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Plexus Holdings: THE INVESTMENT CASE

Contracts have been flowing for Plexus Holdings even though energy companies are still cautious about new drilling

In a trading update in May, the AIM-listed firm said discussions over contracts are taking longer than expected to conclude, although it still anticipated orders under negotiation will come through in its financial year ending in June 2018
Oil rig drilling
INVESTMENT OVERVIEW: POS The Big Picture
Plexus boss Ben van Bilderbeek has said: "Looking to the future I am hopeful that the bottom of the cycle has been reached”

Contracts have been flowing in so far this year for innovative oilfield drilling equipment group Plexus Holdings PLC (LON:POS) even though energy companies are still being cautious about new drilling, keeping the overall oil and gas market subdued.

They're not just any old contracts either - some big names are coming on board.

READ: Plexus offloads Jack-up business for up to £42.5mln

In September Plexus managed to secure contracts with BritishGas owner Centrica PLC (LON:CNA) as well as Russian oil giant Rosneft.

Centrica will use Plexus' POS-GRIPadjustable production wellhead for a gas production well in the UK southern North Sea, while Rosneft's Vietnam subsidary will use POS-GRIP High Pressure/High Temperature (HP/HT) adjustable rental exploration wellhead equipment for an exploration well offshore Vietnam.

That's not all. At the start of June, Plexus said it had signed a new four-year contract with Danish giant Maersk Oil to provide wellhead and mudline suspension systems on a stand-by basis for the development of the Maersk Culzean platforms in the North Sea.

READ: Plexus flows higher as it signs new four-year contract with Maersk

The group’s chief executive Ben Van Bilderbeek said at the time: “This is a fantastic contract for Plexus which will help to underpin our future revenues, as well as delivering the opportunity for further exploration well business with Maersk.”

The previous month, Plexus had announced a first order, worth around £700,000, for its patented oilfield wellheads from Akers BP, the company formed through the merger of BP and Det Norske’s Norwegian assets.

Meanwhile in March,  the company received an order from Nexen, which is owned by Chinese giant CNOOC,  and at the start of the year it got a deal worth US$285,000 for a second well from Masirah Oil Ltd, a company majority owned by REX International Holdings Limited.

It also inked a four-year framework agreement with FTSE 100-listed utility giant Centrica (LON:CNA) for jack-up exploration wells in the Norwegian sector of the North Sea.

But in a trading update in May, the AIM-listed firm said discussions over contracts are taking longer than expected to conclude, although it still anticipated orders under negotiation will come through in its financial year ending in June 2018.

READ: Plexus Holdings says oil drilling market still subdued

With first-half results published at the end of March, van Bilderbeek had said that there was “some way to go” before improving oil market sentiments equate to stronger financial results.

For the first half, Plexus reported sales revenues of £3.77mln, down from £6.76mln a year earlier, and a pretax loss of £2.5mln, a narrowing from a £3.5mln loss a year earlier.

van Bilderbeek added then that: "Looking to the future I am hopeful that the bottom of the cycle has been reached.”

“The industry has realigned itself to an oil price that is closer to US$50 oil as opposed to the US$100 a barrel that had prevailed for much of this decade, and capex and opex costs have been significantly reduced.

“It will take time for the next upswing to take root, but with demand for oil and gas forecast to continue rising, new discoveries will have to be made not only to cover the natural decline of mature fields but also to make up for the exceptional drop in exploration activity we have seen over the last two years,” he added.

Fundamental changes made to business

Plexus was forced to make fundamental changes to its business as continuing low oil prices have resulted in global exploration drilling activities falling to 60 year lows, with the North Sea – where Plexus mainly operates – reporting the lowest levels ever recorded in 2016.

The UK firm slashed its overheads by almost 50% to £7.4mln last year, down from £14mln, in response to a drop-off in revenue, mainly through reduced R&D spending and nearly halving its workforce.

It also focused on diversifying its revenues away from its traditional Scottish and European North Sea stomping grounds, an area in which exploration was hit particularly hard by the downturn, signing licence agreements with firms in China and Russia, and entering the subsea market sector.

Another positive for the firm was the strengthening of its balance sheet, after it completed several placings last year, with van Bilderbeek investing £200,000 of his own cash into the business.

The last fundraise in June 2016 was done at near to market levels of 65p a share and not at a significant discount, although its shares have  drifted since then and at 66.25p currently, are down over 10% in the year-to date - with Plexus’s current market cap at just below £70mln.

The extra cash has allowed Plexus to fast track the development of its unique POS-GRIP well-head equipment for the Russian market.

Unique technology can save drilling time

Invented and developed by CEO van Bilderbeek and his team, POS-GRIP is Plexus’ primary technology – which the group rents out rather than sells.

It is designed to reduce the chance of leakage and the danger of blow-outs, where oil or gas bursts out of pipes, following an unexpected rise in pressure.

Because of the installation time savings it confers, the technology might shave off as many as 100 hours from a drilling programme.

In the aftermath of the BP Deepwater Horizon spill in the Gulf of Mexico, with the support of the oil majors, Plexus developed a new subsea wellhead design adaptation of POS-GRIP that could help avoid a repeat of that environmental disaster.

In a recent blog, oil market commentator Malcolm Graham-Wood, noting the recent Maersk contract, concluded that Plexus “will undoubtedly survive owing to its excellent quality and safety conscious kit.”

The group seems to be doing that, and positioning itself well for future growth as the oil and gas exploration  market stabilises and hopefully rebounds with any crude price recovery in the future.

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