BORR - Seacor Marine Holdings Addresses Near-Term Debt Maturities - Buy

2023-10-03 05:14:51 ET

Summary

• Shares of leading offshore transportation services provider SEACOR Marine Holdings reached a new 52-week high last week.
• Three weeks ago, the company managed to refinance an aggregate $104.6 million in near-term debt maturities with a new $122 million secured credit facility provided by affiliates of EnTrust Global.
• Unfortunately, terms of the new credit facility are less-than-stellar with SEACOR being required to pay interest at a rate of 11.75% p.a., substantially above the average of the refinanced facilities.
• However, SEACOR managed to retain considerable financial flexibility as the loan conditions allow for prepayments at rather moderate penalty rates starting in late 2024.
• Given ongoing, strong market conditions, investors should use any major weakness to initiate or add to existing positions in SEACOR Marine Holdings stock.

Note:

I have covered SEACOR Marine Holdings Inc. ( SMHI ) previously, so investors should view this as an update to my earlier articles on the company.

SEACOR Marine Holdings or "SEACOR" is a leading provider of marine and support transportation services to the offshore energy industry.

The company operates a versatile fleet of 59 vessels, of which 57 are owned or leased and two are managed on behalf of unaffiliated third parties:

SEACOR's closest publicly-traded peer is Tidewater ( TDW ), a company I have been very positive on for quite some time now, based on the ongoing recovery in offshore drilling markets and persistent tailwinds from recent geopolitical events.

While Tidewater cleaned up its balance sheet in bankruptcy six years ago, SEACOR has managed to avoid Chapter 11 at the expense of ongoing debt and liquidity issues very similar to offshore drilling industry leader Transocean ( RIG ).

However, with dayrates for offshore drillings rigs and support vessels at multi-year highs, shares of offshore oil and gas service companies have rallied hard over the past twelve months with both Tidewater and SEACOR among the best performers in my coverage universe.

Just last week, SEACOR's stock price reached a new 52-week high of $14.14 before general market weakness caused shares to retreat alongside peers.

In early August, the company reported strong second quarter results with revenues, average day rates, direct vessel profit, and EBITDA all reaching new multi-year highs.

Last month, the company managed to refinance an aggregate $104.6 million in near- and medium-term debt maturities with a new $122 million senior secured credit facility provided by affiliates of EnTrust Global:

As a result, the company's debt amortization profile has improved considerably:

Unfortunately, terms of the new credit facility are less-than-stellar with SEACOR being required to pay interest at a rate of 11.75% p.a., substantially above the average of the refinanced facilities and also well above recent transactions executed by other industry players. Moreover, the company will have to repay debt principal in quarterly installments of $3.05 million.

In contrast, larger competitor Tidewater recently managed to place a $250 million unsecured bond with a 10.375% coupon while SEACOR's recent efforts to attract investors for a senior secured note offering at competitive rates had failed earlier this year as admitted to by management in the Q1 earnings release :

On April 21, 2023, the Company announced it was exploring a potential offering of new USD denominated 5-year senior secured bonds. The Company has determined not to pursue the bond offering at this time as the indicative terms and conditions were not sufficiently attractive for the Company.

In addition, all leading offshore drillers successfully accessed the bond markets in recent months at interest rates between 8.00% and 8.75%.

However, SEACOR managed to retain considerable financial flexibility as the loan conditions allow for prepayments at rather moderate penalty rates starting in late 2024:

Following the transaction, SEACOR's total debt amounts to $360.1 million with an average interest rate below 10%.

Please note that with the conversion option currently well into the money, the company's $35 million in 4.25% convertible notes due 2026 are likely to be converted into new common stock at a price of $11.75 per share.

At this point, I am still looking for SEACOR to generate between $60 million and $70 million in EBITDA this year and cash flow from operations to turn substantially positive in the second half.

With higher utilization and more vessels rolling over from legacy contracts to prevailing market rates, the company should achieve annual EBITDA well in excess of $100 million in 2024.

Please note that in contrast to many competitors, SEACOR expenses all maintenance and drydocking costs rather than capitalizing them on the balance sheet, which understates margins and profitability relative to peers.

Bottom Line

Admittedly, I would have preferred SEACOR placing a $200+ million secured bond at an interest rate well below 10% but at least the company retained the option to refinance at more attractive terms in the not-too-distant future.

With a substantial increase in profitability and cash flow generation anticipated over the coming quarters, investors should use any major weakness to initiate or add to existing positions in SEACOR Marine Holdings as the recovery in offshore drilling activity continues to be supported by persistent tailwinds from recent geopolitical events.

Given ongoing, strong market conditions, I am reiterating my " Buy " rating on the shares while keeping my price target at $15 based on a 2024 EBITDA/EV multiple of 6x.

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