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ADES International Holding Ltd: THE INVESTMENT CASE

ADES International lays out blueprint for growth through oil downturn

“Our business model relies largely on legacy offshore assets that we purchase and refurbish."
picture of drill rig
INVESTMENT OVERVIEW: ADES The Big Picture
ADES buys rigs at a fraction of the cost new

Mohamed Farouk, oil driller ADES International’s (LON:ADES) chief executive, makes his business sound very straightforward.

"Our business model relies largely on legacy offshore assets that we purchase and refurbish."

Revenue growth of more than 35% in each of the past three years suggests though it might sound simple, the strategy is mightily effective.

Remember, this is a period when the oil market has been flat on its back and drilling has been curtailed severely, but if anything that has been a boon for ADES.

As oil prices have tumbled and more drill rigs have been mothballed, it has been able to ‘cherry–pick’, in Farouk’s words, the best of what’s available.

To give an idea of the cost difference, he says on average it costs about US$30mln to buy and refurbish a mothballed rig compared to the new build cost of about US$200mln.

And it is not as if these are tired pieces of kit. Far from it. Most are in excellent condition, he says, and require just few adjustments to fit in with ADES’s plans.

 

Investors impressed

Investors like the story. The company raised US$170mln when it listed on London’s main market in May with a raft of UK institutions joining the share register.

In a tough operating environment with oil prices under pressure, it was an impressive vote of confidence. Shares in the IPO were priced at US$16.50 though have since drifted to US$12.70 valuing the company at around US$535mln.

At present, ADES has fourteen rigs on its books. Utilisation, key for drilling contractors, has always been high at about 90% but that is a reflection of the way contracts are structured says Farouk.

Taking on rigs and hoping to win contracts for them is too risky he says, so marketing rights are established at the time it tenders for a contract.

It works like this. Once a rig for particular piece of drilling has been identified, ADES will offer the rig owner a price that is dependent on it winning the work.

It’s a win-win, he says. ADES gets a rig at a fraction of the new build cost, while the shipyard/oil giant offloads a very expensive asset to maintain.

 

Aramco latest client

Based in Egypt, ADES is starting to spread its wings. The last interim results reflected the first contribution from a three rig offshore contract with Aramco.

The soon-to-list Saudi oil giant has 43 rigs under contract currently, but ADES is the lowest price contractor in Aramco’s fleet says Farouk.

Two onshore rigs are also now up and running in Algeria, where a lot of exploration for gas is currently underway.

Revenues rose by 46% to US$87.8mln in the half year to June helped by the new contracts and maintaining a trend that has seen turnover rise from US$75mln in 2014 to US$134mln in 2016.

Underlying interim profits rose to US$45mln (US$31.6mln) with a boost from the devaluation of the Egyptian pound.

 

Growth plans

Farouk has a clear plan to maintain the progress.

The first step, he says, is to maximise rig utilisation. The current order backlog is US$430mln.

 Second, there will be additional contract wins from ‘ a significant pipeline of opportunities’. This will follow the buy-to-contract blueprint, with money raised in the IPO earmarked for rigs once it wins a tender.

“We are currently entering bids for contracts between Egypt, Saudi  Algeria ,Kuwait and Iraq , while going through pre-qualification in two other Gulf markets.”

Thirdly, there will acquisitions says Farouk. ADES may be doing well, but oil services generally remains a distressed market and he is looking at ‘multiple opportunities’, though adds he won’t be rushed into a deal.

ADES is currently in the top five of drill contractors in the Middle East and North Africa region (MENA), which he says puts it in a happy middle ground between the giants and local operators -  ‘the culture is of a multinational but the service like a local firm’.

 

Oil market

An ideal scenario would be for the oil market to stay under pressure for a further 18 months as by that stage Farouk says he would have finished expanding the rig fleet, which would put ADES in a very strong position when oil activity does recover.

At that point, if history is guide, prices for contracts will bounce sharply higher as drill contracting is a notoriously feast or famine business.

“Then, we can start maximising and getting cash out for shareholders, increasing delivery rates, and daily rates rather than boosting the size of the fleet as we are doing now.”

It is not all plain sailing. Egypt’s economic difficulties do not make for an easy life though Farouk says the recent IMF loan has improved the situation markedly, with inflows of hard currency again.

In the next few years, he also expects Egypt’s contribution to revenue to drop from 50% currently to about 30%.

Overall, though, he is confident that the business is robust.

Farouk’s own background is a career in oil services groups including a long stint at Invensys, while the recent sector downturn has also allowed him to put together a skilled and experienced and management team from some of biggest companies in the sector.

That experience has been apparent in the way ADES has coped impressively with the sector’s famine and if good times do return to the oil industry who knows how successful it can be.

 

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September 19 2017
“Our business model relies largely on legacy offshore assets that we purchase and refurbish."

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