Lamprell Plc - Jack-up Rigs

The Arabian Gulf is a low cost source of oil and gas production and the UAE is the hub for support services for the gulf region’s oil industry. 

And, in the UAE (and the region generally), Lamprell is the leading refurbisher and manufacturer of jack-up rigs and Floating Production Storage Offloading (FPSO) structures. 

Which is significant because the UAE is characterized by limited industrial refurbishment and fabrication facilities, and especially limited in facilities with quayside access. Why? Because the physical space for them is limited: a natural barrier to entry. (In this sense, the case for Lamprell echoes the case for Hawaiian Holdings).

In 2010, there were four competitors in this naturally protected market: Lamprell was the largest and the others were Dubai Drydocks, Gulf Piping Co., and Maritime Industrial Services. Lamprell acquired MIS in 2011, and now there are three.

Natural barriers to entry and consolidation should mean above-normal returns on capital. And it turns out that Lamprell returns 33% on its operating capital. It’s a good business.

Note: USD

Lamprell has a newish sideline in manufacturing vessels used in installing offshore wind turbines. It won a 320m contract to supply two such vessels to Fred Olsen, the Norwegian 

shipping firm. One of these ships has been delivered and the other will be, soon. 

Lamprell’s present share price problem is that this project wasn’t executed well: it was a fixed-price contract, there were cost overruns and supplier problems, and there will be late delivery penalties. The total cost of this snafu is in the neighborhood of $175 million (GBP 108 million).

One would expect, therefore, that this amount (41p per share) would have been knocked off Lamprell’s enterprise value.  The market has, spurred on by analyst downgrades and a suspension of the interim dividend, instead wiped 6x this amount from Lamprell’s implied value. 

The result has been to price Lamprell in such a way as to say that either (a) it no longer has a competitive advantage in its traditional oil and gas rig markets or (b) the banks will refuse to renegotiate its loan covenants and will pull it into bankruptcy. 

Both these arguments are absurd; the former implication is plainly wrong and the latter scenario is highly unlikely to come about: Lamprell’s order book stands at 1.5 billion; it is the rare company that finds itself in a leading, competitive position in an industry that will experience steady real growth for decades to come.

Lamprell traditionally converts 10% of revenue into earnings and easily earns 30p per share. The shares are worth more than 300p. My sense is that they will re-price in fits over the next twelve months -- which is why I included them in my UK picks for 2013.

Disclosure: No position