But let me be even more conservative and estimate that the vessels are only, in fact, worth $600m (a 40% discount from the value stated on the balance sheet), with the net debt adding up to very roughly $480m and the equity trading for ~$42m I believe there is a margin of safety in GLF at current prices.

Conclusion

GLF is not for the faint-hearted and its shares will continue to be very volatile, but the company will not go bankrupt. Its shareholders may even be further diluted but I think that the worse is over. With the price of oil currently at roughly $52, investors should understand that the world still needs oil. Oil crisis does happen from time from to time, but as Sir John Templeton said, "The four most expensive words in the English Language are "this time it's different".

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Disclosure: I am/we are long GLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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