The penny stock I’m writing about today has doubled in value over the last year. And I think its shares could keep rising.
Like most small-cap turnaround situations, this stock is volatile and carries a real risk of serious losses. However, I’ve been following this story for several years. I’m now confident enough to consider investing some of my own cash.
Gulf Marine Services
The company is offshore energy platform operator Gulf Marine Services (LSE: GMS). This UAE-based company rents out “self-propelled and self-elevating support vessels” to oil, gas and renewable energy companies.
These vessels are motorised platforms with legs that can be lowered to the seabed and lift them out of the water. They’re typically used for well service and offshore construction projects.
Gulf Marine Services’ share price has been on a tear over the last year, doubling in 12 months.
This share price growth has partly been driven by high oil and gas prices. But I think there’s a real recovery story happening here too. Revenue rose by 12% to $115m last year and the group reversed its 2020 loss to report an adjusted net profit of $18m.
Recent contract wins have increased the utilisation of Gulf Marine’s fleet to 88% in 2022. That’s significantly ahead of the 81% utilisation level achieved in 2021. Executive chairman Mansour Al Alami also says rental day rates are continuing to rise, signalling improving market conditions.
A big risk for a penny stock
If things are so good, why have I left it so long to consider investing in Gulf Marine? The short answer is that the company has too much debt and has spent several years struggling to stay afloat.
In 2021, the company took a big step towards normality. Demand for Gulf Marine’s fleet rose as the oil market recovered. Meanwhile, the group’s net bank debt was cut by $35m to $371m and refinanced onto lower interest rates. This combination of events allowed Gulf Marine to avoid defaulting on its loans and return to profitable trading.
Debt levels are still very high by normal standards, but I think the shares could be cheap enough to deliver attractive returns if things go to plan.
Gulf Marine’s big discount
As I write, GMS shares are trading at 6.5p. That’s about 70% below the company’s last-reported net asset value of 21p per share.
A discount to book value is often seen as a value indicator by investors. But it can also flag up risks. In this case, I think Gulf Marine’s discounted valuation reflects the debt risks facing shareholders.
The company’s net debt of $371m is nearly five times the £63m ($77m) market capitalisation of its shares. This tells me that Gulf Marine’s lenders are still in the driving seat. If debt repayments don’t go to plan, shareholders could still be squeezed out and left with big losses.
However, while the oil market stays strong, I think the risk of further problems is fairly low. In my view, Gulf Marine’s shares are cheap enough to deliver attractive gains if 2022 goes to plan. At current levels, I’d be happy to buy a small holding for my portfolio.
