Monitoring bond issuer developments (5)

Financial Article 517 by Edward Rizzo - Dec 21, 2017

In the oil and gas sector, there are two companies that have bonds listed on the Malta Stock Exchange – Medserv plc and Mediterranean Maritime Hub Finance plc.

Medserv plc has been well-known among the investment community for several years as a result of the Initial Public Offering of its shares in October 2006 followed by a debt issuance programme in 2013 as well as a rights issue together with another bond issue in December 2015. Meanwhile, Mediterranean Maritime Hub Finance plc only tapped the market on one occasion with a €15 million bond issue in September 2016.

Medserv’s financial performance and its credit metrics have been rather erratic in recent years as a result of the volatile conditions in the oil and gas sector and the subsequent delay in drilling activity in various locations in which the Medserv group is active. In 2015, Medserv had reported revenues of €42.7 million, an EBITDA of €10.2 million and a pre-tax profit of €5.8 million. At the time, the Medserv group had a strong interest cover of 6.8 times and a net debt to EBITDA multiple of only 2.5 times. In the early part of 2016, Medserv increased its borrowings to partly fund the acquisition of the METS group of companies in the Middle East. Despite the initial contribution from METS as from the first quarter of 2016, the financial performance of the group deteriorated as a result of the challenging conditions across the oil and gas industry (principally due to the declining price of oil) as well as the delay in a number of projects. Revenue declined to €32.8 million during the 12 months ended 31 December 2016, EBITDA dropped to €5.5 million and a loss before tax of €2.5 million was reported. Following the increased debt taken on to partly fund the acquisition of METS coupled with the sharp decline in EBITDA, the credit metrics of Medserv deteriorated substantially with the interest cover dropping to 2.2 times and the net debt to EBITDA climbing to 8.5 times.

The difficult operating environment across the oil and gas sector continued for most of the current financial year and in fact on 22 November 2017 Medserv issued an Interim Directors’ Statement in which it warned of another downward revision to its 2017 projections from the earlier projections revealed in the interim results of €30 million in revenue and around €4 million in EBITDA. This will result in a further deterioration in the credit metrics of Medserv with the interest cover anticipated to decline to below 1.4 times and the net debt to EBITDA deteriorating to well above 5.6 times.

The downturn that continued to be experienced by Medserv during the course of 2017 was largely due to the severe slowdown in Integrated Logistics Support Services (ILSS) activity given that international oil companies suspended various projects in order to restructure their own operations in line with the slump in the price of oil in the last three years. Additionally, the group’s base in Iraq also continued to be a drag on Medserv’s performance as it offset the positive contribution from the other Oil Country Tubular Goods (OCTG) businesses in Oman and UAE.

In the recent announcement, Medserv however indicated that the long-awaited pick-up in activity is now imminent. In Cyprus, Medserv noted that the second base in Limassol, which was recently opened, will be fully operational this month as four to five wells are expected to be drilled in the waters offshore Cyprus in the months ahead. Medserv Cyprus will be supporting the upcoming exploratory drilling campaign planned by ENI Cyprus from both its shore bases in Limassol and Larnaca. Moreover, Medserv indicated that its Cypriot subsidiary has also recently participated in a tender for the provision of shore based support services to a second international oil company which is planning to drill during the course of next year.

Furthermore, Medserv reported that it is also in an advanced stage of negotiations in connection with a new strategic long-term contract for the provision of shore base services in a new geographical area. Medserv explained that negotiations are still ongoing since the scope of services has been widened. The contract is expected to commence in the first quarter of 2018. Earlier this year, Medserv had reported that it set up a company in Egypt and it also signed a Memorandum of Understanding with a major Egyptian entity which will allow the company to offer base facilities out of an Egyptian port to cater for logistical services to some major oil companies operating in the region as a result of the sizeable activity that is expected to take place in the Zohr field which comprises the largest gas find in the Mediterranean region.

With respect to the OCTG segment, this continues to be viewed as the largest growth driver for Medserv in the coming years. In this respect, the group set up its second OCTG base in Oman and this started operating as from last month. The new OCTG base was required to support the large contract awarded by Sumitomo earlier this year which is for an initial period of five years with a further five-year extension option.

Mediterranean Maritime Hub Finance plc is the finance arm of MMH Holdings Limited (formerly Ablecare Oilfields Services Holdings Limited) which in turn is the guarantor of the bonds and also the parent company of the group. On 1 August 2016, the group entered into a contractual deed with Malta Industrial Parks Limited for the 65-year emphyteutical concession of a 169,000 square metre site located in the innermost part of the Grand Harbour formerly occupied by the Malta Shipbuilding. Most of the proceeds of the bond issue were earmarked for the development of the Mediterranean Maritime Hub which the group is currently converting as its main base for the provision of maintenance, engineering, logistical, storage and other support services to companies operating in the marine and oil and gas industries.

MMH Holdings intends to invest approximately €55 million to rehabilitate the hub over three phases. The first two phases of the project are expected to require an investment of around €37.5 million and are anticipated to take seven years to complete. Thereafter, the group plans to embark on the third phase of the project which will mainly consist of final development works to the hub.

The Prospectus dated 16 September 2016 issued by Mediterranean Maritime Hub Finance plc provided financial information of MMH Holdings Limited for the financial years ended 31 December 2013 to 2015 as well as the financial forecasts and projections for 2016 and 2017. On the other hand, the Financial Analysis Summary dated 28 June 2017 provides revised forecasts for 2017 which also include the effect of the servicing of the bonds for a full twelve-month period (as opposed to two-and-a-half months in the previous year). Unfortunately, however, the revised forecasts for 2017 do not provide the EBITDA that the group is now expecting to generate although it also indicates that revenues are estimated to be 34% lower than previously projected due to delays in the development of the hub and also as a result of the very challenging operating scenario within the oil and gas sector. Moreover, the group is now anticipating that it will be registering a net loss of €0.25 million in 2017 compared to the earlier projection of a marginal net profit of €0.25 million. Meanwhile, the gearing ratio is expected to deteriorate further to 81% as at 31 December 2017 from the previous forecast of 76%. The gearing ratio of MMH Holdings stood at 60% as at the end of 2016.

Following the notable rebound in the price of oil in recent months to a two-year high, investors are keen to understand whether this will also lead to a positive impact on the performance and business pipeline of Medserv and MMH Holdings in 2018 and beyond. Given the volatile industry in which these companies operate, investors need to pay particular attention to the 2018 forecasts that both companies will be publishing by June 2018 and any further announcements in the interim to understand whether the companies can improve their performances for the benefit of all stakeholders.

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