In this edition of our biweekly letter, we take a pause from discussion of our investment philosophy to highlight a recent development in the portfolio, and to give a real-time example of how we gain an information advantage through our research process.
For the past few quarters, Gulf Island Fabrication, Inc. (“GIFI” or “Gulf Island”) underutilized its fabrication capacity in hopes that it could secure a large-volume, high-margin contract that would take up the remaining capacity in its fabrication yard. Gulf Island’s strategic decision to forego lower-margin contracts in the short term resulted in a decrease in fabrication revenue. At the same time the fabrication business was slowing, the company was also in the process of selling its shipyard business and losing the associated revenue. The combination of underutilized fixed assets and an unprofitable shipyard business resulted in a multi-quarter cash burn and questions about the execution of its strategic plan. Consequently, the company’s earnings and share price suffered.
During this period of depressed earnings and price, we debated internally whether Gulf Island would be able to execute on its strategy. To evaluate the situation, we used an array of sources for our data. As a matter of course, we review all portfolio companies’ financial statements and filings. The filings provide a large amount of information and provide the level of detail that we require (often found in the depths of companies’ filings or infrequently across time). We also considered information on the oil and gas services industry as a whole that was available through trade publications and analyst reports. Finally, and importantly, we utilized our relationship with both Gulf Island’s management and other portfolio companies’ management to get their thoughts on the macroeconomic environment and particular operational challenges that they have observed in their respective industries.
Through our management calls with the teams at Murphy Oil Corp. (MUR), Callon Petroleum Co. (CPE), and Fluor Corp. (FLR), and our knowledge of the supply-demand dynamics for shallow-water drilling rig servicing through our investment in Borr Drilling Ltd. (BORR), we had a well-developed understanding of the skilled labor and fabrication capacity shortages that face domestic E&P companies. Each management team was able to give us its unique, and relatively unbiased, opinion on the landscape which allowed us to collect first-hand data that directly impacted our view of Gulf Island.
To further bolster our view of Gulf Island, three members of our research team visited the company’s fabrication yard and offices in Houma, Louisiana in June 2022. During our visit we were able to have an extended conversation with management about its strategic plan and any barriers to execution. Importantly, we were able to tour the facilities and see the sheer scale of the company’s fabrication capabilities and the unique attributes of the property and equipment that allow it to have a competitive advantage when bidding against its competitors.
After the visit to Houma, our entire research team circled the wagons to discuss the company in light of the data we had gathered from financial statements, public filings, industry reports, calls with GIFI’s management, calls with other companies’ management, and an in-person visit. As always, team members brought their individual views on the company and asked critical questions driven by their own concerns about the company, management, and industry. Ultimately, our team came to the conclusion that Gulf Island’s patient, disciplined bidding for fabrication projects was well founded and the company was well positioned to take advantage of a continuing decline of available domestic fabrication capacity (a situation that continues to develop).
On September 8, Gulf Island announced it was awarded a “large” fabrication contract that is expected to take up a meaningful amount of the company’s available fabrication capacity. Company management stated that the customer prefers to remain unnamed for competitive reasons, but also stated that more details on the contract will be available with Q3 earnings (expected in early November). This contract is the result of much patience and disciplined bidding by Gulf Island throughout a period in the E&P cycle where capital expenditures by Gulf Island’s would-be customers were depressed. Our long-term investment horizon and conviction in the data gathered on management, capital structure, and industry trends allowed us to see through short-term, but notable, negative operating and investment return results. While future execution and financial results from the company can’t be guaranteed, this contract announcement is a step in the right direction and proof positive that Gulf Island’s strategic plan was sound, and that management is continuing to execute in line with their prior statements.
Our research process for each company is unique. However, ubiquitous across evaluations of all opportunities are: a curiosity about the company and determination of any additional information needed, research team members with varied skillsets that can find the additional information, and rigorous discussion of the collected data points in order to develop (or re-evaluate) an informed investment thesis. Internally, we equate “risk” to “uncertainty.” While risk cannot be eliminated entirely, we can reduce uncertainty through data-driven analysis and an unwavering curiosity about the detailed fundamentals of each company. This approach allows us to make high-conviction investments in a concentrated number of positions and apply our fundamentals-based review process across the life of an investment, a process that has seemingly borne its fruits with Gulf Island.
As always, please reach out to MIAM if you are interested in partnering or would like to discuss a particular company or idea.
The MIAM Research Team
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