Medserv plc has been in the news regularly in recent months. The company issued various company announcements confirming that it won three significant contracts with international oil companies; it published its 2013 annual financial statements; it announced new senior appointments to the board of directors and the management team; and it confirmed its decision to issue the second and final tranche of bonds under its €20 million debt issuance programme launched in the latter part of 2013.
At the time of the launch of the first tranche in September 2013, Medserv published its 2013 financial projections as well as its 2014 forecasts as required by local regulations. On March 28, 2014, when the company issued its 2013 annual financial statements it also had to explain any variances from its projections.
The 2013 financial statements confirmed the volatility of the oil and gas industry and the difficulties in projecting the start dates of contracts on which Medserv’s financial performance depends. In fact, revenue was 29 per cent below projections at €6.9 million and although the company succeeded in returning to a profitable position following the loss in 2012, the profit for 2013 was only €0.4 million compared to €1.6 million anticipated.
Notwithstanding this, Medserv’s chairman Anthony Diacono stated in the annual report that 2013 was the “most successful year for Medserv’s management team”.
Mr Diacono used this same statement at the beginning of the presentation to financial analysts last week. He explained that the objectives for 2013 were to achieve both pro-duct and market diversification for the group. The chairman confirmed that both objectives had been achieved. The new maintenance unit secured significant business offshore Libya contributing 24 per cent to total group revenue in 2013. Moreover, the focus to expand geographically in the Eastern Mediterranean culminated in the licence being granted to Medserv Cyprus to operate out of the port of Larnaca.
Mr Diacono claimed that the important strategic initiatives embarked upon in 2013 underpin the bright outlook for 2014 and beyond. Medserv announced in March that its 80 per cent owned subsidiary in Cyprus was awarded a multi-million-euro contract for three years by ENI (Cyprus) Ltd.
During last week’s meeting, Medserv’s chairman explained that he cannot disclose the size of the contract due to confidentiality clauses within the agreement. However, he remarked that it is Medserv’s largest contract secured to date. With respect to developments in Cyprus, Medserv’s chief operating officer Godwin Borg confirmed that works are ongoing at the base in Cyprus before the start of the ENI contract as from June 1, 2014. He explained that Medserv invested heavily in equipment in line with the contract specifications and claimed that the contract with a major international oil corporation awarded after a competitive tender process places the company in a favourable position to capture additional work offshore Cyprus. In fact, Mr Borg explained that Medserv will be submitting tenders for two more significant contracts by other international oil companies seeking logistics and support services before the start of their exploration activities in the near future.
In the annual report, the chairman claims that through the ENI contract, the base in Cyprus will become a very significant contributor to group revenues in 2014, 2015 and beyond. The revised forecasts for 2014 published last week as part of the document-ation in connection with the issuance of the second tranche shows that the Cyprus base is expected to generate 27.9 per cent of overall group revenues during 2014. Medserv’s chief financial officer Karl Bartolo confirmed that the contract with ENI stipulated quarterly invoicing in advance, which represents a strong recurring revenue for Medserv Cyprus during the duration of the three-year contract which may be extended by two more years.
Mr Bartolo also explained that the variance in financial performance in 2013 was due to the delay in two projects from the Malta base related to a contract for works offshore Libya, as well as the exploration programme of the Malta well by Genel Energy Petroleum Services Ltd. The Malta well was delayed from October 2013 to May 2014 while the contract with the major oil company for works offshore Libya has now been secured and there are strong indications that this project will start during the second half of 2014.
Another project included in the 2013 financial projections was a major maintenance contract for works on a platform offshore Libya which was also delayed. The CFO explained that the contract is expected to be awarded shortly and works will commence within a couple of weeks. This contract should also be completed by the end of the current financial year, and this is included in the revised projections for 2014 at a value of €2.1 million.
Revised profit expectations for 2014 are above the initial forecast prepared last September
The revised forecasts for 2014 show group revenues growing to €14.2 million, earnings before interest, tax, depreciation and amort-isation of €4.4 million and profit for the year after tax of €1.6 million. Medserv’s CFO confirmed that the major part of projected revenue was based on secured contracts in hand, and it is now purely a question of the timing of commencement of such works. Mr Bartolo explained that indications from clients point to delays of a few weeks rather than of many months. This business pipeline underpins the renewed optimism surrounding the senior management team after a number of challenging years following the revolution in Libya. In fact, the CFO pointed out that the revised profit expectations for 2014 were above the initial forecast prepared last September on the back of the change in revenue mix and the higher margins obtained from some works following the recent purchase of the equipment in Malta and Cyprus, which was possible from the bond financing obtained in September 2013.
The chief operating officer as well as the CFO spoke at length about the significant activity currently taking place at the Malta base. The warehousing facilities at their base within the Freeport are currently fully occupied, and in view of the increased demand due to a number of rigs being positioned in the centre of the Mediterranean, Medserv secured a further 30,000 sqm of warehousing facilities at Ħal Far, which is only 4km away from the Malta base. Mr Borg also expects this additional area to be fully occupied with oil and gas equipment in the coming months.
The construction of the additional warehousing facilities in Malta will enable the company to complete the solar farm in the coming weeks. Once completed, this will be the largest solar farm to date in Malta with almost 8,000 panels. Mr Bartolo explained that the company secured a favourable feed-in tariff of €0.17 for 20 years, which will represent a revenue stream of €530,000 per annum for the duration of the contract.
Although through the Malta and Cyprus bases Medserv is well placed to secure the provision of logistics support services to the major offshore oil and gas projects, the chairman concluded the meeting by explaining that the company’s strategy was to continue to identify new geographical areas to set up shore base facilities to service offshore operations of a handful of the major international oil companies. Mr Diacono said that this would be one of the major initiatives of Neil Patterson, who is an expert in the industry and who was recently appointed as chief strategic development officer of Medserv.
Following the various contract wins, market observers will be closely following Medserv’s financial reporting statements in August (in respect of the interim results) and in Q1 2015 to ascertain whether the company achieved its revised projections. Given that the major contract wins are expected to start at the end of Q2 and in the second half, the results for the latter part of 2014 should be significantly above the first-half figures.
Although Medserv was obliged to publish its financial projections in view of current regulations for bond issuers, other companies which only have their shares listed on the Malta Stock Exchange should similarly consider providing guidance to the market through financial projections. Although this would place additional obligations on such companies to explain the reasons for any variances, this is common practice overseas and greatly assists the market at large to gauge the company’s performance and its achievements in the light of its objectives. This is especially important for companies which are in a phase of growth and dependent on new contracts for generating higher revenue figures.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.