MORAM - Monthly update, $GOGO deep dive, Kistos latest acquisition & Earnings analysis ($ONEW,..)
Sunday 7th May
This week we have published our traditional quarterly summary where we analyze the situation of all the companies published in the last 12 months. From now on, we will update this monthly and include a brief update on the market situation. In this end of April update, we talk about Golar, Kistos, Italian Sea Group, Jadestone, Good Times Restaurants... (well, all those in the photo).
Additionally, we discuss in detail the results of OneWater Marine and Vermilion Energy, both better than expected, but especially $ONEW. Anticipating their competitors in margin normalization (pre-Covid) has allowed them to achieve excellent results and position themselves well for the important quarter of the year (the current one).
As the main articles of the week, we have a detailed analysis of Kistos' latest deal in Norway. We analyze the assets, production profile, deal conditions (payments, warrants, contingent payments (and explain everything clearly), how the resulting group looks, and model the EBITDA for the coming years with all the information currently available.
Moreover, we bring a very detailed investment thesis (deep dive) on an American small-cap in the Wifi communication sector, which is growing significantly and trades at quite attractive multiples.
Before moving on to the articles, as you already know, last week we launched our premium service for retail investors to complement our B2B side (mainly aimed at Fund Managers and Family Offices). To promote its launch, and until Monday, May 22, we are offering a 10% discount on the price of the 2023 subscription, with the code Welcome10 . This 2023 subscription option will close in June. Additionally, we believe it makes sense to reward the confidence of those who support us from the beginning. Therefore, for subscribers in this first month, we will apply a discount in the coming years.
Important: Pricing on the website is more attractive as Stripe fees are much lower. Also, the Welcome10 code applies only on the website for the 2023 subscription
Introduction to the Mime Petroleum Acquisition
Last 19th April, Kistos acquired Mime Petroleum, a Norwegian-based oil company which was under financial stress due to the delays of its main project (Balder Future project) and the delayed production from Ringhorne wells. Its main equity holder (Bluewater – a Private Equity firm), decided after injecting $134MM in the project in the last years, to disinvest from some O&G assets and Mime, due to all the delays and the needed to inject more equity was put on sale.
Considering the equity situation (having to provide capital that their main shareholder says they won't contribute), it is now clear that the bondholders are the ones holding the power since the situation requires restructuring (Mime was breaching covenants in March due to lack of funds). It is evident that the negotiation has been complex, which is why it has taken over a year. However, at this point, A. Austin negotiated with the bondholders and reached an agreement to acquire Mime (the transaction structure is explained later).
Obviously, Mime's bonds were trading at a significant discount (a portion of them would have been converted to equity under conditions in which Bluewater's equity would have been completely diluted).
Mime Petroleum Assets
Mime Petroleum is a Norwegian company that has non-controlling interests in the Balder joint venture (comprising the Balder and Ringhorne fields - 10% interest) and a 7.4% stake in the Ringhorne East unit, all operated by Var Energi A.S.A. The acquisition will add 24 MMboe of 2P reserves (operator estimate) plus 30 MMboe of 2C
Currently, it is producing around 2000boe/d from Ringhorne, and this will increase considerably once the Balder X project is on stream (expected COD in 4Q24).
The problem for Mime has been that the Balder X project requires the construction of an FPSO, which has experienced significant delays, as well as the drillings of Ringhorne. (Balder X comprises the Balder Future and Ringhorne Phase IV drilling projects and is designed to extend the life of the Balder Hub)
The Opex for these assets is estimated at around $26 per barrel, although we have been a bit more conservative. In addition, a drilling campaign is being carried out in Ringhorne (which, as we have mentioned, is experiencing significant delays). Phase 3 included 3 workovers and 7 new wells, and Phase 4, which should start in 2Q23, includes 5 new wells. These drillings are expected to increase Mime's production by 2000 bbls and to be connected before the Jotun FPSO starts producing at the end of 2024. Although the company's latest comments (before being acquired by Kistos) indicated that this might be extended until 2025, we understand this was due to a lack of funds and Kistos solves this problem.
Economics of the new Kistos, EBITDA model, analysis of what to expect in the coming months on the Premium side
1Q23 Earnings analysis (Micro summary)
Vermilion reported its 1Q23 results, with higher than expected production (82,455 boepd) but down YoY. The FY23 guidance is set at 84,000 boepd, with the second half expected to be higher than the first half, primarily due to Australian production. FFO amounted to C$256MM or ~1.56 per share, while FCF reached C$98MM.
Some highlights include Mica's overperformance in Canada, increased operating costs in Europe (France and Netherlands), and Australian premium production to be shuttered in 2Q23. The current net debt stands at C$1.37 billion, with a year-end target of 1 billion and plans to distribute 25-30% to shareholders.
During this period, Vermilion repurchased 1.6 million shares, although diluted share count increased slightly. Additionally, 15% of the production (NoR) is hedged, with 49% of European gas covered.
OneWater Marine reported a strong quarter, maintaining an aggressive FY23 EPS guidance of $7.75. The company achieved revenue of $524MM, a gross margin of 28%, same-store sales growth of 11%, and an EPS of $1.56.
Some interesting insights from the conference call include that inventories peaked in February, putting OneWater Marine ahead of its industry peers. The company adjusted margins down in advance, resulting in outperformance compared to competitors like MarineMax. The forecast for boats under 40ft is much better than for those over 40ft, particularly in the sub-20m yacht segment. Additionally, the service segment is expected to account for around 20% of revenue in FY23.
Full details and thoughts —> Premium
Also, Autopartner (one of the thesis presented to our investment competition has released its 1Q23 results) carlosag_92 (Twitter) has analysed them on Moram
$GOGO investment thesis
Gogo’s history dates back to 1991, when Jimmy Ray came up with the idea to bring connectivity to the skies. The company was founded with the name of Aircell. In the early years, Gogo’s technology relied on ground-based towers to provide connectivity to planes flying over the United States.
With their IPO in 2013, they raised almost $200 million to feed the ATG network development with the final objective of enhancing the Commercial Aviation business. The service provided had limited coverage and speed, and the final result was criticism from passengers complaining about Gogo’s connectivity being slow. This technology has evolved during the years introducing satellites to provide better internet access to planes.
Since the IPO, the company could not turn their good competitive position in a growing market into positive earnings and free cash flows. With this situation, the shareholders named Oakleigh Thorne CEO of Gogo to turn around the business situation as he had already done in two of his previous experiences in 2018.
In 2020, Gogo sold their Commercial Aviation business for $400 million in cash to Intelsat. This year, this segment made $233 million in revenues. The company used this proceeds to i) Reduce the net debt position. The net debt before the divestiture was $1,170 million. ii) Invest in growth opportunities in the Business Aviation segment. As part of this transaction, Gogo entered into a 10-year agreement with Intelsat by which the later company will have exclusive access to Gogo ATG services for the Commercial Aviation market in North America, subject to minimum revenue of $177.5 million for Gogo. Less than 5% of the annual revenue comes from the Intelsat agreement.
After the divestiture, the company had a fraction of the sales, but since then they have been able to bring up margins, reducing their capital intensively and bringing for the first time positive free cash flows by focusing on a niche profitable market.
During all these years the company has achieved to position themselves as the front runner in the inflight connectivity market, with long term and stable relationships with the nine OEMS, multiple dealers and with 7,046 aircrafts equipping their products.
As we will look more deeply in the next section, during 2022, Gogo has been investing in deploying the 5G connectivity, expected to be launched in Q4 2023. 2024 will be their last investment year as they will be launching another initiative to bring the business to an international scale and improve their connectivity performance in North America. Despite the strong investment, we expect a double-digit growth with positive free cash flow during this two-year period.
The future is promising and is in path to achieve their ambitious objectives, generating great cash flow that will eventually distribute to the shareholders.
Gogo provides inflight connectivity to the passengers in business aircrafts in the US and Canada. Before starting digging into the business model it is worth understanding how you can enjoy Wifi online. The technologies used are either Air-To-Ground (ATG) or Satellite systems. In an ATG, there are towers on the ground that transmit signals to the aircraft, and the aircraft works as a hotspot that passengers can connect to. The Satellites connectivity uses orbiting satellites which are linked to ground stations. Aircrafts connects to the nearest satellite through the antennas.
The company initially sells equipment to dealers or the final customer, the gross margin of this sale is about 25%-30%. But what makes Gogo business attractive is that once the equipment is installed the customers contract subscriptions plans by which Gogo earns recurrent revenue with margins above 75%. With an approximate 0.5% monthly churn rate, Gogo achieves 17 years of equipment life on the aircraft with the corresponding recurrent revenue and earnings. The reason for this low churn rate are the high switching costs of thousands of dollars and some weeks of downtime.
No customer accounts for more than 10% of the revenues. We do not have more information about concentration risk, but we discard this risk for the market having so many dealers.
A central key point in the business strategy…