Shares in MMA Offshore Ltd (ASX: MRM) are down 5% at the time of writing after the company released a trading update to the market this morning. Trading conditions in West Africa have been particularly tough, and the company has been forced to relocate two vessels to the Middle East and South East Asia, which will result in lower earnings and significant redeployment costs from those vessels.
MMA Offshore also sold one of its accommodation barges, which will boost cash but further reduce earnings from that vessel. Full year Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is now expected to be in the range of $20 million to $25 million (no previous forecast was made). Management again noted that the market conditions are turbulent and very difficult to forecast, depending as they do on the vagaries of the oil price.
But it's cheap?
I wrote just last week that MMA Offshore had potential as a turnaround stock if oil prices rose, due to its excess capacity and the fact that it was trading at a significant discount to its Net Tangible Assets of $1.70 per share.
I also wrote that I wasn't buying the company because market conditions were too depressed and there wasn't much hope of relief in sight. Today's full-year EBITDA forecast from management shows just how heavily the sector is being impacted, with forecasts of ~$25 million contrasting sharply with last year's full-year EBITDA of $75 million.
MMA is a high risk business, and although there appears to be significant upside on the table if oil prices recover, there's also no guarantee the company will be able to turn things around soon. Its revenues are largely a function of expenditure (service contracts, etc) from the likes of Woodside Petroleum Limited (ASX: WPL) and ConocoPhillips. But owing to wider market conditions, capital expenditure has been slashed to the bone and new contracts are intensely cost competitive.
MMA is probably best left on the shelf for the time being.
