The last year hasn’t been a good time to be an offshore oil and gas vessel owner. The 2019 results for MMA Offshore (MRM) show it hasn’t avoided the windy seas.

While revenue rose 19% and earnings before interest, tax, depreciation and amortisation rose 50%, the company stayed loss making to the tune of $37m. Last year marked MMA’s fourth unprofitable year in a row. Net debt remains high at $201m.

But, finally, the industry seems to be nearing calmer waters. The word ‘recover’ appeared 17 times in MMA Offshore’s full year results presentation. Utilisation of the company’s fleet of high-spec offshore oil and gas vessels is improving. Day rates, the price clients pay to use a vessel for a day, are rising. And the company is in the midst of an acquisition of a complementary business. MMA Offshore may finally be on the way to a sustained and profitable recovery.

With offshore oil and gas producers generating healthy cashflows at current oil prices, their attention is turning to replacing declining fields and growing production. This calendar year the number of projects given the go-ahead is likely to double. Higher levels of exploration and long overdue maintenance will increase the amount of work for vessel owners like MMA. The company is already seeing evidence of this: utilisation of its vessels improved by 5% to 72% last year. This financial year 43% of days (and 62% of budgeted revenues) are already contracted or highly likely to be worked.

MMA also needs to earn more revenue for every day its vessels are working. Global day rates have risen substantially from the trough but have been volatile. For the year ahead MMA’s specialised vessels are starting to see more sustained improvement in day rates. The rest of the fleet should follow.

Higher rates bring not only more revenue, but much more profitable revenue. Higher utilisation increased revenue by $39m last year, but costs rose $29m. That’s $0.75 of cost for every $1 of new revenue. Vessels need to be staffed, maintained and fuelled. But as day rates rise each dollar of increased revenue will flow mostly to earnings. MMA’s sustained recovery hinges on better day rates.

The company hasn’t been waiting idly for the recovery. MMA recently announced the acquisition of Neptune Marine (NMS), an ASX-listed provider of commercial diving services to inspect and repair offshore oil and gas assets. It is paying $18.5m, equal to Neptune’s net asset value, made up mostly of diving equipment and underwater maintenance robots.

This looks like a sensible price at a low point in the offshore oil and gas cycle: like MMA, Neptune hasn’t been profitable for four years. Being part of a bigger group will help. By removing duplicated head office expenses, cost savings of $2m per annum are expected. And Neptune and MMA will now be able to bid on projects together. Pairing MMA’s fleet of large vessels with Neptune’s specialised equipment and expertise will make the duo more attractive to clients.

MMA still owes its lenders a lot of money. And the industry is a very long way from a picture of health. As offshore oil and gas producers increase spending, however, more of MMA’s vessels will be working for better rates. Paired with services provided by Neptune, MMA will finally look to break its loss making streak and chart a more profitable course.

Disclaimer: Forager owns MRM in its Australian Fund