World Business

S&P thinks the supplier of offshore supply vessels to the oil and gas industry presents an attractive combination of growth and stability, and ranks the shares "strong buy"

by Stewart Glickman, CFA From Standard & Poor’s Equity Research

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Headquartered in Houston, GulfMark Offshore (GLF; recent price, $53) is an offshore fill vessel (OSV) company that was formed in 1996 and today operates a navy of 90 OSVs, making it one of the larger players in a fairly fragmented industry. With a market capitalization of about $1.2 billion, GulfMark is close abaft more of its publicly traded OSV peers, including Tidewater (TDW) ($3 billion) and SEACOR Holdings (CKH) ($1.8 billion), and about evenly matched with another peer, Hornbeck Offshore Services (HOS) ($1.2 billion).

We believe that a recently completed acquisition should pave the way for strong volume growth for GulfMark and from a strategic standpoint provides a solid entry into the U.S. Gulf of Mexico OSV marketplace. In addition, we expect GulfMark’s other new OSVs currently unsettled (“newbuilds”) to offer farther volume development completely the nearest several years and be permanent the company’s ability to field a relatively younger OSV fleet to customers. Combined with our expectations for strong revenue visibility and specie flow derived from its core North Sea mart, we think GulfMark presents an attractive complot of growth and stability. Along with what we view as a comparatively inexpensive valuation, our recommendation is 5 STARS ("strong buy").

INDUSTRY BACKGROUND

The ability of producers—integrated oil companies, independent exploration and production companies, and nationalized oil companies—to obtain sufficient supplies of crude oil and natural gas in fit condition to keep pace with growing rightfully claim has get to be every increasingly challenging game. The pursuit of obtaining new supply sources involves drilling exploratory wells, and, allowing that successful, developing those wells and ultimately producing from the pond. However, with much of the untapped potential hydrocarbon base located in offshore waters, and drilling locations found many miles from shore, these opportunities present a logistical challenge: How does undivided supply drilling rigs and producing installations by the necessary tools, equipment, and other necessary items and services, to debar operations from grinding to a halt?

The answer lies with the offshore supply vessel. The OSV is a long boat (typically ranging anywhere from 100 to perhaps 300 feet in length, depending attached the type of work performed and the boat’s vintage) with copious amounts of cargo space, providing assistance to drilling rigs and producing platforms. Crew boats ferry workers out to the installations from prop and back. Anchor Handling, Towing, and Support vessels (AHTSs) are used to anchor semisubmersible drilling rigs in place and to tow them from location to establishing; they can also be used as endue boats when not performing these tasks. Platform supply vessels (PSVs) can handle liberal amounts of cargo and also supply offshore version and maintenance be. Standby vessels are used for the reason that safety patrols (mandatory in North Sea operations).

As operators continue to seek new high-growth opportunities, their interest lies increasingly in deepwater reservoirs. As a event, the number of deepwater rigs is on the upswing, and we believe the amount to will rise approximately 50% by 2012. We believe this creates significant ancillary work for OSVs capable of supporting deepwater developments.

COMPANY BACKGROUND

GulfMark reports its results along geographic lines within three segments: the North Sea, Southeast Asia, and the Americas.

The North Sea OSV market, GulfMark’s core market, is somewhat concentrated, due in part, in our opinion, to the harsh environment of operating in the waters done the coasts of Norway and Britain, through strong winds, waves, and spun out distances from shore. As a result, the technological demands of operating in this region well-adapted require deeper-pocketed owners capable of fielding OSVs able to withstand these conditions. Such boats are often contracted on a long-term basis. In 2007, GulfMark generated 79% of total revenues and 73% of section operating income from its North Sea-based operations. As of early 2008, the company owned 29 vessels in this place of traffic, mainly PSVs, and managed 14 other vessels, for a total of 43 vessels.

In contrast to the North Sea market, the Southeast Asia market (13% of operating revenues; 24% of segment operating profits) is a part fragmented, given its nature in the same manner with a coast market with pleasing shallow water opportunities silent to be found, be it so deepwater development is beginning to gain steam. Vessels tend to be on the smaller side. As of early 2008, GulfMark owns and operates 13 vessels in this market.