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03-04-2015, 12:55 AM
Well, hindsight is always crystal clear, as they say.
Perhaps we should take a step back and ask a few questions:-
1) Was the sharp plunge in the oil price predictable? From my point of view, I'd say no, even in hindsight I would not have expected it. Hence, I do not blame myself for not foreseeing it. For such events, you have to buffer yourself against them by having a requisite margin of safety.
2) Does MTQ still generate FCF? Ultimately, what a Company is worth is the sum total of its FCF from now till eternity. The important question should be whether the Company can continue to generate FCF even with the oil price being so depressed. There are two main aspects to this:-
a) Their expansion to the middle east (Bahrain) should be doing OK as the cost of producing oil is very low there, so there should not be much effect on O&G activities in that part of the world. The slowdown would, however, affect their Singapore oilfield operations and also their customers from USA who send their equipment over to be repaired/maintained.
b) Does MTQ have high capex requirements? The last I checked, apart from money being spent on acquisitions of Binder and Premier Land and Sea (as well as Neptune), the business actually didn't require a huge amount of cash. They are not doing upstream E&P and they are also not building pipelines or using pipelay barges or OSV to service oil clients. So we can expect capex to remain low.
If we put these two factors together, it is reasonable to assume the Company can continue to generate a decent (albeit lower) level of FCF.
3) Was the recent profit guidance a significant cause of worry? Note that the writedowns were for goodwill impairment and that March 31 is MTQ's year-end, thus there will be the mandatory test for impairment which is conducted yearly. This is an accounting entry which writes down the value of the goodwill (SGD 29.8m as at Dec 31 2014). The debit goes to expense under exceptional items while the credit goes to goodwill under non-current assets. One must question if there is any cash-flow impact - in this case I believe the answer is no. However, the thing to be wary of is the reason for the write-downs. Since Engine Systems and Binder are under pressure, it is not unreasonable to expect a write-down. The question is whether their core business of oilfield engineering is still chugging along fine.
From the above, it can be observed that a confluence of negative events and pervasive pessimism has set in, and that the pendulum has indeed swung from one extreme to the other; where there used to be extreme optimism that only good times would be seen (and a certain analyst proclaimed that MTQ could be worth as much as $3.20, but that he was giving a "discount" so that it would be worth "only" $2.40).
I leave it to forumers to decide on the implications and ramifications of what I have mentioned.
Thanks and Regards.
Perhaps we should take a step back and ask a few questions:-
1) Was the sharp plunge in the oil price predictable? From my point of view, I'd say no, even in hindsight I would not have expected it. Hence, I do not blame myself for not foreseeing it. For such events, you have to buffer yourself against them by having a requisite margin of safety.
2) Does MTQ still generate FCF? Ultimately, what a Company is worth is the sum total of its FCF from now till eternity. The important question should be whether the Company can continue to generate FCF even with the oil price being so depressed. There are two main aspects to this:-
a) Their expansion to the middle east (Bahrain) should be doing OK as the cost of producing oil is very low there, so there should not be much effect on O&G activities in that part of the world. The slowdown would, however, affect their Singapore oilfield operations and also their customers from USA who send their equipment over to be repaired/maintained.
b) Does MTQ have high capex requirements? The last I checked, apart from money being spent on acquisitions of Binder and Premier Land and Sea (as well as Neptune), the business actually didn't require a huge amount of cash. They are not doing upstream E&P and they are also not building pipelines or using pipelay barges or OSV to service oil clients. So we can expect capex to remain low.
If we put these two factors together, it is reasonable to assume the Company can continue to generate a decent (albeit lower) level of FCF.
3) Was the recent profit guidance a significant cause of worry? Note that the writedowns were for goodwill impairment and that March 31 is MTQ's year-end, thus there will be the mandatory test for impairment which is conducted yearly. This is an accounting entry which writes down the value of the goodwill (SGD 29.8m as at Dec 31 2014). The debit goes to expense under exceptional items while the credit goes to goodwill under non-current assets. One must question if there is any cash-flow impact - in this case I believe the answer is no. However, the thing to be wary of is the reason for the write-downs. Since Engine Systems and Binder are under pressure, it is not unreasonable to expect a write-down. The question is whether their core business of oilfield engineering is still chugging along fine.
From the above, it can be observed that a confluence of negative events and pervasive pessimism has set in, and that the pendulum has indeed swung from one extreme to the other; where there used to be extreme optimism that only good times would be seen (and a certain analyst proclaimed that MTQ could be worth as much as $3.20, but that he was giving a "discount" so that it would be worth "only" $2.40).
I leave it to forumers to decide on the implications and ramifications of what I have mentioned.
Thanks and Regards.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
sold off in 2009.
go figure if 65c is an appropriate discount after the drastic change in macro environment. Personally I'll wait for more profit guidance, obvious signs of cost cutting/productivity improvements before considering.