Thursday, December 31, 2015, 00:01 by Edward Rizzo
Medserv’s need for further funding was first disclosed to the market on October 8 when the company announced that it entered into a conditional share purchase agreement for the acquisition of the three METS companies for a total of $46 million. In this detailed announcement, providing information on METS and the terms of the proposed transaction, Medserv had clearly indicated that it aims to finance the acquisition through a mix of debt and equity financing.
The announcement did not provide details on the debt already within METS and how the $46 million will be split between an equity injection by existing or new shareholders and total debt funding. In the circular to shareholders, sent in anticipation of the extraordinary general meeting that took place on December 3, it was mentioned that the minimum amount of the additional equity would be of €15 million.
Finally on December 21, Medserv announced the terms of the rights issue and the bond issue after obtaining approval from the MFSA.
I will not go into the details of the bond and rights issues, the pricing of these issues or the merits behind the decision taken by the executive directors. Instead, my article is intended to shed light on Medserv’s ambitious growth strategy.
Shortly after the MFSA approval of the Dual Issue Prospectus, Medserv held an information meeting for financial intermediaries and chairman Anthony Diacono provided a detailed overview of the intended plans going forward.
Diacono started off the presentation by explaining the current services portfolio of Medserv. The core business to date has always been the support services provided to international oil and gas companies via the logistics bases. Currently, Medserv operates from its base in Malta supporting two International Oil Companies (IOCs) and other subcontractors; it provides support to ENI Cyprus via a three-year agreement (extendable for a further two years) from its base in Larnaca, Cyprus; and in 2015 it provided port facilities in Greece, mainly to assist a client in the safe anchorage of vessels.
Another service which was always provided to international oil and gas companies was the manufacture of drilling fluids which are required during exploration and/or production programmes. This ‘mud-mixing’ facility is available at the bases in Malta and Cyprus.
Recently, Medserv branched out into the provision of maintenance and engineering services. Over the past two years Medserv was awarded a number of contracts to provide maintenance services to platforms being used offshore Libya. Another contract awarded to Medserv some months ago via the Tripoli office will extend into 2016.
In 2014, Medserv also invested a sizeable sum into Malta’s largest solar farm as it installed 8,000 PV panels across its Malta base generating annual revenue of circa €520,000.
The long-term plan of Medserv is to increase its geographic presence, strengthen its portfolio of services and expand its customer base further with additional international oil and gas companies and subcontractors.
The strategy therefore continues to focus on strengthening the core business, i.e. the support services provided to international oil and gas companies via the logistics bases. Apart from the present facilties in Malta, Cyprus and Greece, Medserv is seeking expansion into other regions. During the meeting, the chairman confirmed that Medserv is currently seeking a strategic partner to set up a base in Egypt after it was approached by two major IOC’s ahead of some important tenders being issued. This coincides with the announcement made by ENI a few months ago that it discovered the “largest ever” natural gas field in the Mediterranean Sea offshore Egypt.
The ‘supergiant’ well (the Zohr field) is the largest gas discovery ever found in Egypt, as well as in the Mediterranean Sea, and could become one of the world’s largest natural gas finds. It was also reported in the international press that the Egyptian General Petroleum Corporation agreed with ENI to start producing from the Zohr gas field by 2017.
Earlier this year, Medserv had also mentioned the possibility of works in Portugal. The chairman stated that a tender was submitted and if it is awarded to Medserv, a temporary ‘pop-up’ base will be set up to assist the IOC in the exploration of one well. Although this may not be a sizeable contract at the outset, it could become more beneficial should the exploration prove successful.
A possible expansion of another support base, this time in the Caribbean, would be more sigfnicant in terms of geographic expansion. The chairman claimed in the recent meeting that a tender for the setting up of a logictics support base in Trinidad & Tobago had been submitted to support the large operation of BP involving several offshore platforms and drilling activities. Medserv is reportedly now also on the global list of approved logistics contractors of BP. This will also help to reduce Medserv’s current dependency on ENI given the significant work by this IOC in the Mediterranean. The prospectus also indicates that earlier this year Medserv made a proposal to the National Energy Corporation of Trinidad to provide and operate a mud plant and bulk silos/brine plant within one of their ports.
Meanwhile, the imminent acquisition of METS fits in perfectly with Medserv’s long-term plans since it helps in widening its geographic presence and achieves diversification in its service portfolio, given the focus on precision engineering. It also extends the client base given the various blue-chip clients utilising the services of METS.
Medserv also aims to explore a number of cross-selling opportunities via the METS acquisition. One of the main attractions of the acquisition is the ownership of the VAM licence in two of its locations allowing METS to provide pipe threading services. This is reportedly a very highly specialised offering and the licence is difficult to obtain given stringent criteria including expertise and volumes of pipes to be serviced. Following the acquisition of METS, Medserv are confident that they will be able to obtain such a licence also for the Malta base within 18 months. This will enable Medserv to introduce this service across the Mediterranean region thus opening a new line of business in a region where exploration and production activity in the oil and gas sector is expected to boom in the next couple of years.
Another cross-selling opportunity is the manufacture of drilling fluids, which is a core competence of Medserv and which is currently not provided by METS.
Additionally, via the METS acquisition, Medserv also intends to explore the possibility of providing services to the major IOCs seeking to work on new projects in Iran. Iran is the world’s fourth-largest holder of crude oil reserves and some very significant exploration/ production contracts (both onshore and offshore) will be available to the IOCs once economic sanctions are lifted in early 2016.
During the EGM held on December 3, which was convened to approve among other resolutions the METS acquisition, a number of shareholders present questioned the financial benefits expected from this imminent acquisition in the Middle East, especially given the business downturn experienced over the past two years. Unfortunately, no additional information on the current trading performance was provided in the Dual Issue Prospectus published last week.
In the coming months Medserv’s shareholders will be eagerly awaiting the publication of the company’s 2015 financial results to get to know the extent of the superior financial performance achieved compared to earlier forecasts for the year and more importantly the publication of the Financial Analysis Summary due by June 30, 2016 providing the financial projections of the Medserv Group for 2016. This should also include the initial contribution from METS. Moreover, shareholders will be expecting news on developments related to the company’s ambitious growth strategy as well as further updates with respect to possible strategic investors following the EGM held on October 12 which authorised the directors of Medserv to divulge confidential information to such investors.
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 company/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, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2015 Rizzo, Farrugia & Co. (Stockbrokers)Ltd. All rights reserved.
Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
SOURCE
