Order book puts Neptune in good shape

DURING the past two years, Neptune Marine has been on a breakneck growth path, which has scared many investors who find it difficult to assess such a fast-moving target.

Growth was instigated by the acquisition of synergistic businesses both locally and overseas and the purchase of work boats to support its operations. Time will tell if the company paid too much for these assets, but Neptune's order book remains strong and the top-down outlook for offshore energy development remains firm.

Several Australian LNG projects are about to embark on their development phases, while new projects in the Gippsland Basin and new oil and gas projects along the north-west should provide a pipeline of new work.

In Asia, the Gulf of Mexico and the North Sea, new projects plus maintenance and repair work on existing facilities should also provide a strong outlook for the company's projected revenue.

Neptune Marine is a Perth-based marine engineering and services provider, principally working with clients in the offshore oil and gas industry. The company employs around 600 full-time employees in addition to contractors and maintains offices in: Texas, from where it services clients the Gulf of Mexico; Aberdeen, for clients in the North Sea; and also in Darwin and Singapore, from where it provides service to Australian and Asian clients.

The company is working in a high-tech and high-skill area of engineering and service provision, where high operating margins are achievable but expensive, high-tech gear is required to achieve results.

Neptune listed on the Australian Securities Exchange in April 2004, focusing on its patented underwater welding technology called NEPSYS, which is still part of its intellectual property portfolio. In 2007, the company embarked on an acquisitive strategy to broaden its business profile in the booming sector. Since June 2007 the company's revenue has jumped nearly 12-fold to around $200 million a year, while total assets have increased by about 270 per cent to more than $280 million and equity has increased by an estimated 216 per cent.

In the face of the subsequent global financial crisis, its frightening pace of expansion - during which net debt expanded from a cash surplus of $9 million to a manageable debt level of just more than $40 million - resulted in its share price plunging from over $1.30 in December 2007 to 30 cents per share in December 2008.

Neptune is organised into two divisions.

Its offshore services division offers commercial diving, underwater inspection, repair and maintenance services, NEPSYS underwater dry welding, marine surveying, pipeline stabilisation and protection, submersible remotely operated vehicle services, support vessels and rope access and tension netting services.

The project management and engineering services division offers subsea hardware design and fabrication, integrated project management for underwater construction and maintenance, subsea pipeline engineering, pipeline integrity management and oil and gas field development feasibility. It competes with and compliments companies such as Clough and other foreign engineering service providers.

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Neptune's client base reads like a who's who of the oil sector, including BHP Petroleum, Apache Energy, Clough, Shell, Chevron, Inpex, Woodside Petroleum, and Santos.

During the past two years, the company has taken on $110 million of new equity plus about $36 million of net debt after running its cash position down by about $12 million. The balance sheet still looks robust, even though working capital is just $3.9 million, gearing is a reasonable 22.4 per cent.

Operating cash flow has grown from a deficit in 2007 to an expected $22 million surplus this year. Cash generated, along with additional debt and equity has supported acquisitions totalling about $95 million and new plant and equipment totalling an additional $63.1 million over the past three years.

Neptune operates in a relatively high-risk arena where broken equipment or weather-related incidents can make a big impact on the bottom line. Reliance on big-ticket contracts can also raise its risk profile. Briefcase believes that Neptune has diversified its operations with good effect, reducing the level of operational contractual risks. Assuming that the oil price remains around $US60/bbl, a steady stream of new build work should arise, while the company should be able to keep its assets employed with routine maintenance and repair work, for the oil and gas industry, as well as other defence and offshore equipment.

The stock appears to have now begun a short-term consolidation around 55 to 58 cents. While there is a longer-term value target of 80cents/share, a pull back below 50 cents is also possible after such a strong recovery from 30 cents.

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Recent data out of the US's housing industry, combined with ongoing slow economic growth numbers coming out of Europe and Japan, point to a false dawn for commodity prices.

High copper and oil prices could easily retrace much of their recent gains and a 20 per cent fall over a couple of days is possible. This sort of pullback would provide some great trading opportunities.

Construction of houses and flats in the US continues to fall from a peak of around 2 million dwelling units a year in late 2005 to around 400,000/year currently. There is a lot of copper and aluminium used in house construction.

Activity numbers out of the US, combined with similar weak news from remaining OEDC nations, should act as a warning signal that the current price of copper, which has risen from around $US1.35/lb to $US2.10/lb, is not sustainable in the short term.

Aluminium inventories have risen to a historically high 10 weeks of consumption, but copper inventories appear low, only because the Chinese government is buying the metal as a way to diversify its financial reserve base away from holding the increasingly shaky US dollar. Copper is easier to store than aluminium, since it is less likely to corrode, it is worth about three times as much per pound as aluminium and takes up one third of the space, since it is three times as dense as aluminium.

Meanwhile, the oil market is awash with the stuff. Briefcase's prediction of $US65/bbl has been met, but the trajectory from here will not be straight up. Supply still outweighs demand and inventory levels are high. Falling non-OPEC oil production during the September quarter will bring the market back into balance, gradually reducing inventories, but this will only allow OPEC to relax its current tight production restrictions. The oil price could easily fall $10/bbl over coming weeks before regaining composure. Trading opportunities will abound.

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With the benefit of hindsight, it is clear that the gut-wrenching stock market collapse, which occurred globally over just two months during the December quarter of 2008, when the All Ords Index plummeted 32 per cent from 5,000 to 3,400 points, was in fact predictive of massive GDP falls seen around the world during the March 2009 quarter. Japan's economy fell by 4 per cent, equal to an annualised rate of over 12 per cent, while the UK and Germany had similar falls.

All of this is ancient history of course. Once corporate solvency is resolved, the stock market will be more interested in how earnings will respond during early 2010. The jury is out on just what is going on in China, where March quarter GDP numbers came out just 15 days after the end of that period, raising eyebrows about the accuracy of those calculations.

However, there can be no doubt that China is back in business with shiploads of iron ore and other goods now making their way to its shores, boosting the Baltic Dry Index and pointing the way for some optimism.

n Peter Strachan is the author of subscription-based analyst brief StockAnalysis. Further information can be found at Stockanalysis.com.au.