Shares in oil services firm Gulf Marine Services (GMS) are down just 10% at 72p in the wake of a big profit warning at 3.04pm on 21 March ahead of 2015 numbers.

The reaction looks out of whack compared with the scale of the warning with 2016 earnings per share (EPS) expected to be 25% to 30% lower than in 2015. To put this in context Canaccord Genuity had penciled in EPS growth of 15% for 2016.

The relatively modest sell-off reflects the fact the market had, rightly as it turns out, priced in a warning. Something we alluded to in an article previewing these numbers when we also hinted at the scope for further pricing pressure.


The self-propelled self-elevating support vessels provider sources work from operating expenditure budgets – which are less vulnerable than capital expenditure spending – and therefore looked better positioned than a number of its peers. Its vessels are also cheaper to hire than the oil rigs which would otherwise be used to carry out maintenance so day rates should in theory have been defendable.

Chief executive Duncan Anderson tells SHARES the timing of the warning reflects discussions with a key client where, after resisting for some time, the company agreed to a ‘comprehensive discount’. Management admits there is still uncertainty over the full impact as it discusses contracts with other clients. The aim is to maximise vessel utilization at a rate of at least 85%.

As a result of the pricing pressure net debt is expected to peak higher at around $435 million, relatively close to net debt to earnings before interest, tax, depreciation and amortization (EBITDA) covenant levels of four times.

The business actually held up well in 2015 with utilization of 98% and EBITDA margins of 63%. Anderson notes the margin ‘will still have a five in front of it which is pretty good going’.

Barclays reduces its recommendation from ‘overweight’ to ‘equal weight’ and slashes its price target from 185p to 95p.

Analyst Mick Pickup comments: ‘To reflect guidance, we reduce utilization to ca85%, still healthy, and pricing by 20-30%, depending on class, noting that new orders have not been signed, especially for the new build Sharqi unit and the five contracts that roll in 2016F.

‘Hence uncertainty exists whether the new pricing level will prove appropriate. As such new contract announcements are vital for rebuilding investor confidence.’


Issue Date: 22 Mar 2016