4Q and 1Q will be weak, but secured funding and depressed pricing makes risk/reward positive

We see weak 4Q19 and 1Q20 results in SeaBird, order backlog is low and peers are lately suffering from reduced demand/delayed projects. However, the risk of equity issue in SeaBird has significantly reduced after the secured credit facility, which combined with the depressed stock pricing makes the risk/reward ratio attractive in the SeaBird share.

Weak 4Q results seen
SeaBird Exploration will present their results for 4Q19 on Friday, February 28. With estimated vessel utilization of just 44% and one of the problematic contracts extending well into October, we estimate the 4Q results to be weak: EBITDA of USD -1m on revenues of USD 12m. The company will take a restructuring charge of around USD 1.2m in 4Q, in addition, we assume a write-down of the Osprey Explorer vessel of USD 4m after the new management decided to decommission it.



Debt financing received – reduces equity issue risk
On the positive side, the risk of equity issue in SeaBird has significantly reduced after the company entered into a USD 16m three-year secured credit facility with Sparebanken 1 SMN on February 18. The proceeds will be used to repay the USD 5m bond loan expiring in June and to outfit the Fulmar Explorer vessel for seismic operations (we estimate the remaining cost at USD 6m) – hence, some USD 5m may be used for working capital/general corporate purposes. Based on our estimates, this should be enough to keep the liquidity in SeaBird through this weak period.

Replacing own old vessels with chartered-in newer ones
Seabird announced about a new chartered-in vessel in February: a two-year, plus 2x1 year options, "pay as you work" flexible charter agreement had been signed for the 2007-built vessel “Geo Barents” which will be equipped for source, 2D and niche 3D work – all areas of SeaBird’s operation. In parallel, the company will decommission its older vessel “Osprey Explorer” (built in 1985) while relocating equipment to the newly chartered vessel. This is in line with the earlier communicated strategy of SeaBird. It will now have a fleet of 6 vessels – 4 owned and 2 chartered. A final decision on another old vessel, “Harrier Explorer” (built in 1979), will be taken later – we expect it to also be decommissioned and to be replaced with another chartered-in vessel so to reach a 3/3 ratio of owned and chartered vessels. This way, SeaBird will have a more flexible cost base allowing to adapt to market fluctuations.

Low backlog more than discounted
The broader seismic market has improved last year with 30-40% increase in day rates, while OBN is taking a larger share of the seismic budgets. However, SeaBird’s order backlog is low with only 25% utilization secured for 1Q20, and SeaBird’s peers have recently suffered from a delay of projects or reduced initial scope of work from the clients – this includes OBN players Magseis Fairfield and Axxis Geo Solutions as well as the electromagnetic (EM) technology player EMGS.


Source: Norne Securities

Nevertheless, with debt funding secured and extremely depressed pricing (2021 P/E 1.0x, P/B 0.44x), the risk/reward is attractive in this stock. We keep our Buy recommendation with a lower target price of NOK 1.40/sh., down from 1.80, representing only 40% of the DCF value.



Analyst

Irmantas Vaskela
+47 21 95 37 48
irmantas.vaskela@norne.no