Plexus Holdings PLC: AGM Statement

Posted by Katie Woodward - OilVoice


Plexus Holdings PLC, the AIM quoted oil and gas engineering services business and owner of the proprietary POS-GRIP® friction-grip method of wellhead engineering, known for its safety, time and cost saving capabilities, will hold its Annual General Meeting ('AGM') today. At the AGM Jerome Jeffrey Thrall, Chairman, will make the following statement:

"Plexus is an IP led oil and gas engineering company which supplies blue chip operators such as eni, Maersk, Royal Dutch Shell, Statoil, and Total with best in class wellhead equipment.  To date over 400 exploration wells have been successfully drilled around the world using our equipment which, thanks to our POS-GRIP technology, a patent protected friction-grip method of engineering, is superior to conventional wellheads in terms of performance, reliability and safety. 

“In recent years and from a standing start, Plexus has taken market share from larger multi-national competitors and become established as the dominant supplier to the HP/HT market in the North Sea.  Additionally, it has won orders to supply wells operating in some of the most inhospitable and challenging environments, most notably Total's ultra-HPHT Solaris well, offshore Norway, which is believed to be the highest pressure and temperature well to have ever been drilled in the North Sea. However, no matter how ground breaking our technology is and how widely it has been used in the field, we can do little in the face of the sharp retrenchment in operators' budgets that has been seen over the last two years in response to lower oil prices. The exceptional reduction in exploration activity to 60 year lows has led to significantly fewer wells drilled, which has in turn inevitably translated into lower rental orders received for our POS-GRIP enabled wellheads.

“After the record financial performance of the previous 12 months, 2016's full year results reflected the challenging trading conditions: a decrease in revenue to £11.23m (2015: £28.53m); an EBITDA loss of £1.56m (2015: profit £9.53m); a loss after tax of £5.79m (2015: profit £5.43m) and a basic loss per share of 6.39p (2015: 6.40p profit per share). However the financial report contained other key financial metrics which demonstrate the decisive action we took over the course of the year to help realign the business to the lower oil price environment resulting in: net cash of £9.9m (2015: net debt £2.9m); 20% reduction in personnel and infrastructure related overheads to £11.28m (2015: £14.93m), which is expected to become a 50% plus reduction in the year ahead, as the full effect of the restructuring programme materialises;  capital expenditure on tangible assets reduced to £1.96m (2015: £7.02m); and the withholding of a final dividend (2015: 1.75p per share).

“During the year, we raised capital near the prevailing share price, boosting our net cash position to £9.9m and adding new institutional investors, as well as our Russian licensing partner Gusar, to our shareholder register, while our R&D led IP development and inventory build-up programme, which saw circa £22m invested over the last five years, is for now largely complete. Today, Plexus owns circa 62 rental wellhead sets, which have a long working life and, if fully utilised, are estimated to be capable of supporting sales revenues of up to £40m per annum.  

“With no significant investment requirements going forward, we have strengthened the Group's balance sheet with the intention of being able to outlast the remainder of the cyclical downturn.  How long the downturn will last and how severe it will be of course remains the big unknown. Already in its third year these adverse trading conditions have lasted longer than many commentators and leading market players had predicted and until a sustained recovery takes hold, today's subdued levels of exploration activity and lack of revenue visibility will likely persist.  We will therefore continue to closely monitor activity levels and update the market accordingly. On a positive note a consensus seems to be forming that 2017/18 will begin to see a reversal of historically low drilling activity levels and extremely tight capex constraints by operators.

“The link between the macro geo political backdrop and day to day operational activity levels remains as important as ever. Although all cyclical upswings have their fair share of false dawns, and the current cycle is no exception the recent OPEC meeting at the end of November offered some much needed encouragement. It was reported that the meeting secured agreement to reduce production by 1.2m to 32.5m barrels a day from the beginning of January 2017 and initially for a period of six months. This had the effect of increasing the oil price on the day by circa 8%. Whether or not the production cut agreed by members is strictly adhered to, the major positive coming out from the group in recent months is, in our view, the noticeable change in tone and rhetoric compared to the previous two years. Yasser Elguindi of Medley Global Advisors went as far as describing the cut as pulling “a rabbit out of a hat”, but cautioned that “compliance with the cuts will be what makes or breaks the deal”. The recognition by OPEC members of the need to restore balance to markets and the need for a higher oil price to drive investment is a major departure from recent times and is therefore welcome news for the oil and gas industry as a whole. This stance is further reinforced by the option OPEC also put in place to extend the agreement to cut production levels until the end of 2017. The level of cooperation achieved is highlighted by the resolution of differences over production levels between Saudi Arabia, Iraq and Iran.

“Ironically, whilst OPEC finally agrees to cut production the International Energy Agency (‘IEA') in its annual World Energy Outlook report sees "no peak yet in sight" for demand for oil.  Furthermore for the longer term the IEA also goes on to predict demand will continue to grow until at least 2040 thanks to continued growth in plastics manufacturing and the increasing use of fuel for critical modes of transport such as shipping, aviation, and trucks where greener technologies have yet to make inroads. Tim Gould head of the IEA's energy supply outlook division said that unless project approvals pick up in 2017 it is looking “increasingly unlikely that supply will be able to meet the rising demand without rapid price increases”. The view that a supply crunch is in the making is also reinforced in a recent  Barclays research report where the bank's analysts forecast that with just 1.2m barrels per day of new supply coming on stream, 2019 could become the "the lowest year for new capacity" added since the 1990s.  Like the IEA, Barclays lays the blame on oil majors cutting back on conventional exploration projects to preserve cash where it was further reported that in 2015 and 2016 investment levels in conventional oil projects hit lows not seen since the 1950's. Together with the natural decline of existing fields and forecast demand growth, Barclay's estimates demand could outstrip supply by as much as 3 million barrels per day and that "2019 marks a juncture where supply becomes a concern”

“Needless to say, like all those operating in the sector we are keenly looking forward to when the cycle turns upwards.  However in the interim, we are doing more than just battening down the hatches and waiting for the cycle to turn.  As Plexus is IP led we are in the advantageous position of being able to pursue the global uptake of our POS-GRIP technology without having to invest significant sums of capital. For example, looking at adopting a pure licensing business model rather than an operational one, would involve us maximising licensing royalty opportunities by selling and promoting our patented method of engineering rather than renting our equipment. Such a strategy would enable us to continue to diversify our revenues away from our traditional stronghold in the North Sea to other hydrocarbon jurisdictions.

“We are already making progress in this direction. In 2016 we completed a licence agreement with two independent Russian oil and gas equipment manufacturers, Gusar and Konar, covering the large Russian Federation market and other CIS states. We also won our first order through our Malaysian joint venture company worth an estimated £0.9m with Talisman Energy following the award of a local licence with PETRONAS, the Malaysian National Oil Company to manufacture and supply our wellhead equipment in Malaysia. Such developments look to replicate our historic success in the North Sea. With this in mind, we are currently in discussions with a number of interested parties in other parts of the world, including the significant Middle Eastern and Indian energy markets.

“In conclusion while the downturn has undoubtedly significantly impacted on our progress and financial performance, and continues to do so, we are confident that once sentiment within the sector begins to recover and operators renew their appetite for exploration, Plexus will in turn regain the momentum that existed before the downturn set in.  Importantly, following the last OPEC meeting three key industry drivers are now aligned – namely a planned reduction in production levels, increasing demand for hydrocarbons, and declining mature fields. Arguably, with a strengthened balance sheet, a large wellhead inventory, an expanded suite of Plexus products, partners in strategically important territories, and a successful track record with a who's who of blue chip operators, Plexus is in a strong position to take advantage of and benefit from the next cyclical upswing.”    

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Plexus HoldingsAGMUnited Kingdom

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