Medserv plc recently hosted members of the stockbroking community to a meeting at their head office within the Malta Freeport to provide further details on their 2011 financial performance and the current conditions in the oil and gas industry with a particular emphasis on developments in Libya. Additionally, the presentation also made specific reference to the internationalisation strategy taking place as Medserv seeks to expand its operations into new territories.
The equity also has the attributes of a growth company given the substantial business potential in the immediate years- Edward Rizzo
Medserv’s international expansion had started in 2006 when it set up a subsidiary in Misurata, Libya. This 60 per cent owned subsidiary had immediately proved to be beneficial for Medserv with strong contributions in 2008 and 2009 when the Libya set-up accounted for circa 35 per cent of overall group turnover. However, the performance from Libya declined substantially in the past two financial years, initially as a result of the Schengen visa dispute and the impact of the Gulf of Mexico oil spill on the industry, and more recently due to the revolution in Libya and the resulting closure of the Misurata base.
Following the initial foray into Libya and following requests made by some of Medserv’s major clients, the strategy was to seek further international expansion outside Libya.
In 2011, Medserv had made initial announcements on their two new overseas ventures in Sicily and Cyprus. During last week’s meeting, Medserv’s two executive directors provided an update on the new ventures with chairman Anthony Diacono specifically pointing to the exciting prospects in the Eastern Mediterranean.
Medserv set up a new company last year called Medserv (Cyprus) Limited retaining a 55 per cent shareholding and the balance held by their partners Ecofuel Cyprus. Medserv’s chairman indicated that the subsidiary in Cyprus was given a concession in the port of Limassol and the final lease agreement is expected to be signed in the coming weeks. Medserv Cyprus is already in touch with potential clients in the area ahead of the commencement of works in the months ahead following the recent successful gas explorations.
On the other hand, there was much slower progress in Sicily since the ban on oil exploration offshore Sicily is still in force. Medserv’s chairman indicated that this is expected to be partially or totally lifted by the end of 2012. Likewise, Medserv and its partners in Sicily are also already in contact with the major oil companies who have the concessions for the sizeable gas find in the immediate vicinity. Mr Diacono explained that although Medserv are seeking to service the client’s requirements from a site in Sicily, the possibility exists for these companies to utilise the Malta base due to the close proximity.
In addition to the near-term potential expansion in Sicily and Cyprus, Medserv’s senior management team also indicated that they are currently seeking to set up a new fully owned subsidiary in Libya. They are also carrying out some exploratory work for new markets following the successful mud-mixing operation at the Malta base during the fourth quarter of 2011. It was carried out for a leading American company operating in Tanzania.
Although a lot of importance was given during the meeting to their international expansion, Medserv’s executive directors also spoke about the Malta base and its fundamental importance to the overall financial performance in future years. Medserv’s clients which mainly comprise a number of international oil companies recognise that Malta is well placed to become a regional base for activities in the Mediterranean due to its strategic positioning and the safety provided for the storage of materials. Furthermore, Medserv is already seeking to expand its storage facilities available in Malta.
The 2011 financial performance was characterised by the assistance provided to the oil companies to evacuate workers from the offshore facilities shortly after the start of the Libyan revolution; the three-month contract with a major oil company during the third quarter of the year to restore facilities on three offshore rigs; and the highly profitable mud-mixing operation during the final quarter of the year.
Despite the encouraging turnaround in the financial performance in 2011 with pre-tax profits rising to €1 million in what were undoubtedly extreme challenging conditions for the business, it was obvious from the air of optimism among all senior members of Medserv’s team that the potential for the company to achieve record profitability levels in future years was very evident especially when work finally begins on the large exploration projects offshore Libya.
Following the large number of oil concessions awarded by Libya’s National Oil Corporation in earlier years, Medserv’s ultimate aim was always to service the substantial work supporting the offshore drilling operations. This work was intended to commence in 2010 but the Schengen dispute and the BP incident in the Gulf of Mexico led to a delay in the commencement of this work. Last year’s revolution then led to a complete suspension of the various drilling programmes. In view of the substantial work involved, the entire exploration programme involving over 100 wells was expected to last for a period up to 10 years. However, due to the importance of oil and gas revenues for the reconstruction of Libya, the exploration programme is now expected to be shortened. This should provide substantial work for the Medserv Malta base possibly commencing later on in 2012. Medserv indicated that preparatory work is already taking place. This backs their views that the much-anticipated work will commence shortly.
The substantial contract with a major oil company should provide the Medserv Group with a significant business pipeline in the coming years thus reducing the volatility in the financial performance evident since the company’s listing on the Malta Stock Exchange in 2006.
Medserv’s chairman indicated that the company has built up a much stronger brand name in the industry following the company’s involvement during the Libyan revolution and the assistance provided to two major oil companies to restore the offshore production facilities.
On his part, Medserv’s financial controller Karl Bartolo highlighted the beneficial tax considerations for the company’s shareholders with a €3 million deferred tax asset on the balance sheet as at December 31, 2011. Mr Bartolo indicated that this will relieve the company from any tax expense of up to €10 million in future profits. The financial controller also explained that this tax benefit increases as further investment is undertaken and also rises in line with inflation.
Fellow executive director Anthony Duncan concluded the meeting by displaying a graph of the dividend distribution by Medserv over the years. Since Medserv is a service company and therefore does not require substantial funds for capital expenditure, Mr Duncan intimated that the dividend policy could become more aggressive in the coming years. Mr Duncan explained that Medserv aims to continue to provide a more meaningful and steady income stream to shareholders but he argued that the equity also has the attributes of a growth company given the substantial business potential in the immediate years.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results.
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Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.