Crucial Investing Lessons From Marco Polo Marine Ltd’s Woes

Oil prices have declined sharply over the past few years. At around US$45 per barrel today, the price of oil is less than half where it was in mid-2014.

As a result, the challenges facing the oil & gas industry are huge, so much so that a giant such as Sembcorp Marine Ltd (SGX: S51) – one of the world’s largest oil rig builders – suffered a loss in 2015.

But excrement did not really hit the ceiling impeller for Singapore’s oil & gas industry until the collapse of Swiber Holdings Limited (SGX: BGK).

In late July this year, the company shocked the market by deciding to wind itself up. It swiftly back-tracked and chose to place itself under judicial management instead, but the point remains that the company has essentially collapsed.

After Swiber’s fall, lenders became more wary of extending loans to oil & gas companies. In a Business Times article published on Thursday morning, the chief executive of an offshore & marine company was quoted as saying:

“Without a doubt, banks are more cautious now after the Swiber incident. The foreign banks were the first to pull out. The local banks are nervous but some seem more willing to step up and are open to discussions.”

The same Business Times article also touched on the difficulties that other oil & gas companies now have in repaying their debt. One of the companies mentioned is Marco Polo Marine Ltd (SGX: 5LY). The company is seeking to extend the maturity of S$50 million worth of its bonds from 18 October 2016 to 18 October 2019.

The experience of Marco Polo Marine reminded me of two important things in investing.

First, it’s a stark memo on the dangers of leverage. At the end of its fiscal 2015 (fiscal year ended 30 September 2015), Marco Polo Marine had a net-debt to shareholder’s equity ratio of 118%. By 30 June 2016, this ratio had ballooned to 141%. Those are not low ratios at all – the company was borrowing heavily.

When times are good, a heavily indebted company can easily borrow new money to repay old debt. But when times are tough, refinancing can become awfully difficult. Billionaire investor Warren Buffett has the best quote on this I’ve ever come across and I think it bears repeating (emphases mine):

“Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.”

(I think Marco Polo Marine is kneeling now.)

Second, Marco Polo Marine is a good poster boy for how cheap shares can also become expensive nightmares. Back in 8 April 2015, I noted in an article that the company had really low valuations – it had a price-to-earnings and price-to-book ratio of just 6.4 and 0.5.

But, I also cautioned that Marco Polo Marine could be a value trap because its return on equity was declining despite an increase in leverage. I thought the phenomenon could be a sign that its economics were deteriorating, which can lead to lousier business results in the future.

When the April 2015 article was published, Marco Polo Marine had a share price of S$0.27. Today, the company’s shares are exchanging hands at S$0.062 apiece, some 77% lower.

American politician Rahm Emanuel once said, “You never let a serious crisis go to waste.” This oil & gas crisis has produced great investing lessons, some at the expense of the unfortunate Marco Polo Marine. Don’t let it go to waste.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.