Company Overview - Mermaid Marine Australia Limited (MMA) is engaged in the provision of marine logistics and supply base services throughout all phases of the oil and gas development cycle. The Company operates in three segments: Vessels, Supply Base and Slipway. The Company operates approximately 40 vessels throughout Australia and internationally. It operates a fleet of vessels, which includes anchor handling tugs; anchor handling tug supply (AHTS) vessels; platform supply vessels; multi-purpose survey vessels; harbor tugs; barges; and accommodation vessels. MMA’s Dampier Slipway is located at the Dampier Supply Base and is capable of docking vessels up to 3,200 tons displacement. MMA operates supply bases in Dampier and Broome. Spanning 28 hectares, its Dampier Supply Base has a six berth wharf facility, open sealed lay down areas, undercover storage and offices capable of servicing the array of vessels engaged in offshore support activities.



Analysis – MRM has entered into an agreement to acquire the assets of Singapore based marine service company Jaya Holdings. We view the transaction positively as it ticks a number of MRM’s strategic boxes and will provide a sustainable earnings stream to MRM. MRM 1H14 profit of A$24.2mwas in line with guidance provided in November. MRM also reconfirmed guidance that FY14 would be in line with FY13’s A$60.36m. MRM confirmed a lift in activity in recent months signaling upside risk to FY14 earnings. We regard MRM as one of the clearest beneficiaries of the expected wave of Australian energy projects. We expect a returns focused management to continue to derive the benefits from this exposure. We identify four clear step shifts to earnings growth: additional vessels, increasing supply base utilization, additional new project approvals and further project expansion around Bowen Basin.


Dampier Supply Base (Source – Company Reports)

In our opinion, MRM represents one of the clearest domestic exposures to the substantial increase in activity within the North West Shelf (NWS) being witnessed now and an extension of growth into greater Asia through the Jaya acquisition. With earnings leverage to the upside on improved operating performance, MRM stands to benefit both directly from sustainability of activity within the NWS whilst also setting up a footprint to grow the business regionally. 


Northern Australian Oil & Gas construction pipeline (Source – Company Reports)

On 25 February 2014, MRM announced that it had entered into an agreement to acquire 100% of the subsidiaries of the Singapore listed Jaya Holdings for A$550m. Completion of the transaction is subject to majority approval by Jaya shareholders at an EGM expected to be held in April 2014. MRM has secured irrevocable undertakings from three of Jaya’s shareholders representing 53% of shares outstanding to vote in favor of the transaction, subject to no superior offer.


Broome supply base (Source – Company Reports)

We believe that MRM can continue to deliver strengthening pretax earnings increments in line with those of past years, through a combination of increased activity levels within the space, a progressive fleet expansion and the company’s continued focus on generating attractive returns from an asset intensive business. 



Some of the drivers going forward would be, PSV Expansion: MRM continues to expand the group’s drilling and construction fleet via entry into the medium sized Platform Support Vessel (PSV) market and to take advantage of emerging opportunities in its international operations. MRM has strategically targeted this segment to enhance fleet capability and capacity for earnings growth through the ability of these vessels to participate in drilling operations and to allow the company to further leverage its supply base assets. In our opinion the results delivered over the past few years have deservedly earned MRM a premium rating, a direct result we believe of a management focus on generating appropriate returns from capital intensive assets - a focus we do not expect to change.





The Australian oil and gas industry is on the crest of a capital expenditure wave ranging geographically from a number of projects  off the NWS in the Carnarvon Basin (Gorgon, Pluto, Wheatstone), through the Browse Basin,  the development of the PNG gas project and the suite of the potential coal seam gas projects in Queensland. While the latter are unlikely to attract MRM’s services, the WA based projects alone are likely to see in excess of A$100bn invested in the space in coming years. Long recognized as a highly strategic asset, MRM’s Dampier supply base has been a key driver of earnings growth in the past 18 months and while this now appears to be stepping off its peak, we expect the decline to gradual with a sustainable level of earnings and returns likely against the back drop of strong activity in the NWS. Long term the Broome supply base (a JV with toll holdings) stands to see a similar rise in activity as focus on the Browse Basin rises.


MRM Daily Chart (Source – Thomson Reuters)

MRM’s current offshore fleet has an average age of 7 years, below the global industry average of more than 10. A younger fleet makes MRM a preferred supplier of vessels, given the high cost of failure to oil service providers. Neither oil companies nor their major service providers have historically shown a desire to vertically integrate vessel operations, highlighting both the capital commitment and recognition of the capability required to manage a fleet. MRM has a clearly defined strategy to expand beyond Australia – the Jaya acquisition now formalizes this. The acquisition creates a substantial presence in Asia, with more than half the combined fleet deployed outside Australian waters. We see this strategic of the growth profile as significantly adding to the long term investment case of MRM.





We view the Jaya transaction as highly positive for MRM in the mid to long term. While activity around the Gorgon project appears to have peaked we expect a drop in FY15 revenue followed by a steady decline to a base rate built around supplies to Barrow Island and support of production assets. In contrast activity associated with Wheatstone, Ichthys and Prelude are all still on the rise, with MRM already having secured a number of contracts with these projects around both Vessel and Supply base services. Vessel revenues were up 24.2% which was above expectations due to higher mobilization costa associated with new contracts. An interim dividend of 5.5cents (fully franked ) was declared in line with 1H13. We are putting a BUY on MRM at the current price of $2.35.

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