- Strong cash position throughout the upstream offshore oil and gas downturn
- Debt-free balance sheet
- $110.5 million of unencumbered assets for sale
- Significant new orders received, adding to backlog
- Emerging alternative energy market opportunities
Gulf Island Fabrication, Inc. (NASDAQ:GIFI) is a leading fabricator of offshore oil and gas platforms, onshore modules, marine vessels and other specialized structures. Traditionally involved in the offshore oil and gas industry, GIFI has seen a marked decrease in revenue and the price of its equity security over the past several years. However, the company’s balance sheet remains strong with zero debt and $34.7 million in cash. GIFI’s backlog is showing signs of expansion with several large new orders announced recently, and the company is making serious inroads into new prospective markets as evidenced by participation in an offshore wind energy development managed by Deepwater Wind, a leading offshore wind and transmission developer. Given these considerations, Global Value Investment Corp believes the company’s shares, which trade hands for $10.30, are undervalued.
Figure 1. Source: S&P Capital IQ. Data as of 6/16/2017.
Strong Balance Sheet and Significant Future One-Time Cash Flows
As of March 31, 2017, GIFI reported cash and cash equivalents of $34.7 million ($2.33 per share) and no long-term debt. Historically, the company has maintained a debt-free balance sheet, having been in debt only once in the past twenty quarterly periods. The company maintains a revolving credit facility, the terms of which were recently renegotiated, on which it carries no balance. In February 2016, management announced a dividend cut, from $0.10 per quarter to $0.01 per quarter, to conserve cash amid uncertain market conditions. Current cash levels are commensurate with those reported over the trailing twenty quarters, which average $35.7 million.
GIFI held assets for sale of approximately $110.5 million as of March 31, 2017, largely represented by the divestiture of its South Texas fabrication facilities. Revenue produced by operations at this location in the first quarter was de minims, and no further depreciation expenses will be assessed against the property or equipment held there; in fact, GIFI will realize a decrease of approximately $1 million in quarterly carrying cost upon sale. Management has publicly stated that there are several potential buyers with interest in this land and machinery. Global Value Investment Corp anticipates that GIFI will realize approximately $80 million on the sale, net of taxes. Deliberations on the use of said cash, if and when a sale is consummated, are ongoing. The company may consider an acquisition; David Schorlemer, who was brought on as CFO in January 2017, has approximately 20 years of experience in the energy services industry and has been involved in nearly 100 M&A transactions throughout his career, which began with Accenture in Houston, TX.
According to court documents, GIFI is currently involved in litigation with Walter Oil & Gas Corporation over the nonpayment of $34.6 million related to the fabrication of a jacket completed in late 2015 and invoiced on March 10, 2016. After a recent discussion with GIFI’s senior management, it is our belief that GIFI will recover some significant portion of this amount. A hearing has been scheduled for January 2018, according to court filings.
Figure 2. Jacket for the Coelacanth platform, fabricated by GIFI.
Finally, GIFI recently completed fabrication of two large petroleum supply vessels for Tidewater, Inc, which refused delivery of these vessels on their respective delivery dates in early 2017, citing technical deficiencies. GIFI carries a contracts receivable balance of $9.5 million between the two vessels, which the company believes will be recovered when either the customer accepts delivery of the vessels or the vessels are sold to other interested buyers. GIFI retains possession of the vessels. Despite its current Chapter 11 reorganization, in a June 8, 2017 SEC filing, Tidewater’s 12-month cash flow projections lead us to believe they have allocated capital in September 2017 and January 2018 for payment of the GIFI invoices.
Our analysis below itemizes amounts we believe GIFI will potentially receive over the next 12 to 18 months. We estimate the proceeds to be roughly $7.20 per share.
In January 2016, GIFI acquired LEEVAC Shipyards, LLC for $20.0 million. Since then, inroads into marine vessel fabrication have been notable. Several new shipbuilding contracts have been secured since the end of GIFI’s most recent fiscal quarter, providing encouragement that the company can diversify its order book as the offshore upstream oil and gas market remains in a depressed state.
On May 8, 2017, the company announced that Oregon State University had provided a contingent notice of intent to award a contract for one Regional Class Research Vessel with an option for two additional vessels. Finalization of the contract is contingent on funding from the National Science Foundation. Various versions of the 2017 federal budget call for the funding of up to three vessels, although definitive funding has yet to be secured. GIFI’s management has ventured that a contact may be signed by mid-2017, but we view this situation as fluid. We estimate that each of these vessels will cost between $60 million and $90 million to build.
On June 1, 2017, GIFI announced two orders, each for four Z-Tech 30-80 Class Terminal/Escort Tugs. GIFI identified its customers as Suderman & Young Towing Company and Bay Houston Towing Company. We estimate the purchase price of each vessel to be between $11 and $13 million based on the purchase of a similar vessel in July 2009 built by J. M. Martinac Shipbuilding in Tacoma, Washington; the two orders are predicted to add between $88 million and $104 million in backlog for the quarter ended June 30, 2017.
GIFI’s senior management reports they have several additional shipbuilding contracts in the bidding process, which may include river cruise vessels or small military vessels.
New Prospective Markets
Traditionally involved in the fabrication of subsea and surface structures for offshore oil and gas rigs, GIFI has experienced a dramatic decrease in orders from the industry over the past few years. However, other promising opportunities have arisen that allow GIFI to parlay their experience in offshore structural fabrication.
In 2015, GIFI completed the fabrication of five jackets for a shallow water wind turbine project off the coast of Rhode Island in the Block Island Wind Farm, managed by Deepwater Wind. Having received regulatory approval in January 2017, Deepwater Wind is actively developing the South Form Wind Farm, consisting of 15 turbines, in the same offshore lease as the Block Island Wind Farm, with construction beginning as early as 2019. On May 11, 2017, the Maryland Public Service Commission awarded offshore wind renewable energy credits for two offshore wind projects, one managed by Deepwater Wind for the Skipjack Wind Farm, consisting of 15 turbines, and the second managed by U.S. Wind for a project consisting of 62 turbines. Deepwater Wind indicated in documents filed in late 2016 as part of its application that it plans to engage Gulf Island Fabrication to fabricate and finish transition pieces. GIFI’s management has expressed intent to bid on each of these three projects. We believe GIFI has a strong relationship with Deepwater Wind having successfully completed the Block Island Wind Farm.
Figure 3. Block Island Wind Farm, the first offshore wind farm in the United States.
As of the end of the first quarter of 2017, the fabrication division was constructing four modules associated with a US ethane project. While not outside of the purview of GIFI’s historical involvement in the petrochemical business, the project offers encouragement that some amount of backlog can be maintained with onshore demand.
GIFI had previously been involved in the fabrication of parts for an offshore alternative energy project designed to harvest electricity from wave movement. Although the project was suspended, given the possibility of a prolonged slump in offshore energy activity, such diversification is reassuring.
As a company historically deriving a significant portion of its revenues from customers involved in the offshore upstream oil and gas business, GIFI has faced substantial challenges during the industry’s downturn, as evidenced by a decline in revenues and backlog. Should depressed oil and gas prices prevail in the long-term, it is possible that revenues do not reach prior levels. Like many of its competitors, GIFI has been forced to seek business elsewhere, and the company admits in SEC filings that margins on new contracts in the current competitive environment are compressed. While the company’s assets are unencumbered, a prolonged period of low revenues could deplete cash reserves, forcing a further divestiture of assets or complete liquidation.
At $10.30 per share, GIFI trades at approximately 60% of its tangible book value of $17.05 per share (we do not anticipate a change in tangible book value upon the consummation of the sale of the South Texas fabrication facilities). As the offshore upstream oil and gas business stabilizes and GIFI’s backlog grows, we anticipate a modest increase in the dividend, which was cut in February 2016. Considering the possible inflow of roughly $7.20 per share of cash from non-operating activities over the next several quarters (in additional to an existing cash position of $2.33 per share), GIFI’s debt-free balance sheet, a growing backlog and abundant opportunity in new prospective markets, Global Value Investment Corp believes that the company is sharply undervalued.
About the Firm:
Global Value Investment Corp. (GVIC), and its divisions, Milwaukee Institutional Asset Management, Milwaukee Private Wealth Management and Global Value Research Company, work in partnership with Registered Investment Advisors and their Investment Advisory Representatives, as well as Broker-Dealers and their Registered Representatives.
GVIC invests using value-oriented principals to provide fundamental security analysis in the spirit of Graham and Dodd. The firm employs a concentrated investment strategy, holding both equity and debt across industries and geographies. Holding periods tend to be long-term (10-year average turnover 18%). Our research process includes one-on-one conversations with senior management to appraise both the financial and strategic visions of leadership. When appropriate, GVIC will engage its operational activist approach to influence board members and management. The firm’s associates own the same securities recommended to clients.
The opinions expressed herein are those of Global Value Investment Corp. (GVIC). The data is furnished for informational purposes only and should not be relied upon as the basis for an investment decision. Although it is derived from sources believed to be accurate, GVIC cannot guarantee the accuracy of statistical information. This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results.