I've followed Gulf Island Fabrication's (NASDAQ:GIFI) turnaround for nearly two years; my previous articles can be found here and here for reference. The company's stock price has risen ~50% since my first turnaround article, but there is still meaningful upside potential ahead. GIFI has made tangible improvements to its business model and will benefit from high oil and gas prices in 2022. I expect GIFI's operating performance to improve and believe the market will begin to appreciate the work that management has done to turn the company around. There are three potential catalysts that should drive performance in the year ahead:
As I discussed in my last article, GIFI sold off the majority of its money-losing shipyard division in 2021. The company took a big non-cash impairment charge from the sale, but operating performance going forward will benefit from the removal of this drag. GIFI retained a pair of contracts in the deal that they expect to complete by the 3rd quarter of 2022. These ongoing contracts will continue to hurt performance; the remaining shipyard operations resulted in a loss of nearly $2mm in Q3 of 2021. Once the contracts have been fulfilled, quarterly operating income should increase by $1-2mm. This seems like only a small improvement, but GIFI's market cap currently sits at $65mm; $8mm in additional annual operating income will have a meaningful impact on the company's bottom line.
GIFI derives the bulk of its revenue from its "Fabrication and Services" (F&S) division. The F&S division has historically served customers that operate offshore oil drilling platforms in the Gulf of Mexico. GIFI is attempting to expand into the onshore liquid natural gas (LNG) refining and transportation space. Both oil and LNG prices have been in a funk since 2016, leading to much less demand for GIFI's fabrication services. Prices for both oil and natural gas have risen sharply in the last 6-12 months, with crude oil now trading at over $100/barrel. It remains to be seen how long prices stay elevated and how willing oil and gas companies will be to invest in additional infrastructure, but GIFI was already bidding on a number of LNG and petrochemical projects prior to the spike in energy prices. I am disappointed that the company hasn't announced any new project deals yet (management had expected one or more deals to close in Q3 of 2021), but more oil and gas activity in and around the Gulf of Mexico means more opportunities for GIFI. Management expects to generate 10% gross margins on their fabrication projects (source); $150mm in fabrication revenue would be enough to return the company to GAAP profitability.
GIFI announced the acquisition of the services and industrial staffing businesses of Dynamic Industries, Inc on December 1st, 2021 (source). GIFI paid $8mm in cash to acquire these businesses, which generated ~$2.7mm in operating income the previous year. In addition to getting the businesses at a cheap price, the acquisition doubles the size of GIFI's workforce and expands the range of projects they will be able to bid on. Management has made it clear that finding and retaining labor has been a challenge over the last few years, so I think it is a great move to beef up their employee count as they look to bid on larger LNG projects. The acquisition also gives GIFI access to Dynamic's existing customer base, opening the door to cross-selling opportunities. If the acquisition improves GIFI's operating income by $2-3mm annually, this will have a meaningful impact on the company's overall profitability.
GIFI is cheap, both in relation to the value of its assets and to its earning potential. On the asset side, GIFI had $73mm in cash at the end of Q3 and retained the bulk of their shipyard assets, with total PP&E worth ~$30mm conservatively. Total assets were $140mm. GIFI had about $10mm in remaining working capital obligations related to the disposition of their shipyard division and used $8mm in cash for their acquisition. Backing out these transactions puts the company's cash position at roughly $50mm. Cash burn has dropped dramatically; the company broke even from a cash flow perspective in Q3 and management has guided that cash burn should be minimal in the coming quarters. GIFI has total liabilities of $38mm and no long term debt. Putting this all together, GIFI has a book value above $100mm and is trading at a market cap of just $65mm.
GIFI's balance sheet is appealing and provides an adequate margin of safety, but I am more excited by the company's potential earning power. Excluding the benefit from PPP loan forgiveness, GIFI is on track to lose about $12mm from continuing operations in full-year 2021. If we assume the staffing acquisition provides $3mm in annual operating income and the shipyard wind down saves $4mm in losses (half of $8mm in annual savings), then without any other changes I would expect GIFI to only lose $5mm from operations in 2022. Using management's 10% gross margin expectation for new fabrication work, this means just one deal worth at least $50mm would be enough to get the company to GAAP profitability. Management has stated that the projects they are actively bidding on (and are looking to bid on in the future) are in the range of $50-$100mm (source), so one of these deals would be enough to reach that goal. Two projects at an average of $75mm each would translate to roughly $15mm in additional income and thus $10mm in expected net income. I use a conservative earnings multiplier of 10-15 when valuing a cyclical company like GIFI; splitting the difference at 12.5 results in an expected market cap of ~$125mm, which is just about a double from the current market cap.
The optimistic earnings power projections in this article rely on management's estimates and their ability to win contract bids in the future. If GIFI can't manage to win meaningful new contracts at rates that allow for positive gross margins, then the operating business is not worth owning. The company's fabrication history is pretty good, prior to the sharp drop in oil prices in 2016, but it will need to prove that it can operate profitability in the current environment. The company's assets act as a reasonable margin of safety against total ruin, but I wouldn't own GIFI just for the value of its assets.
GIFI's has the usual risks associated with micro and nano cap companies. Trade volume is low, and as such volatility can be high. Less than $200 thousand worth of shares are traded daily on average, and the low volume can lead to price spikes and drops if there is a motivated buyer or seller.
2023 will be the first full year that benefits from the GIFI turnaround, but the seeds of future success are being planted in 2022. 2022 will still contain losses from the shipyard wind down, and the bulk of revenue generated from any contracts signed in 2022 won't be realized for another 12-18 months. However, there is a very real possibility that the company could reach GAAP profitability by Q3 or Q4 of 2022 and the announcement of a major contract should be enough to send the company's stock higher. There is likely still some short-term pain ahead for GIFI investors, but I am comfortable being early to the party for the chance to get in before the full effects of the turnaround are clear to the general market.
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Disclosure: I/we have a beneficial long position in the shares of GIFI either through stock ownership, options, or other derivatives. 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.
Additional disclosure: This article is not financial advice, it is only an expression of my own opinions as an individual investor