Today, I want to talk about a penny stock I think has the potential to double if the company can continue to deliver on its plans.
However, this energy sector business has suffered serious problems in the past and could do so again. For this reason, I’d only consider allocating a small part of my portfolio to this stock.
The company in question is rig operator Gulf Marine Services (LSE:GMS). This small-cap stock is based in the UAE and operates a fleet of modern jack-up platforms. These offshore support vessels have retractable legs that can be lowered to the seabed to create a stable platform for drilling and other engineering work.
The right time to buy?
The group has historically focused on serving the needs of national oil and gas companies in the Middle East, but it’s diversifying into renewable energy and other geographic markets.
I avoided this penny stock for a long time because it had serious debt problems. Shares in the group are worth 80% less than they were five years ago, but a refinancing has helped to put the business on a sustainable foorting. I think there’s now a good chance that a sustainable turnaround is underway.
Strong prices for oil and gas mean demand for Gulf Marine’s fleet is strengthening. I think it could be the right time to buy. As I’ll explain, the shares could still be very cheap.
Why I think GMS is cheap
During the first half of 2022, 89% of Gulf Marine’s fleet was on hire, compared to 77% during the first half of 2021. The average daily rental rate also rose, from $25.5k to $27.2k. This improved operational performance saw revenue rise by 30% to $66m for the half year. Operating profit for the period almost doubled, rising from $11m to $21m.
Importantly, net debt is expected to fall from $371m to $319m this year. That tells me Gulf Marine is now generating more cash than it needs to operate — a big win.
However, this improved trading performance hasn’t lifted the share price, which has been broadly flat this year. That’s left the stock trading on a forward price-to-earnings ratio of just 2.5.
At around 6p, the shares are also trading at a discount of nearly 75% to their last-reported book value of 22p.
What I’d do now
These valuation measures look very cheap by conventional standards. I think that reflects the risk investors still face from the group’s elevated debt load. If profits dip and repayments become difficult, the shares could still collapse again.
However, Gulf Marine appears to be making good progress so far. Broker forecasts suggest the group’s profits will continue to rise in 2023. Given the state of the energy markets worldwide, that seems realistic enough to me.
If GMS shares doubled to 12p, they’d still only be trading on four times 2023 forecast earnings. If I had spare cash to invest in the speculative part of my portfolio today, I would definitely consider buying Gulf Marine shares.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.