• Baker Tech is in strong position to survive the challenging landscape ahead in the Oil and Gas equipment services sector.
  • $128 million in cash with no debt, stock price trading at discount to Net Current Asset value.

With $130 million market cap, Baker Tech is trading on multi year lows as the industry goes through a challenging period as an Oil and Gas equipment provider.

Oil and Gas explorers are adjusting to a major shift in economics which is causing a ripple effect in the oil industry and Baker Tech wasn’t spared.

The Group has been affected by the oil glut and low oil prices, at the current price of oil (less than $60 bbl) offshore drillers are cutting back on exploration and production due to high breakeven cost. Offshore projects were defer and some cancelled as oil companies seek to conserve cash to ride out the downturn. Hence, these factors has impacted revenue and cash flows since 2015.

The company struggled to secure contracts and recorded net losses for Q1 and Q3, in Q2 the company was marginally profitable due to a one off compensation income from a supplier for defective material.

As a result its share price suffered a 50% drop since 2014.

Background

Baker Technology designs and manufactures upstream marine offshore equipment and service for oil and gas industry mainly, exploration companies in Singapore, China, Middle East and other parts of Asia Pacific. Under its subsidiary Sea Deep Shipyard Pte Ltd, It offers equipment, such as offshore pedestal cranes, steel products and components, including rack chords, and pinions; ancillary equipment comprising elevating systems, skidding systems, raw water towers, winches and mechanical handling equipment.

Baker Engineering complements Baker Tech’s core business segment by designing and constructing mobile offshore units and critical equipment and components. It manufactures Liftboats that are used for shallow water projects to perform maintenance on Oil and Gas well platforms.

BT Investments is led by Heath McIntyre, an experienced private equity and middle market buyout professional.

Offshore Marine Industry in Singapore

Unless you’re living under a rock, you would know by now that the oil crisis has impacted many oil & gas related businesses causing some to totally implode and go out of business.

In recent times, Ezra Holdings has been making headlines as investors bailed out on concerns that its huge debt may send it to bankruptcy. Not too long ago, in mid 2016, Swiber Holdings went under after the cash strapped company defaulted on its loans.

It has been messy and ugly so far, Singapore’s oil services industry is suffering from an oversupply of Offshore assets own by debt burdened, cash strapped shipyard and offshore equipment companies.

Despite stabilizing oil prices, some of these highly geared companies would be out of cash at a much faster pace before oil prices could make a comeback. These companies could follow the likes of Ezra and Swiber to liquidate assets at distressed prices.

A good majority of our SGX listed oil and gas related counters are trading at half of its book value, but most of which are also recording net losses and negative cash flows. I believe that the market has already priced in downside risk on most of these stocks and its upside potential presents good value. Hence, a sound strategy to pick good bargains would be to weed out companies that are highly geared, low in cash reserves and find ones that have the financial capabilities to ride the downturn.

Sentiment on Oil prices

Since its lows of $27 per barrel in Jan 2016 has rallied 100% to recent highs of $54 per barrel, the recovery was led by OPEC’s decision in Nov 2016 to reduce output by 1.3mm barrels per day and followed by an agreement with Russia to further reduce output a few weeks later. In recent updates, the oil ministers of Iran and Qatar raised concerns that OPEC’s work would be undone if the deal was allowed to expire in June 2017. They suggested that the cuts might need to be extended until the end of the year if the oil market is to balance, a sign that the adjustment process is taking longer than anticipated.

A statement by International Energy Agency (IEA), suggests global oil production fell by 1.5 mb/d in January, thanks to a huge contribution by OPEC members. The cartel’s high compliance rate of 90% to reduce output is a sign that the group intents to honour its agreement. The IEA also added that if OPEC maintains the cuts at current levels, global inventories could fall by 600,000 bpd through June.

A recent report by OPEC also highlights the impact of monetary policies on the oil market,  the Fed is looking to raise rates further, following the improvement of the US economy and a healthier labour market together with rising inflation of close to 2%.

This will eventually lead to swifter rebalancing of the oil market due to healthier inflation levels in major economies and to improvements in global economic growth.

But let’s not get too far ahead of ourselves, predicting oil prices is not my game. My point here is that the sentiment in the oil market has been improving and its governing bodies are at work to improve conditions.

Management

The Group is led by CEO, Dr Benety Chang who owns 51% of the company, he was the founding shareholder of PPL Shipyard. Benety and his brother Brian Chang led PPL Shipyard to be one of the largest rig builders in Singapore from 1970s to mid 1980s. In 2001, Sembcorp Marine acquire 50% stake in PPL Shipyard.

Well, I’m not going to blabber more about the CEO like I know him personally, but I wanted to know if the management is capable of making good decisions. So I went on to check its past acquisitions, here’s a summary:

  • York Transport Equipment Asia was bought for SGD 14.09mm and in 2007, TRF Singapore acquired 51% stake for SGD 16.575 mm, remaining 49% was sold in 2012 to SGD 22.17mm.
  • In 2007, bought 100% stake in PPL Holdings for SGD 3.6mm in cash and, in 2010 sold to QD Asia pacific for USD 116mm (ROI 3000%).
  • In 2008, acquired Sea Deep Shipyard for SGD 20mm with profit after tax of SGD 11.8mm (P/E: 1.7).
  • In 2011 & 2012 acquired 10.5% stake in Discovery offshore for SGD 18.8mm + SGD 1.4mm additional to increase stake to 20%, in 2013 sold for SGD 40mm (ROI close to 100%)

 

In my opinion, that’s quite a decent record in acquisitions.

The Group also has a record of maintaining strong cash reserves, in FY 2016; 111.7mm, FY 2015; 140mm, FY2014; 168.6mm, FY 2013; 205.8mm and FY 2012; 173.9mm. Comparatively amongst the O&G stocks listed in SGX, Baker Tech has one of the highest cash reserves to market cap.

Valuation

In these volatile and uncertain times, I shall not attempt to forecast cash flows of the business to build my valuation. The strongest selling point for this stock is its cash reserves, and based on a simple Net Current Asset Value, the stock is worth 0.92 cents per share. (30% discount to current price)

Obviously, this valuation is based on the assumption that the business does not take on huge debt to fund operations. I’ve estimated average CAPEX to be at least 10-15mm per year, assuming that the financial situation of the business remains unchanged, it will take approximately 7-10 years to deplete its cash reserves. My point is, based on my assumptions, Baker Tech has enough cash reserves to survive the tough economic climate.

Key Factors

  • The major factor will be the price of oil, if oil prices remain at depressed levels for too long (more than 5 years). Offshore explorers incur a high breakeven cost, oil prices has to be high enough for drilling projects to generate decent profits.
  • Oil majors increasing CAPEX, this will trickle down the supply chain as there will be more projects.
  • Increase in demand for jack ups and increase in utilization rates for jack ups and other offshore platforms.