Financial Results - 2019

This announcement contains inside information and is provided in accordance with the requirements of Article 17 of the EU Market Abuse Regulation.

 

1 May 2020

Gulf Marine Services PLC

('Gulf Marine Services', 'GMS', 'the Company' or 'the Group')

2019 Financial Results

 Financial Overview

	2019	2018
	US$m	US$m
Revenue	108.7	123.3
Gross (loss)/profit	(25.0)	47.0
Adjusted gross profit[1]	34.2	47.0
Adjusted EBITDA1	51.4	58.0
Asset Impairment	(59.1)	-
Loss for the year	(85.5)	(5.1)
Adjusted loss for the year1	(20.0)	(5.1)
Net cash flow before debt service3	41.9	5.9

 

 

2019 Financial Highlights

·    Adjusted EBITDA at US$ 51.4 million was ahead of the August Guidance of US$ 45-48 million[2]. While 11% lower than in 2018, this reflects lower revenues, partially offset by the impact of cost savings.

·    Net cash flow before debt service[3] rose to US$ 41.9 million (US$ 2018: US$ 5.9 million) due to disciplined management of capex and working capital, in the second half of the year.

·    Significant progress was made in reducing costs. The 2019 cost saving programme delivered US$ 13.0 million on an annualised basis during the period, significantly exceeding the original target of $6m set in March 2019. 2019 results reflect a saving of US$ 5.6 million, split between opex, capex and administrative expenses. The remaining savings will flow into the 2020 results.

·    Revenue fell by 12% to US$ 108.7 million (2018: US$ 123.3 million) reflecting lower rates and shifts in the utilisation mix.

·    Loss for the year before adjustment was US$ 85.5 million, mainly arising from the impact of impairment charges totalling US$ 59.1 million, on two of our E-Class vessels and two smaller charges on the Naashi and a S-Class cantilever, and US$ 6.3 million of restructuring costs.

·    Average day rates decreased by 14% across all classes of vessel, as 2017/18 legacy contracts expired. Market rates have been broadly flat over the last twelve months.

·    The Group is considered to be a Going Concern, but subject to a material uncertainty relating to the need to complete documentation relating to the restructuring of facilities announced on 31 March 2020 and the management of a tight short-term liquidity position. This is explained in further detail below.

 

 

2019 Operational Highlights

·    HSE Performance was stable with Lost Time Injury Rate at 0.19 (2018: 0) at the end of 2019. Total recordable injury rate was 0.29 (2018: 0).

·    Operational downtime remained low at 2018 equivalent levels.

·    Average fleet utilisation stable at 69% (2018: 69%) with underlying changes in the mix by vessel class. Average E-Class utilisation reduced, reflecting soft market conditions in North West Europe. S-Class and K-Class utilisation improved, reflecting strengthening demand in Middle East and North Africa (MENA). 

·    Eleven new contract awards were awarded, with a combined charter period of 13 years (including options), rising to 15 years including contract extensions.

 

   

2019 Governance Highlights

·    Board and Senior Management overhaul

o  New Chairman, Tim Summers (appointed April)

o  Two new Independent Non-Executive Directors (appointed June)

o  New Non-Executive Director (appointed March)

·    New Chief Financial Officer (CFO), Steve Kersley (appointed June)

·    Chief Executive Officer (CEO) replaced with Executive Chairman, Tim Summers (August)

·    Remuneration Policy revised to align with management performance

·    Requisitioned General Meeting held on 18 March 2019 at the instigation of a shareholder. Resolutions to appoint their nominees and remove certain existing directors were rejected by substantial majorities of shareholders

 

 

2020 Highlights and Outlook

·    The cost savings programme has delivered further gains during 2020 and is currently running ahead of plan.

·    Secured backlog is US$240 million, as at 31 March 2020, an increase of $20 million since March 2019.

·    Nine of the total fleet of 13 vessels already fully contracted for 2020.  Utilisation for 2020 currently stands at 76% (with 100% of our available capacity deployed at work for clients at 30 April 2020).  Contracted utilisation for 2021 stands at 49%.

·    Two E-Class vessels relocated from Europe to Middle East in Q1 2020, arriving safely and on schedule in February.

·    Non-binding term sheet agreed with lender syndicate in March 2020 to restructure the existing debt facilities, including access to new working capital and bonding facilities, underpinning liquidity. The term sheet also covers the restructuring of repayment profiles, term, and covenant levels.

·    A waiver, for deferral of the March 2020 term loan amortisation payments and December 2019 Financial Covenant tests, has also been received, each until 30 June 2020.  The Group's working capital facilities have also been rolled over until 30 June 2020.

·    Full documentation is expected to be completed such that new facilities are available to the Group by 30 June 2020.

  

 

COVID 19

·    The combination of COVID-19 and low oil prices brings significant operational and financial risks that are being experienced by all businesses across the energy sector. It is not possible to quantify the impact in the current constantly changing environment, however the high level of contracted utilisation (76% for 2020) and supply chain flexibility, provides some risk mitigation to GMS.

·    Downside scenarios are regularly assessed, and further cost saving measures are in place to ensure that the business is in a position to operate successfully while maintaining adequate liquidity. Current year-to-date[4] Adjusted EBITDA for Q1 2020 is slightly better than the Company's 2020 Business Plan.

·      The Group is closely monitoring potential counter-party risks and resultant liquidity and pricing pressures, with particular focus on the impact of the current situation on suppliers and customers.

 

Material Uncertainty Statement

·    Should full loan documentation not be agreed with Lenders by 30 June 2020, they would retain the right to call default on the loans. This would allow a majority of banks, representing at least 66.67% of total commitments, to exercise their rights to demand immediate repayment and/or enforce security granted by the Company as part of this facility at the asset level and/or by exercising the share pledge to take control of the Group.

·    The Group's short- term liquidity position is currently tight.  This will continue to require careful management until the loan documentation is completed and access is obtained to additional working capital facilities.

·      The need to complete the refinancing of the Group's banking facilities by the end of June and the Group's tight short-term liquidity position indicate a material uncertainty that may cast significant doubt as to the Group's ability to continue as a going concern. Notwithstanding this material uncertainty, the Directors believe that there is good reason to believe that final loan documentation will be completed in a timely fashion and that liquidity can be managed until such time as the refinancing of the Group's banking facilities completes. Accordingly, the going concern basis of accounting has been adopted in preparing the 2019 consolidated financial statements.

 

Tim Summers, Executive Chairman, GMS said:

"2019 was a difficult year for GMS, and we took decisive action on all fronts. Governance processes were reformed, the Board reshaped, and a new senior management team put in place. We made material reductions in our cost base, while at the same time delivering significant new contract wins.  We ended 2019 with EBITDA levels slightly ahead of our guidance.

 

After a year's negotiations, in principle agreement has been reached with lenders on the key terms of restructuring our bank debt which will give GMS renewed access to liquidity and a firm financial platform to move the business forward through 2020 and beyond.

 

Given the global conditions, and the present commodity price environment, it is hard to comment credibly on market outlook and evolution. However, notwithstanding current difficulties, major National Oil Companies are continuing to pursue multiple long-term tender offerings. Having relocated two E-Class vessels, from North West Europe to MENA, now already deployed for clients, we are well placed to participate in these opportunities.  Contracted utilisation for 2020, at 76%, is already in excess of that delivered in in 2019.

 

Market conditions remain challenging, but we are aware of the risks and are actively managing them. Our financial performance to the end of March 2020 is slightly better than our 2020 Business Plan.

 

I would like to thank the dedicated employees at GMS for their teamwork and achievements in difficult circumstances, particularly over recent months.  Throughout the Company, our first concern and priority is for the health and wellbeing of our colleagues."

 

Analyst presentation:

A presentation to analysts will be held today, 1 May 2020, at 09.00 UK time; for details to attend analysts should please contact Nabhan Malik at Brunswick: [email protected].

The live webcast of the presentation will be available on our website homepage at 09.30, and subsequently on demand on http://www.gmsuae.com/investor-relations/results-and-presentations

 

Enquiries

For further information please contact: 

Gulf Marine Services PLC Tim Summers Executive Chairman Tony Hunter Company Secretary Tel: +44 (0) 207 603 1515

Brunswick   Patrick Handley - UK Will Medvei - UK Tel: +44 (0) 20 7404 5959 Jade Mamarbachi - UAE Tel: +971 (0) 50 600 3829

 

Notes to Editors:

Gulf Marine Services PLC, a company listed on the London Stock Exchange, was founded in Abu Dhabi in 1977 and has become a world leading provider of advanced self-propelled self-elevating support vessels (SESVs).  The fleet serves the oil, gas and renewable energy industries from its offices in the United Arab Emirates, Saudi Arabia and Qatar.  The Group's assets are capable of serving clients' requirements across the globe, including those in the Middle East, South East Asia, West Africa, North America, the Gulf of Mexico and Europe.

The GMS fleet of 13 SESVs is amongst the youngest in the industry, with an average age of eight years. The vessels support GMS's clients in a broad range of offshore oil and gas platform refurbishment and maintenance activities, well intervention work and offshore wind turbine maintenance work (which are opex-led activities), as well as offshore oil and gas platform installation and decommissioning and offshore wind turbine installation (which are capex-led activities).

The SESVs are categorised by size - K-Class (Small), S-Class (Mid) and E-Class (Large) - with these capable of operating in water depths of 45m to 80m depending on leg length.  The vessels are four-legged and are self-propelled, which means they do not require tugs or similar support vessels for moves between locations in the field; this makes them significantly more cost-effective and time-efficient than conventional offshore support vessels without self-propulsion. They have a large deck space, crane capacity and accommodation facilities (for up to 300 people) that can be adapted to the requirements of the Group's clients.

Gulf Marine Services PLC's Legal Entity Identifier is 213800IGS2QE89SAJF77

www.gmsuae.com

Disclaimer

The content of the Gulf Marine Services PLC website should not be considered to form a part of or be incorporated into this announcement.

Cautionary Statement

This announcement includes statements that are forward-looking in nature. All statements other than statements of historical fact are capable of interpretation as forward-looking statements. These statements may generally, but not always, be identified by the use of words such as 'will', 'should', 'could', 'estimate', 'goals', 'outlook', 'probably', 'project', 'risks', 'schedule', 'seek', 'target', 'expects', 'is expected to', 'aims', 'may', 'objective', 'is likely to', 'intends', 'believes', 'anticipates', 'plans', 'we see' or similar expressions. By their nature these forward-looking statements involve numerous assumptions, risks and uncertainties, both general and specific, as they relate to events and depend on circumstances that might occur in the future.

Accordingly, the actual results, operations, performance or achievements of the Company and its subsidiaries may be materially different from any future results, operations, performance or achievements expressed or implied by such forward-looking statements, due to known and unknown risks, uncertainties and other factors. Neither Gulf Marine Services PLC nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. No part of this announcement constitutes, or shall be taken to constitute, an invitation or inducement to invest the Company or any other entity, and must not be relied upon in any way in connection with any investment decision. All written and oral forward-looking statements attributable to the Company or to persons acting on the Company's behalf are expressly qualified in their entirety by the cautionary statements referred to above.

Chairman's Review

Repositioning the business for the future

2019 was a year of substantial change at GMS. Governance has been fundamentally overhauled at both Board and Senior Management level. Significant progress has been made in driving cost savings while at the same time improving vessel utilisation and backlog. Agreement has been reached in principle with our lenders to restructure our banking facilities to give the business a stable platform, on which we can complete our business turnaround and recapitalise the business. During this time, we have continued to deliver safe and reliable operations for our customers.

 

The advent of COVID-19 has brought fresh challenges, in conjunction with low oil prices. Those risks to the business are being actively managed with formal processes in place at both Board and Senior Management levels. The progress made over the last twelve months, has placed GMS in a much stronger position to meet these challenges.

 

Governance

On 18 March 2019, the Group held a Requisitioned General Meeting at the request of a shareholder at which the resolutions to appoint their nominees and remove certain existing directors were rejected by substantial majorities of shareholders. This meeting took place in the context of the disappointing financial results of the Company. Following feedback from shareholders more generally and from shareholder advisory bodies, substantial changes were made to Governance and Management.

 

The entire Board has been replaced over the last 18 months. I joined as Chairman of the Board in April 2019, shortly after the appointment of Mo Bississo as Non-Executive Director in March. David Blewden and Mike Turner then joined the Board in June, along with Steve Kersley, as Chief Financial Officer.

 

In August it was announced that the Chief Executive Officer would be leaving GMS. Until his replacement has been appointed, I have taken on his executive responsibilities in addition to my role as Chairman.  All of the prior Senior Management team have now been replaced, and internal management processes and financial forecasting have been substantially overhauled.

 

The new Board are fully engaged with the business.  Remuneration policies have been changed fundamentally.  Annual bonuses are now fully at risk, 100% performance-based and are linked to a Business Scorecard which is driven solely by financial and operational metrics tied to the delivery of shareholder value. Its metrics apply in the same way for all eligible members of staff. This alignment underpins the drive towards a more performance-based culture focused on financial and commercial success.

 

The Long-Term Incentive Plans have similarly been restructured to tie share-based compensation to our Total Shareholder Return in comparison to oilfield services peers and the wider stock market.

 

Group performance

Adjusted EBITDA at US$ 51.4 million was 11% below that achieved in the previous year. This was mainly driven by a 14% reduction in average charter rates, compared to 2018 as legacy contracts have expired, to be replaced by new contracts negotiated in current market conditions.

 

Average utilisation, at 69%, was the same as in 2018. However, there has been a reduction in utilisation of our most profitable E-Class vessels, offset by increases in utilisation of the remainder of the fleet. This put further pressure on overall margins and therefore EBITDA.

 

While the Adjusted EBITDA outturn for the year has fallen since 2018, it exceeds the US$ 45-48 million guidance offered in August 2019, at the time of leadership change[5].  This reflects the impact of additional cost savings delivered in the second half of the year. The cost saving programme is running ahead of plan and is expected to deliver further savings to the Group's bottom line in 2020. This has been achieved by the delivery of further reductions in headcount, with a focus on eliminating senior management positions, the closure of offices and redundant facilities, and the reduction in costs of the supply chain through competitive tendering and contract renegotiation.

 

The position on backlog is also improving. GMS secured 11 new contracts in 2019 and these have added a total expected charter period of 13 years (including options) to the backlog. Contracted utilisation for 2020 is already in excess of levels actually delivered in 2019. Contract wins through the autumn have rebuilt confidence in the ability to deliver, in what remains a very a competitive environment.

 

 

Capital structure and liquidity

We have agreed a non-binding term sheet with the Group's lenders to restructure our existing debt facilities. Once implemented, it will re-establish access to our working capital facilities to support both short term cash flow and bonding requirements. It will also establish a loan repayment and financial covenant profile that is better suited to the current market environment.  We are in the process of completing the detailed loan documentation which we expect to have completed by the end of June. Over that period, we have received waivers for both our covenant and payment obligations under the existing agreements.

 

Whilst the absence of binding loan agreements and the Group's tight short-term liquidity position represent a material uncertainty, that has been highlighted in our Financial Statements[6], the Directors believe that, based on the progress made to date, there is good reason to believe that final loan documentation will be completed in a timely fashion; and that the Group's working capital and liquidity position can be managed effectively during that period.

 

Once this is completed, it will give the business a solid financial platform, which will allow us to focus on the business turnaround and reposition the business sustainably. The next phase is to complete the legal documentation over the coming months and prepare the Company to be ready for an equity injection as and when market conditions allow.

 

Commercial and Operations

We remain committed to providing all personnel and our customers with a high quality, safe working environment at all times and continue to maintain a focus on safe, reliable operations. The Lost Time Injury rate increased to 0.19, from zero in the previous year.

 

In 2019 there were no environmental incidents across our operations. We are taking measures to reduce our emissions going forward as part of a broader goal to align with the Paris Agreement objectives, by, for example, changing our refrigerant usage across all of our vessels and reducing our office and facilities footprint. All our vessels are already configured to run on low sulphur marine diesel.

 

Demand in Europe, where three of our Large Class Vessels were situated, has been disappointing. This has been reflected in utilisation levels, which, for our E Class vessels fell to 51% (2018: 73%). This reflects the phasing of renewables work, and a pause in oil and gas activity, as upstream customers reassessed their development plans.

 

By comparison, demand in the Middle East has remained firm. For our S Class and K Class vessels, utilisation has therefore improved as outlined below, balancing the decline in North West Europe, such that overall utilisation has remained flat.

 

These disparities in market conditions underpinned our decision to relocate two of our E-Class vessels to the MENA region at the end of December.  Both vessels arrived successfully in February. One is in the field already working on short-term operations, and the other is mobilising in the next few weeks.

 

COVID-19 and Outlook

Given the developments in the world at present, it is hard to comment credibly on market outlook and developments.  The Board reviews COVID-19 actions, impacts and forward plans as a standing Board agenda item, and Senior Management have daily (virtual) meetings to assess risks and adapt to the changing situation.

 

COVID-19 has been recorded on two separate GMS vessels, one of which is on a short term  contract. Both vessels are currently quarantined, as we await final test results.  They remain on hire and we expect any financial impact to be small.  There are likely to be other cases in the future, and procedures are in place to handle them.  There have been no material impacts on operations, although some government agencies and suppliers are operating more slowly than normal which is to be expected.

 

Preventive measures have been put in place to respond to the challenge of COVID-19, and its impact on oil prices.  All travel has been stopped.  Crew changes have been restricted offshore, and onshore staff are working virtually.  Further reductions have been made in the organisation size and remaining onshore staff are also working shorter hours on reduced salaries (75% of normal).  Directors have also volunteered a 25% reduction in fees.  I have taken a further 15% cut for a total of a 40% reduction in base pay.  Cash bonus payments due to be paid in Q2 2020 for 2019 performance have been deferred.  Critical supplier availability has been analysed to minimise the risk of disruption to operations.

 

The Group is also closely monitoring potential counter-party risks and resultant liquidity and pricing pressures, with particular focus on the impact of the current situation on suppliers and customers.

Notwithstanding the current environment, major National Oil Companies are continuing to pursue multiple long-term tender offerings. Having safely and successfully relocated two E-Class vessels, from North West Europe to MENA, we are well placed to participate in these opportunities.  Contracted utilisation for 2020, at 76%, is already in excess of that delivered in the previous year. Financial performance to the end of March 2020 remains slightly better than the 2020 Business Plan.  80% of the 2020 Business Plan revenues are covered by firm contracts, and this rises to 83% if contracted options are exercised.

 

Strong preventive measures are in place to manage the operational and financial impact of COVID-19 (and its impact oil prices). The Company is acting to manage financial risks and preserve liquidity.  The repositioning of the business to be resilient through difficult market conditions continues.

 

Conclusion

Our business has been through a challenging twelve months, but we are now beginning to see the benefits of restructuring: driving cost savings, improving operational efficiency and securing additional business. The provisional agreement reached with our lenders would, upon execution of binding documentation, provide much needed stability to our organisation as we move forward.  

 

2020 has brought additional and profound challenges, with the global impact of COVID-19 and significant oil price reduction.  Despite the tight short-term liquidity position, GMS is now in a much stronger position to face these uncertainties.

 

On behalf of the Board, I would like to thank all our staff for a year of hard work and for their continued commitment to GMS during this challenging period. I would also like to thank our stakeholders, including customers, suppliers, lenders and shareholders for their support during the past year.

 

 

Tim Summers

Executive Chairman

 

Financial Review

	2019	2018
	US$m	US$m
Revenue	108.7	123.3
Gross (loss)/profit	(25.0)	47.0
Adjusted gross profit[7]	34.2	47.0
Adjusted EBITDA1	51.4	58.0
Asset Impairment	(59.1)	-
Loss for the year	(85.5)	(5.1)
Adjusted net loss1	(20.0)	(5.1)
Net cash flow before debt service2	41.9	5.9

 

 

Introduction

Adjusted EBITDA, at US$ 51.4 million, was lower by US$ 6.6 million (11%) compared to the previous year. This was driven by lower revenues driven, in turn, by a combination of rates and utilisation mix, offset by reduced costs. It does, however, represent a significant improvement on forward guidance offered at the time of the half year results (US$ 45 - 48 million), due to further cost reduction initiatives, executed in the second half of the year.

 

Revenue reduced by 12%, mainly arising from the E-Class (US$ 16.1 million decrease) offset by an increase in revenue earned by the K-Class (US$ 1.5 million increase). Although average utilisation across the fleet remained stable in 2019 at 69% there has been a significant "mix effect" by vessel class. Utilisation of E-Class vessels fell to 51% compared to 73% in 2018. This reflects the challenging market conditions faced in the oil and gas sector in North West Europe as well as the phasing of renewable energy projects. Three of our four E-Class vessels were located in North West Europe and, of those, two were off hire for much of the latter part of 2019.

 

Against that, market demand in the Middle East has been relatively stable. There has therefore been an increase in utilisation across S-Class vessels to 97% (2018: 75%) and K-Class to 68% (2018: 64%), with five of the vessels now mobilised for long term[8] contracts. 

 

Overall average day rates deteriorated in 2019 across each class of vessel. E-Class has reduced by 11%, S-Class by 18% and K-Class by 4%. In the Middle East, this results from three legacy contracts which were secured before the market downturn. In North West Europe, there was only a modest fall (less than 5%) reflecting the seasonal mix of work obtained on one of our vessels. Market rates themselves have been largely flat over the last 12-18 months.

 

In March 2019 the Group introduced a cost saving programme as part of its repositioning plan, with an original savings target of US$ 6.0 million in annualised savings. The programme has so far delivered annualised savings of over US$ 13.0 million. Of this, US$ 5.6 million has flowed into 2019 financial results: US$ 2.7 million into operating expenses, US$ 0.5 million into capital expenditures and US$ 2.4 million into general and administrative expenses. The remaining savings are expected to flow through into 2020 EBITDA.

 

Operating costs decreased by 10% to US$ 43.3 million (2018: US$ 48.0 million). This has been driven by the implementation of the cost saving programme, and, in particular, the retendering or renegotiation of supplier contracts, the closure of redundant facilities and offices. General and administrative expenses, excluding depreciation and amortisation, decreased by 18% to US$ 14.1 million (2018: US$ 17.3 million).  This has been through the reduction in onshore headcount to 80 at the end of the year, compared to 111 employees in the previous year.

 

The loss for the year was US$ 85.5 million (2018: US$ 5.1 million) with the increase being primarily the non-cash impairment charge of US$ 59.1 million, from two of our E-Class vessels and two smaller charges on non-core assets, the Naashi and S-Class cantilever, the charge of US$ 6.3 million relating to restructuring costs and the lower EBITDA described above and depreciation described below.

 

Total capital expenditure for 2019 reduced to US$ 10.2 million (2018: US$ 23.2 million) as the business focused on essential capital expenditure only, whilst ensuring that all vessels remained operationally effective and met class requirements.

 

Total depreciation and amortisation increased to US$ 35.0 million (2018: US$ 29.5 million) primarily as a result of a full year's depreciation on Evolution which was introduced to the fleet in 2018 and also a full year of depreciation relating to modifications on Endeavour.

 

Agreement has been reached in principle with lenders to restructure the Group's debt facilities. Negotiations have commenced on detailed loan documentation which are expected to be completed by the end of June. Over that period, waivers have been received for both covenant and payment obligations under the existing agreements. Once complete, the new structure will re-establish access to our working capital facilities to support both short term cash flow and bonding requirements. It will also establish a loan repayment and financial covenant profile that is better suited to the current environment.

 

As an incentive to raise equity, if by 31 December 2020 the Group has not successfully concluded an equity capital raise of at least US$75m,  the term sheet provides for the issuance of warrants, subject to vesting over a number of years, which could result in the Banks owning a minority interest in the outstanding shares of GMS, as well as the incurrence of PIK interest from 1 January 2021.

 

 

Should final loan documentation not be put in place, Lenders would retain the right to call default on the loans, as at 30 June 2020, when the next set of amortisation payments fall due. This would allow a majority of banks, representing at least 66.67% of total commitments, to exercise their rights to demand immediate repayment and or enforce its rights over the security granted by the Company as part of this facility either through enforcing security over assets and/or exercising the share pledge to take control of the business.

 

The Group's short-term liquidity position is currently tight.  This will continue to require careful management until such time as the Group's banking facilities are restructured (currently anticipated in the scenario described above to be no later than 30 June 2020), and further access is obtained to additional working capital and bonding facilities.

 

The need to complete binding loan documentation in respect of the Group's restructured banking facilities and the Group's tight short-term liquidity position indicate a material uncertainty that may cast significant doubt as to the Group's ability to continue as a going concern. Notwithstanding this material uncertainty, the Directors believe that based on the progress made to date in this regard, there is good reason to believe that final loan documentation will be completed in a timely fashion; and that the Group's working capital and liquidity position can be managed effectively. They have therefore adopted the going concern basis of accounting in preparing the consolidated financial statements.

 

The impact of COVID-19 and the low oil price environment has been fully considered in making this judgement. While circumstances are continually evolving, the risks are mitigated by the high level of committed contracts underpinning current forecasts; preventive measures taken by management to mitigate operational risks; continued evidence of demand in core Middle Eastern markets; further cost cutting measures taken to improve financial resilience in the current environment.

 

**************

 

The following sections discuss the Group's adjusted results as the Directors consider that they provide a useful indicator of the Group's underlying performance.  The adjusting items are discussed below in this review and a reconciliation between the adjusted and statutory results is contained in note 31 of the consolidated financial statements.

 

 

Revenue and segmental profit

The table below shows the contribution to revenue and segment adjusted gross profit or loss (being gross profit excluding depreciation, amortisation and impairment) made by each vessel class during the year. 

 

 

Vessel Class	Revenue (US$'000)		Adjusted gross profit/(loss)* (US$'000)
	2019	2018	2019	2018
E-Class vessels	35,984	52,077	2,737	17,769
S-Class vessels	35,422	35,407	17,462	17,344
K-Class vessels	37,313	35,847	14,449	12,657
Other vessels	2	4	(497)	(752)
Total	108,721	123,335	34,151	47,018

*See Glossary

 

There has been a significant drop in the average utilisation of E-Class vessels. This reflects market conditions in the North Sea. The major reductions were attributable to Evolution and Endurance, with the vessels recording utilisation levels of 22% (2018: 93%) and 54% (2018: 92%) respectively.  Enterprise, which is the only vessel located in the MENA region, experienced an increase in utilisation of 12%.  Average E-Class day rates reduced by 11%; in North West Europe there was a 4% reduction reflecting the seasonal mix of work obtained on one of our vessels.  

 

There has been a significant increase in average S-Class utilisation at 97% (2018: 75%) with two of the three vessels now on long-term charter. This has, however, been offset by a reduction in rates, as legacy contracts negotiated before the market downturn expired during 2018 to be replaced by contracts that reflect current market conditions. Rates have been broadly flat for the past 12-18 months.

 

Utilisation for K-Class vessels has marginally increased from 64% in 2018 to 68%, and rates have stayed relatively stable, thus leading to marginal increases in both revenue and gross profit, for these vessels.

 

During the year, the share of total Group revenue derived from customers located in the MENA region increased to 75% (2018: 66%) with National Oil Companies (NOCs) being the principal client (over 50% of total 2019 revenue generated from NOCs). This trend is expected to continue, with the relocation of two vessels from North West Europe to MENA completing in early 2020.

 

There has been a switch in the revenue mix within the MENA region with the UAE now being responsible for 33% (2018: 14%) of total revenue, slightly more than KSA (30%), which was the biggest revenue contributor in 2018 at 44%.   

 

Revenue in North West Europe has declined, and the region contributed 25% to total revenue compared to 34% in 2018. 

 

Cost of sales, general and administrative expenses, restructuring costs

Cost of sales excluding depreciation and amortisation decreased by 10% to US$ 43.3 million (2018: US$ 48.0 million). The decrease of US$ 4.7 million is mainly attributable to the cost savings programme implemented during the year.

 

General & administrative costs are 18% lower in the year at US$ 14.1 million (2018: US$ 17.3 million) due to the implementation of the cost savings programme, and organisational simplification.

 

As at December 2019 the Group had incurred US$ 6.3 million of restructuring costs that were not directly related to our principal business activities and therefore have been excluded from Adjusted EBITDA. They comprise redundancy costs, professional and consultancy fees and expenses relating to the closure of office and port facilities.

 

Depreciation and amortisation included in cost of sales increased to US$ 31.3 million (2018: US$ 28.3 million) with 2019 including the full year effect of Evolution which was introduced into the fleet during 2018 and additional depreciation on modifications completed on Endeavour in 2018 for a long-term contract.

 

EBITDA[9] and Adjusted EBITDA

EBITDA and EBITDA margin for the year were US$ 14.1 million and 12.9% respectively (2018: EBITDA US$ 58.0 million/EBITDA margin 47%).

 

Along with the reduction in revenue, operating costs and general and administrative expenses, there was an impairment charge in 2019 of US$ 59.1 million. The Group has recognised an impairment charge of US$ 1.7 million on the sale of Naashi (37 years old) to reduce its estimated recoverable amount and an amount of US$ 2.8 million on vessels under construction.

 

In addition, as a result of prolonged deteriorating market conditions in North West Europe two E-Class vessels were impaired by US$ 54.6 million in total. This reflected the higher cost of these vessels relative to the rest of the fleet. The remaining vessels in the fleet have reasonable impairment headroom.

 

Adjusted EBITDA was US$ 51.4 million (2018: US$ 58.0 million) with the Adjusted EBITDA margin remaining steady at 47% (2018: 47%). Restructuring costs of US$ 6.3 million were mainly due to changes in the organisational structure during the period.

 

Finance costs and foreign exchange

Finance costs increased slightly in 2019 to US$ 32.1 million (2018: US$ 31.3 million).  Total debt was slightly lower, reflecting amortisation of term debt, but was more than offset by slightly higher interest rates.

 

During the period there was a net foreign exchange loss of US$ 1.2 million (2018: US$ 0.3 million gain).  The loss mainly arises from the movement in exchanges rates of the Pound Sterling and Euro against the US Dollar, with both experiencing declines in 2019 due to Brexit.

 

Taxation

Net tax charge for the year was US$ 3.7 million (2018: US$ 2.7 million). This reflects a US$ 1.8 million deferred tax charge with the Group no longer recognising a deferred tax asset due to insufficient future taxable profits expected to be generated in the UK.  An unrecognised deferred tax asset of US$ 2.4 million based on cumulative losses of US$ 12.3 million is disclosed in the consolidated financial statements. 

 

Earnings

The net loss for the year was higher than 2018 at US$ 85.5 million (2018: US$ 5.1 million) mainly reflecting lower EBITDA, an increased depreciation charge (including a US$ 59.1 million impairment) and an adjustment for restructuring costs of US$ 6.3 million.  After adjusting for exceptional items (impairment and restructuring costs) the Group incurred an adjusted net loss of US$ 20.0 million (2018: adjusted net lost US$ 5.1 million).

 

Capital expenditure

The Group's capital expenditure during the year was US$ 10.2 million (2018: US$ 23.2 million).  The reduction in spending reflects a combination of disciplined capital expenditure control, coupled with higher than usual client driven capital expenditures in the previous year.

 

Cash flow and Liquidity

Despite lower EBITDA levels and significant restructuring costs, during the year the business has delivered increased operating cash flows, which, at US$ 51.3 million in 2019, are substantially higher than that generated in the previous year (2018: US$ 28.9 million).  This has been driven by lower costs as well as rigorous working capital management. Renewed focus during the second half of 2019 on cash collections and effective management of supplier payments has resulted in a working capital inflow of US$ 11.2 million in 2019 (compared to an outflow of US$ 24.7 million in the previous year).

 

The net cash outflow from investing activities decreased in 2019 to US$ 9.4 million (2018: net outflow of US$ 23.0 million), primarily as a result of lower capital expenditure.  This has driven a significant increase in net cash flow available to service debt[10] which at US$ 41.9 million is significantly higher than in the previous year (2018: US$ 5.9 million). This has enabled the business to service term debt and amortisation, with only minimal draw on its working capital facilities.

 

Liquidity remains tight, reflecting the decline in run rate Adjusted EBITDA in the second half of 2019, the incremental costs of vessel relocation, and legal/advisory costs of negotiating the debt restructuring. As underlying run rate EBITDA builds over the next six months, liquidity is expected to improve. To navigate the short-term challenges, the following measures and mitigants are in place:  

·    Cash forecasts are reviewed on a weekly basis, at both an operational level and at senior management meetings.

·    Liquidity is formally reviewed on a routine basis as a standing item by the Board.

·    Over the last nine months, management have been successful in optimising terms with trade debtors and creditors using the strength of its business relationships.

·    The Group has a high level of committed contracts for its vessels that underpins Management current revenue forecasts for the next twelve months.  These contracts provide the Group with relatively high EBITDA margins from a core base of customers that typically have a strong credit profile and a reliable payment track record.

·    The Group has been successful in implementing a package of cost reductions measures in recent months that will reduce the Group's cost basis over the foreseeable future.

·    Liquidity over the next twelve months has been rigorously tested against a range of hypothetical downside scenarios, mainly driven by the potential market risks to rates and the delivery of additional business. Future cash flows and liquidity were found to be robust against the crystallisation of a series of risks that Management believe to be remote, when aggregated together.

 

GMS believes that the material uncertainty in respect of going concern that is described further below can be managed effectively and accordingly the going concern basis has been adopted in the consolidated financial statements.

 

Balance sheet

Total current assets at 31 December 2019 were US$ 47.9 million (2018: US$ 52.5 million).  Cash and cash equivalents decreased to US$ 8.4 million (2018: US$ 11.0 million), reflecting the timing of working capital payments and the lower draw down on the working capital facility drawdown compared to 2018 and careful capital spend management. Trade and other receivables decreased from US$ 40.9 million in 2018 to US$ 39.2 million as at 31 December 2019.  Trade receivables are mainly with NOC, IOC and international EPC companies, with over 96% of debt being aged between 0-60 days.  

 

Total current liabilities increased to US$ 438.3 million at 31 December 2019 (2018: US$ 436.6 million), primarily as a result of the amortisation of term loan debt, which has more than offset fluctuations in trade creditors and a US$ 5.0 million draw on our working capital facility. Term loan debt is currently included in current liabilities, split between payments due within one year and greater than one year while the Group is in breach of its loan covenants. It will be reclassified as a non-current liability, once formal loan documentation with lenders is executed.

 

Total non-current assets at 31 December 2019 were US$ 722.3 million (2018: US$ 802.9 million). This decrease is primarily due to the US$ 84.4 million decrease in the net book value of property, plant and equipment arising from depreciation which has more than offset capital expenditure.  In addition, an impairment charge of US$ 59.1 million has been recognised (see above). 

 

Net bank debt and borrowings

Net borrowings were US$ 390.1 million as at 31 December 2019 (2018: US$ 400.5 million), mainly reflecting the amortisation of term loan debt, which has more than offset reduced cash balances.

 

On 31 March 2020, the Group's banking syndicate granted GMS relief under its existing bank facilities in the form of (i) the rollover of certain loans, (ii) the waiver of applicable financial covenant tests and (iii) the deferral of the principal payments due thereunder, in each case from 31 March 2020 until 30 June 2020. Until the Group is able to successfully amend and extend the terms of its banking facilities including financial covenants, all bank debt continues to be classified as a current liability.

 

Going Concern

The Group has been in negotiation, with lenders, on a longer-term solution to its capital structure for the last twelve months. On 31 March 2020, it agreed a non-binding term sheet for the restructuring of its existing facilities.  This seeks to address both covenant levels and amortisation profile going forward.  It would also give the Group access to working capital and bonding facilities. Drafting of the detailed loan documentation with lenders is already underway, and the new facilities are expected to be fully in place by the end of June 2020. While the term sheet is not legally binding it reflects the commitment of our lenders to restructure the debt facilities in a way that will support the business as a Going Concern.

 

Should final loan documentation not be put in place, the lenders would retain the right to call default on the loans, as at 30 June 2020, when the next set of amortisation payments fall due. This would allow a majority of the lenders, representing at least 66.67% of total commitments, to exercise their rights demand immediate repayment and or enforce its rights over the security granted by the Company as part of this facility either through enforcing security over assets and/or exercising the share pledge to take control of the business.

 

The need to complete binding loan documentation in respect of the Group's restructured banking facilities and the Group's tight short-term liquidity position (described in the Cash Flow and Liquidity section above) indicate a material uncertainty that may cast significant doubt as to the Group's ability to continue as a going concern. Notwithstanding this material uncertainty, the Directors believe that based on the progress made to date in this regard, there is good reason to believe that final loan documentation will be completed in a timely fashion, and that the Group's working capital and liquidity position can be managed effectively to ensure that the Group can continue to continue to realise its assets and discharge its liabilities in the normal course of business. Please refer to Note 3 of the consolidated financial statements for further details.

 

COVID-19

 

The impact of COVID-19 and the low oil price environment has been fully considered in making this judgement. While circumstances are continually evolving, the risks are mitigated by the high level of committed contracts underpinning current forecasts; preventive measures taken by management to mitigate operational risks; continued evidence of demand in core Middle East markets; further cost cutting measures taken to improve financial resilience in the current environment.

 

Possible offer to acquire the Company by Seafox International Limited ("Seafox")

As announced in the RNS released by the Company on 30th April 2020, Seafox has announced that it made a non-binding proposal to the Board of GMS on 26 April 2020 regarding a possible cash offer for the entire issued and to be issued share capital of GMS by a wholly owned subsidiary of Seafox, at a value of US$0.09 per GMS ordinary share (the "Proposal"). The Board is currently considering the Proposal as of the date of this report. The Board has considered the existence of the Proposal in its assessment of going concern and has concluded that it does not alter the nature of the material uncertainties or the Board's conclusion in respect of the Group continuing to be a going concern that have been disclosed further in note 3.

 

Related party transactions

During the year there were related party transactions with our partner in Saudi for leases of breathing equipment for some of our vessels and office space totalling US$ 1.0 million. These transactions were at usual commercial terms.

 

 

 

Steve Kersley

Chief Financial Officer

1 May 2020  

 

 

GULF MARINE SERVICES PLC

Consolidated statement of profit or loss and other comprehensive income

As at 31 December 2019

 

		2019		2018
		US$'000		US$'000
Revenue	20	108,721		123,335
Cost of sales		(74,570)		(76,317)
Impairment		(59,125)		−
Gross (loss)/ profit		(24,974)		47,018
General and administrative expenses		(17,788)		(18,556)
Restructuring costs	21	(6,322)		−
Finance income		16		22
Finance expense		(32,063)		(31,301)
Other income		543		146
Foreign exchange (loss)/gain, net		(1,181)		266
Loss for the year before taxation		(81,769)		(2,405)
Taxation charge for the year		(3,696)		(2,698)
Loss for the year		(85,465)		(5,103)
Other comprehensive expense - items that may be reclassified to profit or loss:
Net (loss)/gain on cash flow hedges		(165)		685
Net change in cost of hedging		(1,337)		(923)
Exchange differences on translating foreign operations		164		(615)
Total comprehensive loss for the year		(86,803)		(5,956)
Loss attributable to:
Owners of the Company		(85,778)		(6,126)
Non-controlling interests		313		1,023
		(85,465)		(5,103)
Total comprehensive loss attributable to:
Owners of the Company		(87,116)		(6,979)
Non-controlling interests		313		1,023
		(86,803)		(5,956)
Loss per share:
Basic (cents per share)		(24.48)		(1.75)
Diluted (cents per share)		(24.48)		(1.75)

All results are derived from continuing operations in each year.