A rising energy tide should help to lift the shares of
Trico Marine Services
. Much like most energy service companies, Trico Marine has felt the past year's pinch of lower oil and natural gas prices in the form of reduced demand, but that may change as prices inch toward a bottom.
This Louisiana-based company provides support boats to the oil and gas industry, primarily in the Gulf of Mexico, the North Sea, Latin America and West Africa.
Its fleet of more than 90 vessels serves companies that explore and drill for energy, offering such services as transporting drilling materials, supplies and crews to drilling rigs and other offshore facilities; towing drilling rigs and equipment from one location to another; and supporting the construction, installation and maintenance of offshore facilities.
Near a Bottom
When Trico announced Monday a first-quarter loss of 13 cents a share, vs. the year-ago 5-cent profit, Trico President and CEO Thomas E. Fairley blamed it on a lousy operating environment. "The weakness in the Gulf of Mexico market, which carried over from the fourth quarter and continues today, is the biggest factor in our first-quarter results," he said.
However, pricing is getting close to a trough, presenting a longer-term opportunity for Trico investors. "Trico believes dayrates for Gulf of Mexico supply vessels have bottomed," says Jim Wicklund, oil services analyst at Banc of America Securities. He rates the stock market perform, and his firm has not provided banking services for the company.
Although a bottom in pricing doesn't necessarily mean a rebound, the energy vessel business appears to be better positioned at the bottom of this cycle than in previous periods of weakness. For example, Trico's average current supply boat dayrate -- the cost to use a vessel for a day -- is now $6,050, compared with only $3,000 in the second quarter of 1999, the last cycle bottom. The ability to hold pricing steady has resulted from better supply and demand balance and the decision not to put boats in service at uneconomical prices. That could mean a quicker recovery.
In addition, Trico's fleet in both the North Sea and West Africa is showing signs of life. North Sea activity is picking up from the traditional winter lull, and pricing has moved 5% to 10% higher since the beginning of the year. In South Africa, Trico is adding a fourth boat to the region and sees the potential for up to 10 boats in the next two years. Dayrates of the West Africa coasts are running about $10,000, more favorable than Gulf rates.
Looking for Better Signs
Even as Trico suggests the bottom may be near, the stock may not react immediately. In fact, the energy vessel business is a late-cycle performer, making it a bit early to look for an impending pop in Trico stock. "Dayrate improvements for supply boats have traditionally lagged improvements in dayrates for offshore drilling rigs as supply/demand fundamentals have generally been less favorable for boats," says Wicklund.
Yet, if drilling for natural gas accelerates in the Gulf of Mexico -- and it very well could if
production depletion continues -- Trico would benefit. "Over half of Trico's total fleet is currently located in the Gulf, providing significant operational leverage to an improvement in Gulf of Mexico activity," Wicklund says.
Until then, Trico stock may tread water. But, with the stock trading near its book value of $8 a share, there isn't a lot of downside risk. Wicklund notes that Trico stock has traditionally traded at about 1.1 times book, implying a price of about $9. However, at the peak of the cycle, the stock has traded at about two times book, suggesting a potential of $16.
That said, the company is expected to lose 29 cents a share this year, but post a profit of about 30 cents in 2003. Plus, combine the possibility of negative free cash flow in 2002 with its 50% debt-to-capitalization ratio and you get the picture: The stock could experience short-term stickiness around $8 a share, at book value.
However, when the environment in the Gulf of Mexico starts to improve, Trico will benefit. Given the difficulty in timing such a move, a small position in Trico at about $8 a share should yield profits in the coming year. While understanding the risks is key, I give Trico Marine two barrels. (For an explanation of our barrel rating system, see our
A Barrel Full of Earnings
Earnings from stocks in the Barrel portfolio continue to pour in, and the numbers generally look pretty good. A couple of highlights and thoughts from the week just ended:
I am changing the barrel rating on
, removing the barricade and giving the stock one barrel. Though I remain cautious about the company's outlook and changes in its strategy, Actrade reported a decent quarter. For the quarter ended March 31, it reported fully diluted earnings per share of 77 cents, vs. 60 cents in the year-ago quarter.
Two names that have been pushed lower in recent weeks deserve another look. First,
has lost 50% of its value in the past month and is now back to where it was when
initially profiled in October.
Even as the company sees short-term weakness in new account growth, the company still can earn 15 cents a share this year and 30 cents next year based on very conservative estimates. That growth rate should support the stock at current levels and should work back to about $10 in the coming months.
As noted before, weakness in
would present an opportunity to establish or add to positions. Nothing has changed in the stent business except that the hype of the last positive announcement has worn off. A chance to buy this stock around $40 is intriguing, especially as more good news is likely.
Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a
gift to commemorate your pick.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to