With the Dow Jones Industrial average down about 30% for the year, most hedge funds are under substantial water in their long-term positions. 

Since most hedge funds get paid based on their returns for the year, managers who do not want to underperform often turn to shareholder activism as a way to increase shareholder value and ultimately boost their returns. 

Here at Stockpickr.com we track all of the latest activist siuations in attempts to piggy back off of the best managers around. This week we focus on Trico Marine (TRMA).

Trico Marine received a letter from its largest shareholder, Kistefos, in which Kistefos requested that two of the company's founding executives be appointed to Trico’s board of directors to help improve shareholder value

Kistefos, which owns about 22.5% of Trico Marine, highlighted a litany of mistakes that Trico has made this year, citing that its market value has fallen by $565 million, more than 90%, in the past eight months.

Kistefos also highlighted the company’s unusual amount of debt in the firm’s capital structure, saying: “Trico Marine has quadrupled its indebtedness to over $800 million in the last year and its ratio of debt to enterprise value now exceeds 90%.” Debt levels this high show a firm that is in financial stress; General Motors' (GM) debt level is more than 95% of the capital structure. Trico’s massive amount of debt was issued in May of 2008, after the company’s merger with DeepOcean, a sub-sea wiring and trenching company.

Kistefo believes that the merger with DeepOcean was an “ill-timed fundamental change in its business focus in 2007-2008 at the peak of the offshore supply services cycle by making significant acquisitions in the subsea segment.”

It’s worth noting that the acquisition of DeepOcean, which leveraged Trico even more to the spot price of oil near the peak of the market, has not been profitable so far.

Before the DeepOcean merger, Trico was mostly a tow and anchor handler moving and repairing various oil rigs in the North Sea and Gulf of Mexico oil markets. About 45% of its business is derived from the North Sea Spot market, which has been very weak. That said, Trico Marine has some 30% to 50% of its long-term contract rates currently higher than where the market is trading.

Trico, which trades with a forward P/E of 2, substantially lower that the industry average of 15, is a complex company to analyze. The massive amount of debt, management’s refusal to grant NewCastle Capital any board seats late last year, and the declining price of oil and spot towing rates have forced this stock down about 90% in the past eight months. That said, last quarter, Trico earned almost $1.85 per share in a single quarter, with EBITDA of $99.7 million vs. the industry average of $105.9 million. If the company can survive at these levels, Trico would be trading for less than one times earnings, which would be five times cheaper than GulfMark Offshore (GLF), its nearest competitor.

Trico is going to be a work in progress for Kistefo, but given the firm’s large equity position and the massive mismanagement at the company, it's likely that Trico welcomes Kistefo to the board.

Posted on Dec. 24, 2008