Please note that Thalassa is an oil & gas service company. When the oil price falls the ranking of companies to have contracts cut by E&P Operators will be: 1) geophysical service companies (offshore first then onshore) 2) drilling rig contractors (deep-water, mid-water, jack-up then onshore in that order) 3) supply & logistics services companies 4) production services
On oil price falls, E&P operating companies can, and do, react quite quickly. They don't, necessarily, wait to "take a view". The oil price has now, in my view, entered a down cycle. Caveat Emptor!
Secondly, the implications of the EU/US sanctions of Russia, and the sharp falls in the oil price, have impacted the business far more than anyone could have foreseen, but my failure (and that of analysts for that matter) to recognise this geopolitical risk was a major oversight.
Thirdly, the company had a share issue at 250p in October 2013, the proceeds of which were to be used to fund the large pipeline of future work. It was well backed by institutions. However, for the equity raise to enhance shareholder returns then Thalassa needed to steadily convert potential contracts into firm orders to deliver the profits to support its share price rating. The fact that it failed to do so led to a revenue warning in September. In hindsight, I should have bailed out at that point even though the share price had slumped to 150p, rather than issue my sell advice at 114p a month later.
Ultimately, the reason for investing in any company comes down to confidence and trust. In the case of Thalassa, it’s going to be a long time before either of these are restored in the minds of a large number of investors, myself included, and that’s a good enough reason not to hold the shares.
There are major lessons to be learned for all of us from the unravelling fiasco unfolding at Aim-traded marine seismic equipment provider Thalassa
(THAL: 55p). To recap, I was so uncomfortable with corporate governance concerning a related property transaction involving the chairman Duncan Soukup that I advised readers exit their holdings seven weeks ago (‘A conundrum to solve’, 7 October 2014). Other investors were clearly of the same view as shares in the company had slumped by over 11 per cent to 114p by the time my article was published. My investment column undoubtedly contributed to a sharp sell-off in the shares. It also prompted the board of Thalassa to have a meeting to discuss the issues I had raised.
By the time they released a London Stock Exchange announcement in defence, the shares had fallen to 80p (‘Thalassa defends its actions’, 22 October 2014). At the time net funds covered two thirds of the share price and the market capitalisation was almost 40 per cent below book value, so I concluded that “if you didn't manage to sell out, then I would hold onto the shares at the current price of 80p”. Given the modest drift in the price thereafter it’s fair to assume that most readers had already bailed.
It was just as well because yesterday the company announced a major profit warning resulting from its failure to convert a number of contracts and due to legal issues concerning a significant contract in the Russian Artic, delivery of which is being impeded by the current EU and US sanctions or export restrictions on Russia. So instead of delivering pre-tax profits of $4.5m and EPS of around 10p as analysts had predicted only a couple of months ago, Thalassa is heading for a small loss of $400,000 according to brokers. Expectations of revenues of $26.3m have been slashed to only $15.5m, or half the level reported in 2013.
To compound matters, analyst John Cummins at brokerage WH Ireland has slashed his 2015 estimates too, predicting a modest profit of $1m on turnover of $18.7m in 2015. The one positive is the company’s cash pile of $15m, or around £9.6m at current exchange rates. That’s the equivalent of 38p a share, or 70 per cent of the current share price of 54p.
But given the problems converting its pipeline – Thalassa’s board cites the fall in the oil price, economic uncertainty and ongoing budget reviews being carried out by energy companies as the key reasons – I see little reason to even hold the shares, let alone buy them even at this depressed level.
There are several lessons for me to learn from this affair. Firstly, I was too optimistic at the start of the year. Having seen Thalassa shares more than double on my buy recommendation in March 2013 to hit my 300p original target price I should have banked the gains instead of trying to eke out some more
I see I've been beaten to the comments regarding Dunc's canny trading and his booming property portfolio. I actually googled him earlier today and found all kinds of articles on page 1 of the search...I'll leave that for others to do themselves rather than commenting further.
With the cash burn, awful outlook and (what appears to be) self interested management, it's quite a compelling short. I don't yet have expertise to do so, but think it all looks quite bleak
yes...he cannot win (Kaiser Bill and Adolf at least had a shot at global domination)...I guess he is not interested in more than asserting Russia's power over the near abroad, and expects the West to blink as Chamberlain did over Czechoslovakia: Ukraine (esp E Ukraine) is a quarrel in a far away country between people of whom we know nothing
...he may be right (and ironically cos of Merkel's lack of enthusiasm for confrontation)
1) A possibility of new deals, maybe if the price of oil gets shored up. 2) Do you think Putin will bow down to the west even when the current sanctions are costing him 140Bn/year.I would have thought not. The bloke is a proud nutter. 3) Dunc may buy some shares. Maybe….he most likely will be able to afford it with the rent received from his property as new HQ.
they allowed their success and cash raised last year to lose discipline...they dropped their guard
...the grand new HQ...but more importantly the free spending on whatever, the EBT...the cash drain is acute now (I had thought they would have tightened their belts since mid 2014..but no lol)
...and with little visibility over where the cash profits are coming from, the sp may be in for a v tough time
...so waiting for ....1. great contract news ... 2. Putin seeing sense (seems unlikely: his sense is distorted by untrammeled power..the democrats are yet again struggling to keep up cf 1914 and 1930s) .. or 3. Dunc buying several million shares (from his well judged flip out lol)
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