SeaEnergy, lots of cash but no energy business....yet

SeaEnergy (SEA.UK)

Price: 26.25p (2/22/2010)

This is a stock I kept getting mentioned on Twitter and I finally got around to looking into it recently.  SeaEnergy is a Scottish company that used to own an energy company which they sold for £38.6m back in June of 2011.

When I first looked over the company's interim report I was a bit confused.  I kept seeing pictures of boats yet the long term asset account was non-existant.  I then looked for leases and didn't find that either.  I looked at the pictures closer and realized they were computer drawn, not real boats.  I surfed their website a bit more and discovered that the company is currently a shell of cash, and they hope to get into the business of servicing offshore wind farms with a fleet of service ships.

Balance sheet

SeaEnergy is a really simple company to understand, they're a pile of cash, plus a 24.68% stake in listed company Lansdowne Oil and Gas.  This is simple enough I'm just going to show my net-net worksheet below:

Looking at the spreadsheet there's obvious value here.  The shares are trading at 26.25p against a discounted net asset value of 45p and net cash of 42p.  What's attractive about SeaEnergy is that almost all of their assets are completely liquid.

What's really interesting is that management mentions with their interim results that they've restructured the balance sheet so they can return some of the cash to shareholders in the form of dividends or buybacks.  Management plans to make an announcement once the audit of 2011 results are complete, so I'd expect something in a few months.

Looking forward

The big selling point to SeaEnergy is the pile of cash that management has indicated they intend to return a portion of.  What I haven't discussed yet is the business plan that should soak up the rest of the cash.

Sometimes a value thesis will rest on a pile of cash and the fact the company is selling for less than cash, a thesis similar to the one for SeaEnergy.  The flaw with this is that unless the company plans on liquidating that cash has little purpose.  I prefer to buy businesses that are cash heavy, or selling below NCAV/cash, but rarely cash shells.  The problem with a cash shell is they either need to enter a business (using the cash), or liquidate which I mentioned is unlikely.  A typical net-net is just a dumpy business that has hit hard times and is trading at an absurd valuation.  A cash shell is similar to a venture firm, they have raised investment funds and are planning on launching a new business.

SeaEnergy has chosen to do a bit of both, give back some cash and use the rest to start a new business.  They have identified that offshore wind farms have some hurdles in maintainability that they feel could be solved with a fleet of service ships.

SeaEnergy plans on building ships customized specifically to service wind farms on the North Sea.  Conditions on the North Sea are rougher than other locations where wind farms currently exist making current servicing fleets ineffective.  In the shareholder letter they state that they plan on being in operation by 2014 but they are testing their concept this winter with a trial ship.

There really isn't enough information for me to go in depth on the potential for the business.  Management has put out a few slide decks discussing the problem and their potential solutions.  I like that they're taking on the servicing aspect of the renewable market.  Servicing isn't as capital intensive as constructing and maintaining the farm itself.  SeaEnergy has also talked to potential customers and they've expressed interested in their business model.  I want to press the pause button here to mention one thing. I've been involved in startups, and known a lot of startup guys, and let me state that ALL entrepreneurs talk to potential customers, and ALL potential customers express interest.  The problem is when payment is required that sudden expression of interest is more of a nice to have rather than a necessity.

What I don't like

The one thing that I really didn't like is that SeaEnergy is highly promotional, not unlike many US biotech cash shells.  The biotech's always have the next greatest drug that will cure the world of all disease with limitless profitability.  Unfortunately for most investors biotech's almost universally have two outcomes, 1) a buyout (rare, but good outcome) 2) management burns the cash, pays themselves well and investors are diluted to nothing.

SeaEnergy's website is all geared toward potential investors with lots of charts and news releases about how the company is poised for growth.  I'm not sure what the goal is outside of moving the share price.  I would think the management team would be intensely focused on the design of their ships rather than the share price.

Another intangible is that if management knew how explosive this potential servicing business was why aren't they happy to have the company selling below cash while they scoop up shares like crazy.  Instead they seem very concerned about the market discounting their share value.

This stock isn't without a conspiracy theory either.  There was a regulatory filing saying some third party was trying to scam shareholders into giving up shares or entering into phony warrant transactions.  I don't know how the UK works, but stuff like this in the US is always a red flag.  Since I'm not as familiar with the UK markets I'm going to just go yellow flag on this one.  This could be a result of the sometimes wacky investors who form a cult following around stocks like this.

I know these are intangible items, and for most investors these things might not matter much, but for me they're things I try to consider before an investment.

Summary

My last few paragraphs might have seemed a bit overly critical, but it's not common to find a company that's selling below cash without some sort of negative.  If there wasn't a negative aspect I'd be worried!

In short SeaEnergy is like buying into an overcapitalized venture investment.  There is too much cash for the future servicing business so some of it will be returned.  Future gains will be made as a result of the success of the servicing business.  The nice kicker here is that this is different from investing in a venture fund that's returning capital because this isn't your money that's being returned, it's someone else's initial investment being returned to you.

I'm going to watch SeaEnergy play out but hold off on an investment.  I don't know enough about the offshore renewables servicing business to take a gamble on it, and I haven't done very well investing in cash shells.  Some of the intangibles concern me as well.  I think this would be a great investment for someone who is more knowledgable with UK energy investments.

Talk to Nate about SeaEnergy

Disclosure: No position