Marco Polo Marine: Termination of rig construction contract.

It has been more than a year since I blogged about how I managed my exposure to Marco Polo Marine. 

I believe that it is a good example of how we could size our investments not only based on our motivations and whether the investments meet those motivations. It is also a good example of what we could do if the investments' ability to meet our motivations should change over time.

Marco Polo Marine had a very good track record even through the Global Financial Crisis a few years ago. I was also impressed by their foresight to move into the business of OSVs and not just stick to tugs and barges. Things were looking good and they started paying dividends. 

To me, as an investment, Marco Polo Marine provided a nice combination of growth and income.

Without a working crystal ball, I definitely did not see an order for a jack up rig coming. It was a huge commitment and this is probably putting it rather mildly. Of course, if things were to pan out nicely, Marco Polo Marine would probably do even better to have an asset like a modern jack up rig which would bring their business to the next level.

However, I decided that the deal introduced a certain amount of speculation. I also decided that it would be difficult for Marco Polo Marine to continue paying a meaningful dividend with a heightened borrowing level. So, based on the way I allocate my resources, it would require that I thin my exposure to Marco Polo Marine and I did.

Of course, for a while now, we know that things did not pan out nicely, with the price of crude oil having plunged quite suddenly and plunged badly too. 

It does not look like things are going to improve until global demand rises enough to address the current oversupply of crude oil. Although the Cabotage Law in Indonesia will expand to cover jack-up rigs as well in the new year, there is no guarantee that Marco Polo Marine would benefit from it in such an environment. 

I still have a position in Marco Polo Marine and I actually added to this position in recent months as the stock price declined but only to a level at which I feel comfortable with a more speculative position. 

Now, with the news that Marco Polo Marine has terminated the contract with PPL Shipyard for the construction of the jack-up rig, what do I think?

The reason given for the termination is PPL Shipyard's "failure to comply with certain of its material contractual obligations". I believe it had to do with some quality issues found with the rig that is still under construction.

Apart from terminating the contract, Marco Polo Marine is also going to try and take back the 10% deposit it paid for the rig. Will they be successful? I don't know.

I do know that without the rig in the picture, Marco Polo Marine's balance sheet would be stronger. Their profit would also be higher. Yes, despite what some might think, Marco Polo Marine is still a profitable company.

In an environment of prolonged low crude oil prices, the rig order cancellation is probably more of a good thing, realistically. Of course, with the speculative overhang removed, how is Mr. Market going to treat Marco Polo Marine's stock? 

Sell? Buy? Hold? You tell me.

Marco Polo Marine's NAV per share is 52.8c and their EPS (9M FY2015) is 3.42c. 

4Q FY2015's results should be out soon and if we were to assume zero earnings in that quarter, at 19c a share, we have a PE ratio of 5.56x.

With the rig order cancelled and if there are no severe ramifications because of this, I think that Marco Polo Marine should eventually shake off the more speculative air that surrounds it as an investment.

See announcement: here.

Related post:
Managing exposure in investment portfolio.

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