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Plexus Holdings PLC

Plexus Holdings Plc - Preliminary Results for the year to 30 June 2017

RNS Number : 6451W
Plexus Holdings Plc
16 November 2017
 

Plexus Holdings PLC / Index: AIM / Epic: POS / Sector: Oil equipment & services

 

16 November 2017

Plexus Holdings plc ('Plexus' or 'the Group')

Preliminary Results for the year to 30 June 2017

 

Plexus Holdings plc, the AIM quoted oil and gas engineering services business and owner of the proprietary POS-GRIP® method of wellhead engineering, announces its preliminary results for the year ending 30 June 2017.

 

Financial Results

•      Sales revenue £4.75m (2016: £11.23m)

•      Adjusted EBITDA £2.48m loss (2016: £1.56m loss)

•      Operating loss £7.03m (2016: £6.8m loss)

•      Loss after tax £5.70m (2016: £5.79m loss)

•      Basic loss per share 5.41p (2016: 6.39p loss per share)

•      Net cash £6.5m (2016: net cash £9.9m)

 

Whilst the Company remains committed to distributing dividends to its shareholders, the Directors believe that in view of the challenging oil price environment and resultant financial performance it is prudent to continue the suspension of the payment of dividends.  The Company will look to reinstate the dividend at the earliest opportunity.

 

Overview

 

·    Plexus' proprietary POS-GRIP friction grip technology wellhead equipment enabled the Company to win new business despite continuing subdued levels of exploration activity as a result of the extended period of low oil prices:

 

o Purchase order from operator Masirah for an exploration well in Oman

 

o Four-year framework agreement with Centrica Norway to supply surface wellhead and mudline equipment services for jack-up exploration wells of all pressure ratings in the Norwegian sector of the North Sea

 

o Extension of an existing agreement with Shell Brunei to supply both HPHT and standard pressure wellhead systems and services for three exploration wells in Brunei

 

o New customer contract win from Nexen Petroleum U.K. Limited ('Nexen'), a subsidiary of CNOOC Limited for an exploration well in the Central North Sea

 

o First purchase order for the Company's Tersus™ TRT Mudline Suspension System ('MLS') equipment from LLC Gusar (OOO Gusar) Ltd ('Gusar'), Plexus' licensing partner in Russia

 

o Initial purchase order from Aker BP for an exploration well offshore Norway

 

o Four-year contract with Maersk Oil North Sea UK Limited, for the provision of standby wellhead, mudline suspension systems and associated services including initial purchase order

 

·    Additional orders won post period end:

 

o First order from Rosneft (TNK Vietnam B.V) ('Rosneft Vietnam'), a subsidiary of leading Russian oil and gas company, Rosneft for exploration well offshore Vietnam using POS-GRIP high pressure high temperature ('HPHT') adjustable rental wellhead equipment - in line with strategy to gain exposure to new geographies and markets

 

o First production well order from long-standing customer Centrica North Sea Limited ('Centrica') for a gas well in the UK Southern North Sea - in line with strategy to extend the application of POS-GRIP technology beyond jack-up exploration and into mainstream production and subsea applications

 

Corporate Highlights

 

·    Post period end, a conditional Business Purchase Agreement ('BPA') signed for the sale of Plexus' jack-up exploration business to a subsidiary of top three global oil and gas services supplier TechnipFMC ('TFMC') which provides major industry recognition of Plexus' POS-GRIP technology and triggers a switch in strategic focus to the roll-out of POS-GRIP products into new markets such as production and decommissioning (outstanding conditions relate to the transfer of employees and the novation of commercial contracts)

 

·    Collaboration Agreement to be signed with TFMC at Completion to explore the development of new and existing products based on POS-GRIP for roll-out into new markets within the wider energy sector which could extend to production, subsea, geothermal and fracking applications

 

·    Current product suite based on POS-GRIP technology can cater for all stages of the cycle from exploration to production to decommissioning

 

·    Cash rich, debt free balance sheet due to be further strengthened following completion of the sale of the jack-up exploration business to TFMC with initial £15m cash consideration less certain adjustments payable on completion

 

·    Three-year earn-out up to a maximum additional payment value of £27.5m allows Plexus to benefit from anticipated pick-up in exploration activity and TFMC's extensive global presence

 

·    Bank facilities available to the Group with the Bank of Scotland comprise as from 1 October 2016 a two year £5m revolving credit facility, and in addition to a reducing five year £1.5m term loan (with a current balance of £0.7m) which was put in place in September 2014 to part fund the purchase of a building in Aberdeen and which runs to August 2019

 

For further information please visit www.posgrip.com or contact:

Ben van Bilderbeek

Plexus Holdings PLC  

Tel: 020 7795 6890

Graham Stevens

Plexus Holdings PLC

Tel: 020 7795 6890

Derrick Lee

Cenkos Securities PLC

Tel: 0131 220 9100

Frank Buhagiar

St Brides Partners Ltd

Tel: 020 7236 1177

Isabel de Salis

St Brides Partners Ltd

Tel: 020 7236 1177

 

Chief Executive Ben van Bilderbeek said:

 

"Following the post period end signing of a conditional BPA to sell our jack-up exploration business to leading oil and gas service and equipment company TechnipFMC, this will be our last set of accounts as a company whose core business is the supply of rental wellhead equipment and associated running tools to the niche jack-up exploration market.  Going forward, Plexus will be 100% focused on replicating within the wider energy industry the success our proprietary POS-GRIP technology has had in jack-up exploration.  This has seen our equipment deployed by blue-chip operators such as BP, Centrica, Maersk, Royal Dutch Shell, Statoil and Total on over 350 wells worldwide and in the process set new higher standards in terms of performance and safety.  We already have a suite of POS-GRIP products designed for use in other energy sub-sectors and, with this in mind, the recent announcement of a first contract with Centrica to supply our production wellhead equipment bodes well for the future.

 

"Results are, by their nature, backward-looking, and our full year financial performance goes a long way to justifying the decisive action we have taken in recent years to realign our cost base to the lower oil price environment and the associated significant reduction in the levels of capital investment seen across the upstream industry, particularly in relation to exploration drilling.  According to the International Energy Agency's World Energy Investment 2017 report, upstream investment recorded a 44% drop between 2014 and 2016.  Such a sharp fall in investment has inevitably led to lower levels of exploration and consequently lower demand during this period for our best in class jack-up exploration wellheads.  This has been reflected in our full year financial results: 57.7% decrease in revenue to £4.75m for the year to 30 June 2017 (2016: £11.23m) with the UK and European revenues decreasing by 59.7%; an EBITDA loss of £2.48m (2016: £1.56m loss); a loss after tax of £5.7m (2016: £5.79m loss) after incurring £4.47m of depreciation and amortisation and a basic loss per share of 5.41p (2016: 6.39p loss per share). 

 

"Thanks to a cash rich, debt free balance sheet; a streamlined cost base; a fully paid up inventory of jack-up exploration wellheads; and long-standing relationships with a blue-chip customer base, Plexus has been positioned to withstand a lower oil price.  Prior to the downturn, we had become the dominant supplier of HPHT wellheads in the North Sea jack-up exploration market with a near 100% market share, and had made inroads in other parts of the world, having won orders to supply operators with equipment for wells being drilled in geographies such as Asia, West Africa, Australasia, and Venezuela.  Despite the drop off in activity, we have continued to win orders where there has been business to be won.  Post period end, we were delighted to announce an order for a well to be drilled by Russian supermajor Rosneft in Vietnam, a double first for Plexus in terms of a new customer and a new geography.  However, as the full year numbers demonstrate, there can be no doubt that the challenging trading conditions of the past two years have acted as a brake on our plans to position POS-GRIP as an enabling technology in the energy industry. 

 

"The sale of our jack-up exploration business to top tier oil and gas service and equipment provider, TFMC, promises to re-establish the momentum behind the business.  As well as allowing us to benefit from a sustained recovery in jack-up exploration drilling activity through the three year earn-out agreement with TFMC, we expect the disposal to accelerate industry awareness and the roll-out of our POS-GRIP friction based method of engineering across the wider energy sector and beyond jack-up exploration applications.  The disposal repositions Plexus as an IP development and licensing business and importantly provides industry validation for our family of POS-GRIP enabled equipment, which is scientifically proven to be superior to conventional technology in terms of performance, reliability, safety and cost savings.   Furthermore, the implementation of the Collaboration Agreement between ourselves and TFMC, where we will look to work together to develop our existing POS-GRIP IP for applications outside of jack-up exploration, represents a major endorsement of the technology's potential to make safer and more efficient equipment for use in the wider energy industry, including geothermal, fracking and wind energy.

 

"The timing of the transaction with TFMC is in our view extremely apposite, particularly when viewed against the wider context of an energy industry which is undergoing a structural shift including consolidation.  At the same time our sector is showing signs of renewed appetite for investment, albeit from subdued levels, on the back of a more stable oil price.  In this year's BP Statistical Review, BP's chief executive Bob Dudley wrote, 'The energy mix is shifting towards cleaner, lower carbon fuels, driven by environmental needs and technological advances.'  Much debate surrounds the speed of this shift and the future makeup of the energy sector, but one thing is for certain: the world will continue to need energy, be it from renewable sources or cleaner hydrocarbons such as natural gas.  We believe that our engineering led POS-GRIP technology is energy source neutral in terms of its range of applications.  Whether gas or renewables, POS-GRIP can deliver significant operational benefits, saving operators considerable time and money while at the same time increasing overall standards and safety.  Indeed, if an application is required to operate under extreme temperatures or pressures we believe that our technology comes into its own, as we have shown out in the field many times over.  POS-GRIP has set new standards in jack-up exploration and we look forward to achieving the same success in other areas inside and outside of the energy industry."

 

 

 

Summary of Results for the year ended 30 June 2017

 

2017

£'000

2016

£'000

Revenue

4,749

11,227

Adjusted EBITDA

(2,483)

(1,560)

Operating loss

(7,031)

(6,798)

Loss after taxation

(5,701)

(5,790)

Basic (Loss) / earnings per share (pence)

(5.41)

(6.39)

 

Chairman's Statement

 

Business progress

 

This year's results reflect the continued downturn in the industry, as operators' level of capital expenditure, particularly in the area of exploration drilling activity, remained depressed.  Plexus' traditional markets have for many years been the UKCS and the ECS, and whereas in the prior year European revenues remained more resilient than the UK, this year the North Sea as a whole was impacted.  These trading conditions resulted in a 57.7% decrease in revenue to £4.75m for the year to 30 June 2017 (2016: £11.23m), which was circa 10% ahead of market expectations; an adjusted EBITDA loss of £2.48m (2016: loss of £1.56m); a loss after tax of £5.7m slightly improved on the prior year (2016: loss of £5.79m) and a basic loss per share of 5.41p (2016: 6.39p loss per share).  It should be noted that the loss is after the Group incurred £4.47m of depreciation and amortisation costs.

 

Globally the International Energy Agency ('IEA') reported that oil and gas investment continued to tumble in 2016 at a rate of decline close to the collapse of 2015, and in fact was little more than half the peak level of 2014 when oil prices started to fall sharply.  The IEA called this "an unprecedented contraction" and although the pace of the decline varies by region, companies, and type of asset, it is important to note that the IEA points out that a significant share of the contraction is due to reduced drilling which impacted the year being reported on.  Crucially the IEA further highlight the new projects that are expected to go forward as being those where costs have been cut sharply, which once again highlights the importance of Plexus' ability to deliver significant operational time savings to operators that can run to millions of dollars per well.  Importantly, despite the fall in overall revenues, Plexus was still able to win new customers in new territories, and in particular Nexen in the UK and Rosneft in Vietnam who joined a range of blue chip customers including AkerBP, Centrica, Brunei Shell Petroleum, Maersk and Total.

 

Post period end we believe the reputation that Plexus has been able to establish for its innovative wellhead equipment led to the announcement last month of the intended sale of the Plexus jack-up exploration rental wellhead business activities to a division of TechnipFMC for up to £42.5m, subject to the fulfilment of certain conditions.  This is a clear endorsement of the unique strengths of Plexus' proprietary technology and represents a significant strategic step, as it realigns Plexus as an IP led research and development business which will now pursue other applications, such as production and subsea wellhead supply either organically or through licensees.  The transaction will enable greater resources and focus to be brought to bear on the development of new and existing POS-GRIP applications outside of jack-up drilling, particularly it is hoped through a new collaboration agreement to be signed with TFMC on Completion to establish a framework and steering committee to work together on potential new applications.

 

Overview

Plexus is first and foremost an innovative and specialist IP-led business.  Our ground-breaking POS-GRIP friction grip technology, which was originally sponsored by Exxon, has been used on over 350 exploration wells across the world by a blue-chip roster of operators.  Exploration wells however, are just one of a number of applications our POS-GRIP friction-based method of engineering can be deployed on, both within the oil and gas sector and the wider energy industry.

 

Our objective has always been to develop and commercialise a suite of best-in-class POS-GRIP products serving a wide range of markets, each of which can offer the customer the same range of benefits in terms of performance, reliability, cost saving and safety. If any piece of equipment incorporates POS-GRIP technology, we want customers to immediately see it as best in class.  To get to this point, we first had to ensure the industry recognised the superior nature and cost effectiveness of our equipment compared to the competition.  The post period end sale of our jack-up exploration business to TFMC, a top three oil and gas service and equipment company, with a market cap of circa US$12 billion, and over 40,000 employees with operations in 48 countries, provides the recognition we have been working towards and can provide a platform for growth going forward. 

 

With technology lying at the heart of what we do, a natural model for the Company to adopt is the capital light, low cost and high margin licensing route, widely adopted to good effect by companies in other sectors such as computer software and IT.  This has been our objective from the outset and last year we were delighted to secure a jack-up exploration application licensing agreement with two leading independent oil and gas services companies covering the important Russian and CIS markets.  Despite signing this licensing agreement, which is not included in the sale of the Jack-up Business, we recognised at an early stage that to become a supplier of critical equipment to an industry that has traditionally taken its time to embrace change, we could not just wait for business to come to Plexus.  We needed to go to the market directly and have operators try out our equipment in field conditions so that they could experience for themselves the benefits and cost advantages of our best in class wellheads.  The jack-up exploration market provided the perfect showcase for our technology as, thanks to the temporary nature of exploration wells, it enabled us to adopt a rental and services model, rather than the more capital-intensive manufacturing alternative required for larger markets such as production. 

 

This strategy has proved to be highly successful.  In a relatively short period of time, Plexus became the dominant supplier of wellheads and associated equipment for HPHT wells in the North Sea; our equipment has been used on over 350 wells; a who's who of operators have become long-standing customers; we have been approached by operators to work jointly with them to apply our technology to new products such as a subsea wellhead; and as far as we are aware Plexus wellheads are the only ones to have passed a new set of higher standards recently prescribed by a major operator.  All of the above were key steps that have led to the signing of the conditional BPA for the sale of our jack-up exploration business to TFMC.  For a top tier supplier to acquire this business following an extensive due diligence process, we believe, represents a major vote of confidence in our technology.  Furthermore the signing on sale completion of a collaboration agreement with us to explore applying POS-GRIP to new products in different markets in our view highlights how POS-GRIP is a game-changing technology that raises the standards of critical equipment such as wellheads.

 

POS-GRIP was designed to address a number of limitations associated with conventional wellhead technology, particularly in terms of metal to metal sealing.  By providing operators with superior solutions which offer unique safety and operational advantages, while at the same time delivering significant time and cost savings, POS-GRIP has raised wellhead standards especially for HPHT applications to equal or exceed those of premium couplings.  The benefits of our technology have been proven many times over in exploration wells drilled out in the field; often in the most challenging environments.  The recognition that there are numerous applications and products which could benefit from the POS-GRIP method of engineering, in our view, lies behind TFMC's decision to explore potential areas of future collaboration.  These are anticipated to range from oil and gas production, subsea and connector technical solutions, to the development of initiatives to make equipment safer and more efficient for use in the wider oil and gas industry, including geothermal and fracking.

 

Gaining industry recognition of our technology is not just a milestone, it also promises to transform our business over the coming years.  Following completion of the deal, our already debt free, cash rich balance sheet will be further strengthened by receipt of the initial consideration payment.   Together with the removal of the outgoings associated with running the jack-up exploration business and a three-year earn-out, which will see Plexus receive a third of revenues generated from revenues up to a cap of £27.5 million, Plexus will be in a position to adopt the licensing operating model more befitting of an IP-led technology company.  This will allow us to move onto the next phase of our development, one which will see us focus on commercialising POS-GRIP in other larger markets both within and outside the energy sector.   

 

We already have a suite of POS-GRIP based products targeting markets outside jack-up exploration that have been tried and tested and, in some cases, have already been successfully deployed by operators out in the field.  For example, in March 2015 Plexus was awarded a contract by Centrica Energy Exploration and Production to supply and rent our POS-SET Connector™ utilising POS-GRIP friction grip engineering, for use on abandonment operations on a gas well originally drilled 35 years ago in 1982 offshore Holland.   As a large number of ageing wells reach the end of their lives in the North Sea and other regions, the Directors believe the abandonment market has significant growth potential and as a result could become an important new revenue stream for the Company.  

 

Post period end in September 2017, we received a purchase order from Centrica North Sea Limited to supply our POS-GRIP "HG" 10,000psi adjustable production wellhead for a gas production well in the UK Southern North Sea.  This contract represents the first order Plexus has been awarded by Centrica for a production well, having previously supplied the operator with wellhead equipment for a number of exploration wells in the North Sea.  Post the sale of the jack-up exploration business, the larger production market is one of several markets we will be targeting, so it is highly encouraging to have won this contract from Centrica.  Indeed this is not our first production well order: we have previously supplied Tullow in the North Sea, BP in Azerbaijan and the BP Amethyst gas field in the Southern North Sea with our POS-GRIP production wellheads. 

 

In addition to the Connector and surface production wellheads, Plexus has, over the years, invested heavily in R&D and IP development covering a wide range of areas and applications outside jack-up exploration. In particular our Python™ Subsea Wellhead, which we believe sets a new best in class and safest standard for subsea wellheads, was developed via a Joint Industry Project supported by BG, Royal Dutch Shell, Wintershall, Maersk, Total, Tullow Oil, eni, Senergy, and Oil States Industries Inc.  Although subsea drilling activity has also been adversely impacted by the industry downturn we are confident that this innovative subsea wellhead, which was designed to meet a range of industry targets such as instant casing hanger lockdown, will have a major role to play.   Other products within our family of POS-GRIP enabled applications include HPHT dual marine risers, which provide a safer, technically superior and cost-efficient solution for use on jack-up rigs; an innovative HPHT Tie-Back connector product; and a new well tree product.   Meanwhile, other markets where we believe POS-GRIP enabled products can raise standards and optimise performance include the renewable energy sectors of wave energy, wind turbines, geothermal and gas storage. 

 

In addition to rolling-out new POS-GRIP products, Plexus will continue to target international markets including the Gulf of Mexico, India, the Middle East and Russia, geographies where we expect activity levels to remain relatively high going forward.  With this in mind, we were pleased to be awarded a follow-on contract for an exploration well offshore Oman during the year under review and post period we were awarded a contract with new customer Rosneft Vietnam, a subsidiary of leading Russian oil and gas company, Rosneft.  We expect this contract, which will see Plexus supply its POS-GRIP HPHT adjustable rental exploration wellhead equipment for an exploration well offshore Vietnam, to help raise the profile of Plexus with Rosneft and other operators in Russia through our Russian licensing partners.

 

On behalf of the Board I would like to thank all our employees both past and present for their dedication and hard work during a challenging oil and gas industry trading environment which, like many other E&P and service companies across the world, led to Plexus having to restructure and reduce staff numbers and overheads.  Such cost control measures were regrettable and I look forward to the level of both exploration and production activity increasing and Plexus once again being able to increase its workforce.

 

Our goal is to replicate the success we have had in jack-up exploration in other markets within the energy industry, including surface production.  With the production sector being many times the size of jack-up exploration, achieving the same success here would be truly transformational for Plexus.  Our production wellheads, like all our products including the connector technology, are based on the same POS-GRIP method of engineering as our exploration equipment and so offer operators superior qualities in terms of performance, reliability and safety as well as significant time and cost savings.  As a result, we believe our production wellheads have the potential to become the go-to equipment for operators all over the world whether supplied by Plexus or future commercial partners.  Crucially we hope we can achieve this in a much shorter timeframe than it took for our jack-up exploration equipment to become established as the wellhead equipment of choice for use on the most challenging wells, such as the Total Solaris well in the North Sea which was the highest pressure well ever drilled in that location.  

 

Several reasons lie behind our confidence.  At the micro level, we are not starting from scratch: operators are already familiar with what POS-GRIP-enabled wellheads deliver as they have been used on over 350 wells worldwide.  Furthermore, it will no longer just be Plexus extolling the benefits of POS-GRIP, top tier supplier TechnipFMC will be offering our technology to their extensive client base for use in jack-up exploration wells. At the macro level, the long-term dynamics of the oil and gas industry very much play to our strengths, specifically natural gas' increasingly key role in the hydrocarbon energy mix.  If targeted reductions in C02 emissions are to be met across the globe, cleaner hydrocarbons such as natural gas will have to displace dirtier fossil fuels such as coal. 

 

The global industry is already seeing the impact of this trend.   According to the BP Energy Outlook 2017, gas is the fastest growing fuel and is set to overtake coal as the second-largest fuel source by 2035.  In April 2017, for the first time since the 1880s, Britain went a full day using electricity that was not generated by coal.   Speaking at the time, Duncan Burt, head of real-time operations at the National Grid, told the Daily Telegraph, "It's a very proud moment for us to be there on the first day when we weren't burning coal…Days like this will become more and more common in the next two or three years, and by the early 2020s burning coal will become increasingly rare."  As the FT further reported, "Gas has been critical to Britain's success in pushing coal to the brink of elimination from its electricity system".  Maarten Wetselaar, Head of Shell's gas business, sees gas playing an important role going forward.  Speaking to the FT he said, "Renewables will dominate in the long run but during the transition, and maybe even at the end of it, there will need to be a stable source of electricity that can step in when wind and solar are not available…I'm absolutely convinced that gas will provide that role."  In the same article, Mr Wetselaar adds, "Heavy transport by ships, trucks and buses can't be electrified and the lowest carbon alternative is for them to use LNG".

 

To continue growing during what amounts to a structural shift towards cleaner fuels, the majors are increasingly prioritising gas projects over oil.  Big Oil is morphing into Big Gas.  As Andrew Ward of the FT wrote on 7 September 2017, "The $14bn Prelude project, led by Royal Dutch Shell, is the latest in a surge of new LNG capacity which promises to reshape the oil and gas industry - and with it, the energy markets they serve.  Chevron's Wheatstone LNG development in Australia is due to start producing this month, on the heels of its nearby Gorgon project last year, after a combined $88bn of investment.  ExxonMobil, BP, Total and Eni have also made big commitments." It is not just the operators who are changing their business mix.  The FT on 30 October 2017 reported that Mitsui & Co, one of Japan's largest trading companies, is moving its energy operations away from oil to liquefied natural gas in response to growing Asian demand for cleaner fuels.  In the article Mitsui's chief executive Tatsuo Yasunaga is quoted as saying, "We're not that keen on liquid, we are now shifting more to gas…Beyond 2020 we have seen lots of opportunities, and demand will be increasing significantly.  Now we have to prepare the supply side".   Plexus is well placed to capitalise on what has been called a 'dash for gas'.  We believe we have the best metal to metal sealing system technology available which is crucial for gas drilling.  As a result, our equipment is ideally suited to the high pressures and high temperatures associated with gas wells, as demonstrated by the £3.3 million contract from Total E&P Norge AS in 2015 to supply the Solaris exploration well, a technically challenging Ultra HPHT well offshore Norway.

 

Regardless of how fast the majors restructure their portfolios in favour of gas, there is a more pressing need that requires addressing.  As the International Energy Agency's World Energy Investment 2017 report states, "falling investment points to a risk of market tightness and under-capacity at some point down the line.  A drop in upstream oil and gas activity and the recent slowdown in the sanctioning of conventional oil fields to its lowest level in more than 70 years may lead to tighter supply in the near future.  Given depletion of existing fields, the pace of investment in conventional fields will need to rise to avoid a supply squeeze, even on optimistic assumptions about technology and the impact of climate policies on oil demand.  The energy transition has barely begun in several key sectors, such as transport and industry, which will continue to rely heavily on oil, gas and coal for the foreseeable future."  Remi Eriksen, the boss of Norway's DNV GL, a leading risk assurance expert in the global energy industry, adds: "There will be oil and gas in the future, and there will need to be further exploration of our resources because the depletion of existing reserves will be faster than the drop-in demand".  Clearly the ongoing demand for hydrocarbons, and the need for the exploration and drilling activity that inevitably goes with it, has some way to go yet.

 

In a similar vein, in this year's BP Statistical Review, Group Chief Economist Spencer Dale wrote of the "the growing gravitational pull of the longer-run energy transition that is under way."  Energy markets are changing. Plexus is changing too.  Post-sale we will have a structure and model that will allow us to develop and market other POS-GRIP products in multiple sectors within the energy market including renewables.  We will however not be alone.  Thanks to our intended Collaboration Agreement we will be looking to work with TFMC to maximise the potential of POS-GRIP to raise standards across the industry, establish POS-GRIP as the enabling technology of the energy sector, and in the process, generate significant value for our shareholders. 

 

 

J Jeffrey Thrall

Non-Executive Chairman

15 November 2017

 

 

Strategic Report

 

Principal Activity

 

The Group markets a patented friction grip method of engineering for oil and gas field wellheads and connectors, named POS-GRIP.  This involves deforming one tubular member against another within the elastic range to effect gripping and sealing.  This superior method of engineering for wellheads offers a number of important advantages to operators, particularly for HPHT applications and can include improved technical performance, improved integrity of metal seals, significant installation time savings, reduced operating costs and enhanced safety.  Revenues during the year under review were predominantly derived from the rental of POS-GRIP wellheads for jack-up exploration, although the range of commercial and safety benefits of POS-GRIP also apply to surface land and platform production and subsea wellheads which are significantly bigger market sectors that Plexus will be actively pursuing both organically and with international partners.  Furthermore, the Directors believe that the Company's proprietary technology has additional wide-ranging applications both within and outside the oil and gas industry.

 

The post period end signing of a conditional BPA for the sale of the niche jack-up exploration wellhead rental operations to a division of leading oil and gas service and equipment provider TechnipFMC realigns Plexus predominantly as an engineering and IP led product design, development and licensing business.  Following Completion, Plexus retains the right to pursue jack-up exploration related business in Russia and the CIS, the third largest hydrocarbon producing market in the world, and where it has existing licence agreements with LLC Gusar and CJSC Konar.  Plexus retains upside exposure to the resumption of jack-up exploration drilling activity through the three year earn-out arrangement which forms part of the terms of the sale agreement with TFMC.  The Company remains free to pursue the much larger surface production market and in due course the subsea market.  Positively in this regard on 25 September 2017, Plexus announced a production equipment order for Centrica, its first production order since 2006, for a gas production well in the UK Southern North Sea.

 

 

 

Revenue

Revenue for the year was £4.75m, down 57.7% from £11.23m in the previous year.  The decline in sales revenue is a result of the continued low level of activity in the jack-up exploration market in Plexus traditional markets, particularly the UKCS and ECS.  Encouragingly certain territories such as India and the Middle East are more active and it is areas such as these where Plexus believes TFMC can reach more effectively.

 

Positively the Group had a number of orders from first time customers both domestically and in Asia such as Nexen in the North Sea and Rosneft in Vietnam, with 23.9% of revenue being achieved from "new customers".

 

The rental of exploration wellheads and related equipment and services accounted for approximately 94% of revenue reflecting the fact that the Company's organic business model remained focused during the period on the supply of jack-up rental surface exploration wellhead equipment and services.  HPHT rental equipment and related services continued to account for the majority of sales revenues declining to £3.80m down from £8.21m last year, a decrease of 53.7%, and accounted for 80.2% of total sales, compared to 73.2% in the prior year.  Standard pressure equipment sales decreased by 63.3% to £0.66m from £1.80m in the prior year, and accounted for 13.9% of total sales compared to 16.0% in the prior year.  This year re-billable expenses revenues made up £0.25m compared to £0.68m last year for items such as freight, shipping and equipment hire.

 

Plexus continued to invest for the future and in its technology with total R&D spend, excluding test fixtures totalling £0.63m compared to £1.86m last year.

 

Margin

Gross margin reduced to 20.6% (compared to 46.6% in the previous year). The decline in margin is largely driven by decline in revenue along with the fixed nature of the depreciation charge at £2.5m.  This makes up 66% of the cost of sales balance compared to 42% in the prior year.

 

Overhead expenses

The financial year to June 2017 has seen the full year benefits of a number of cost saving initiatives which were identified and implemented during the prior financial year.  These were put in place to conserve cash and reduce expenditure following the decline in trading activities and, following the reduction in personnel and infrastructure related overheads, have resulted in significant cost savings being made which decreased to £7.94m from £11.28m in the previous year, a reduction of 29.6%.

 

During the year to June 2017 there was a further headcount reduction programme to "right size" the Group to fit current trading conditions.  Salary staff costs reduced to £3.87m from £6.56m, whilst the employee headcount at the year-end was 68 compared to 81 for the prior year, a decrease of 16.0%.  All other categories of overhead expenditure experienced cost savings when compared to the prior year with the exception being bank charges following the cost of the renewed the banking facilities in October 2016.

 

Adjusted EBITDA

The directors use Adjusted EBITDA as a non-GAAP measure to assess the Group's business.  The directors consider Adjusted EBITDA, approximating as it does to the cash generated by or used in the business, to be the most appropriate measure of the underlying performance of the Group's business in the period.

 

Adjusted EBITDA for the year (before non-recurring restructuring costs of £0.07m) was a loss of £2.48m, compared to a loss of £1.56m (before IFRS 2 share based payment charges of £0.02m) the previous year.  Adjusted EBITDA is calculated as follows:

 

 

 

2017

£'000

2016

£'000

Operating (Loss) / profit

(7,031)

(6,798)

 

 

 

Add back:

 

 

-Depreciation

3,438

3,488

-Amortisation

1,034

980

-Restructuring costs

69

755

-Fair value adjustment to asset held for sale

8

-

-Gain on disposal

(1)

(6)

-Share based payments charges

-

21

 

 

 

Adjusted EBITDA

(2,483)

(1,560)

 

 

Loss before tax

Loss before tax of £7.03m compared to a loss last year of £6.92m. The loss was after absorbing depreciation and amortisation charges which remain in line with last year at £4.47m compared to £4.47m for the prior year.

 

Tax

The Group shows an income tax credit of £1.33m for the year compared to a tax credit of £1.13m for the prior year.  The income tax credit for the year is driven by the loss incurred during the financial period.

 

The Group has an effective tax rate for the year of 19% (2016: 16%).  The effective rate of tax is lower than the current standard UK corporation rate of 20% as a result of SME enhanced R&D tax credits, which arise from the Group's ongoing R&D programme.

 

EPS

The Group reports basic earnings loss per share of 5.41p compared to a loss per share of 6.39p in the prior year.

 

Cash and Statement of Financial Position

The net book value of property, plant and equipment including items in the course of construction and the property held for sale at the year-end was £12.37m compared to £15.57m last year.  Capital expenditure on tangible assets decreased to £0.29m compared to £1.96m last year in line with cash conservation initiatives.  The net book value of intangible assets, including IP rights, R&D and software, decreased by 2.8% to £13.68m compared to £14.08m last year. Capital expenditure on intangibles totalled £0.63m compared to £1.9m last year, a decrease of 66.8%.  Receivables decreased to £1.0m compared to £1.7m last year.  Net cash closed at £6.50m (cash and cash equivalents of £7.18m less bank loans of £0.68m compared to net cash of £9.88m last year (cash and cash equivalents of £15.86m less bank loans of £5.98m) reflecting net cash outflow for the year of £3.38m (net decrease in cash of £8.69m per Statement of Cash Flows plus net decrease in bank borrowings of £5.30m).  The reduction in bank borrowing represents repayment of the £5.0m drawn down revolving credit facility in addition to £0.30m of repayments on the property term loan reducing the balance from £0.98m to £0.68m.  Banking facilities remain unchanged following their renewal in October 2016 and comprise of a £5m revolving credit facility in addition to a reducing five year £1.5m term loan (with a current balance of £0.68m) which was put in place in September 2014 to part fund the purchase of the additional building in Aberdeen and which runs to August 2019.  These facilities combined with the expected cash inflow from the TFMC transaction and the cash balances held are anticipated to be adequate to meet current on-going working capital, capital expenditure, R&D and related project commitments.

 

Intellectual Property ('IP')

The Group carries in its statement of financial position goodwill and intangible assets of £14.45m, a decrease of 2.7% from £14.85m last year.  This represents investment of £0.63m less the annual amortisation charge of £0.98m, reflecting the Group's on-going investment in, and commitment to, the development of its proprietary POS-GRIP technology, the most important elements of which continued to be in relation to the POS-GRIP friction-grip method of engineering and the new Python subsea wellhead.  The Directors have considered whether there have been any indications of impairment of its IP and have concluded, following a detailed asset impairment review, that there is no impairment.  The Directors therefore consider the current carrying values to be appropriate.  Indications of impairment are considered annually.

 

Research and Development

R&D expenditure including patents was reduced by 66.1% year on year from £1.86m to £0.63m.  This reduction must not be taken as a sign that R&D ceases to be an important and necessary part of our activities, as such investment is clearly key to protecting, developing, and broadening the range of proprietary POS-GRIP friction-grip method of engineering applications and related IP.  More particularly this reduction reflects the strategy of focusing on essential R&D as part of our cost control expenditure as well as the fact that our IP and product development suite has never been stronger following the completion of a number of R&D driven projects including the Python subsea wellhead.

 

IFRS 2 (Share Based Payments)

No IFRS 2 charges have been included in the accounts, in line with reporting standards following the completion of the vesting period of all share options.  The fair value of share based payments has been computed independently by specialist consultants and is amortised evenly over the expected vesting period from the date of grant.  The charge for the year was £nil which compares to £0.02m last year.

 

Dividends

While the Company remains committed to distributing dividends to its shareholders, the Directors believe that in view of the continued challenging oil price environment and resulting reduction in exploration drilling activity, and resultant financial performance, it is prudent to continue the suspension of the payment of dividends.  The Company will look to reinstate the normal dividend at the earliest opportunity, and in addition will, following completion of the TFMC transaction, assess the on-going capital requirements of the business and if appropriate may consider paying a proportion of the proceeds to shareholders by way of a special dividend.

 

Operations

During the year, the Company's operational focus was centred on its jack-up exploration business which resulted in a number of orders and contracts being awarded to Plexus, both within the reporting period and post period end.  In line with the Company's strategy to expand its geographic reach away from its dominant position in the North Sea, several of these contracts are for wells which are located in territories that are being actively targeted by Plexus.  Details of all these contracts are provided below. 

 

In tandem with the ordinary course of business, a number of strategic initiatives were pursued during the period.  These culminated in the post period end signing of a conditional BPA for the sale of the jack-up exploration business to TFMC, with whom Plexus will also at completion enter into a Collaboration Agreement to explore opportunities for new, safer and more efficient POS-GRIP technology based applications into significantly larger markets, particularly within the target applications of production, subsea and decommissioning.

 

Contracts announced during the year under review include:

 

·     January 2017 - Purchase order from Masirah for an exploration well in Oman

·     January 2017 - Four-year framework agreement with Centrica Norway to supply surface wellhead and mudline equipment services for jack up exploration wells of all pressure ratings in the Norwegian sector of the North Sea

·     February 2017 - Extension of an existing agreement with Shell Brunei to supply both HPHT and standard pressure wellhead systems and services for three exploration wells in Brunei

·     March 2017 - New customer contract win from Nexen Petroleum U.K. Limited ('Nexen') a subsidiary of CNOOC Limited for an exploration well in the Central North Sea

·     April 2017 - First purchase order for Plexus' Tersus™ TRT Mudline Suspension System ('MLS') equipment from LLC Gusar (OOO Gusar) Ltd ('Gusar'), the Company's partner in Russia 

·     May 2017 - Initial purchase order from Aker BP for an exploration well offshore Norway

·     June 2017 - 4 year contract with Maersk Oil North Sea UK Limited, for the provision of wellhead, mudline suspension systems and associated services including initial purchase order

 

Plexus continued to invest in R&D despite the ongoing challenging trading environment, albeit at a reduced level excluding test fixtures of £0.63m compared to £1.86m in the prior year, a reduction of 66.1%.  R&D remains an important operational activity and underpins and further develops the value of our IP and ability to extend the range of applications of POS-GRIP technology.  Innovation in the oil and gas industry continues to be an essential part of developing both cost saving initiatives and ever safer drilling methods, and Plexus is confident that it can continue to play an important role in delivering such solutions whilst raising wellhead standards to a level that conventional technology cannot reach, such as passing test standards equivalent to those used for premium couplings.

 

Staff and staff development continues to be important to the Group, and following a sustained period of depressed operational activity there was concern the technical skills of those who fulfil specific technical roles would diminish and would find it challenging to perform their role effectively and efficiently when activity increased again.  To ensure this is not the case, a full review of each individual's abilities was completed during the second half of the financial year, highlighting areas that have not been refreshed during low levels of operational activity, and suitable in-house training modules were made available to ensure the necessary skill levels were maintained.  The review was completed in February, and in-house training carried out during March and April.  The training programme was received very well by the technical staff and noted as beneficial and a worthwhile refresher of the skills they have already developed.

 

Competency across the business has continued to evolve and broaden; particularly within workshop and office based staff areas.  The workshop competency system has been developed under the OPITO standards with a view to being accredited by OPITO.  The office based competency system will not be developed under the OPITO standard as it is a concise system that supports the requirements of the ISO9001:2015, which Plexus is currently transitioning to.  Although this system is in its infancy, an action plan is in place to ensure all staff are under assessment within the first quarter of 2018.

 

In light of the increasingly concerning activities and resultant human misery that have brought about the much needed Modern Slavery Act 2015, a review of the requirements was carried out and a focus group was formed (HR, Executive Assistant, Contracts & Supply Chain) to create a Business Code of Conduct, Supplier Code of Conduct, Modern Slavery Statement and Whistleblowing procedure suitable for the business needs.  Plexus takes such matters very seriously, and it is considered good practice that Plexus manages its supply chain in line with the Modern Slavery Act to support the legislative requirement placed on the majority of our clients.  In addition, these business tools have proven to be essential in recent tendering processes as companies' awareness levels about this pernicious crime increase.

 

Staffing figures at the end of June 2017 were 68 employees including 2 international employees, which compares to a total of 81 in the prior year.

 

Health and Safety is an operational area where Plexus remains fully committed to delivering the highest practical safety standards in everything we do each and every day.   We continue to maintain a positive safety culture which is aligned with our Company Safety Values and are pleased to report our HSE culture remains strong across the business and this is reflected by our LTCF and TRCF percentages both being zero, with no major findings during our most recent LRQA certification surveillance audits set against the OHSAS 18001:2007 standard.  

 

Quality also remains a key focus in the delivery of our products and services demonstrated by no major findings in our recent LRQA ISO 9001:2008 surveillance audit and the successful recertification of our API monogram licences for 6A and 17D products.   

 

We continue to seek opportunities for continual improvement and have fully revised our Business Management System not only to comply with our current certification standards but also to meet the new ISO 9001:2015 standard.  We aim to complete our transition to this by the end of January 2018 ahead of the September 2018 deadline, again demonstrating our relentless commitment to attain and sustain the highest standards possible and allow us to respond quickly to client demands.  We recognise it is important that we maintain our facilities so that they comply with applicable regulations and equally promote our commitment to the welfare of our employees.  We have just completed several relevant improvement projects including replacing the Plexus House workshop roofs as well as modifications to the water supply to comply with the recent changes to the Scottish Water Bylaws 2014 and The Water Supply (Water Fittings) (Scotland) Bylaws.

 

IT services and support is an area that continues to be in the headlines with increasing levels of online fraud and related criminality.  Plexus is committed to delivering comprehensive and robust IT systems safely and securely to its employees and business partners.  The IT Department provides technology leadership for Plexus, including governance, information security, software development and expertise in deploying modern information technologies to improve company efficiency, especially during challenging trading conditions.  Plexus relies on its own in-house developed software systems, the ultimate goal of which is to provide employees with timely and convenient access to appropriate information and services, whether sales, cost, or asset related.  The commercial demands of any business drive information technology needs and the ability to develop in-house solutions allows us to maximise the productivity of employees and react quickly to changing business and customer demands.

 

The ever-changing, and seemingly increasing, risks from cyber breaches presents an ongoing threat to the security of our systems.  Defending against cyber-attacks and keeping up to date with evolving policies and regulations is a complex and time-consuming task.  To guarantee that the confidentiality, integrity and accessibility of information is maintained, Plexus has continually evolved its security defences to minimise such cyber risks.  To ensure that the Plexus IT infrastructure, systems and data are as secure as possible Plexus is currently working towards ISO 27001 accreditation, which will help ensure that both internal and external risks are minimised.  Such certification provides customers and key stakeholders with the confidence that security risks are taken and addressed seriously. 

 

 

 

Technology

Plexus' unique and patented POS-GRIP technology involves applying compressive force to the outside of a wellhead or pipe, to flex it inwards.  As the bore of the vessel moves inwards, it makes contact with an inner pipe (or hanger) on the inside.  Sufficient contact force is generated to hold the inner member (hanger) in place through friction between the two components, and creates a superior metal-to-metal seal.  The Company's strategy is primarily focused on delivering the highest standard of wellhead design for the upstream oil and gas markets around the world, and one which is already proven to be uniquely advantageous in terms of safety features, operational efficiency, and cost savings for jack-up drilling especially HPHT applications.

 

POS-GRIP wellhead designs deliver many advantages over conventional "slip and seal" and "mandrel hanger" wellhead technologies for surface exploration and land and platform production applications.  These include larger metal-to-metal seal contact areas, virtual elimination of movement between parts, fewer components, simplified design and assembly, enhanced corrosion resistance, simpler manufacture, long term integrity, annulus management, and reduced installation cost.  Key components of Plexus wellheads can include proprietary superior HG seals; robust metal-to-metal seals which can be machined directly into the hanger, and are energised by use of the external POS-GRIP mechanism.

 

Plexus' POS-GRIP enabled product suite includes the Python subsea wellhead as well as the POS-SET Connector™ for use in the growing decommissioning market. Importantly the Python subsea wellhead eliminates the need for wear bushings, pack-offs, lock-rings, and lockdown sleeves, whilst delivering instant rigid lock-down in all directions, fully reversible for ease of workover, side-tracking or abandonment.  These design simplifications and features not only reduce the risk of installation problems and safety issues, they also significantly reduce installation time and the number of trips that are needed such that it has been independently estimated that up to US$10m of savings are possible for a deep water well.  The POS-SET Connector, which is designed to re-connect to bare conductor pipe for well re-entry or permanent abandonment operations, creates a solid connection with reliable sealing directly against the pipe, and retains bend and load capabilities at 80% of pipe strength.  The directors believe Plexus' wellhead equipment sets a new standard.  Apart from the operational time saving and related safety benefits, at an engineering level the Company has scientifically proven that its technology can uniquely raise the integrity of wellhead testing and sealing to that of premium couplings, which supports its claim that wellheads no longer need to be the weak link in the well architecture chain.

 

POS-GRIP friction-grip technology has wide ranging applications both within and outside the oil and gas industry.  As POS-GRIP is a method of engineering and not a product in its own right, where there is an opportunity for the technology to improve the performance of conventional products, the Company will look to integrate POS-GRIP so that the benefits together with HG sealing can be realised.

 

Business Model and Markets

The Company is proprietary technology driven and its extensive patent protected IP and many years' worth of know-how has been successfully deployed in hundreds of wells around the world.  Its superior performance, safety and operational advantages have given it an enviable position in the niche jack-up exploration market, and the directors believe that this success can be leveraged and extended to the wider energy sector including production, subsea, geothermal and fracking applications based on its POS-GRIP technology.

 

Historically Plexus has focused on supplying adjustable wellhead equipment and associated running tools on a rental basis for the relatively niche jack-up exploration drilling in the UK Continental Shelf ('UKCS') and has achieved a near 100% market share.  This market has over the years expanded into the ECS (Norway, Netherlands and Denmark) and individual contracts have been secured as far afield as China, Russia, Egypt, Cameroon, Trinidad, Venezuela, and Morocco.   The exploration wellhead contracts have been supplied from a rental fleet of owned inventory of which the majority are for 15,000psi HPHT; as opposed to standard pressure 10,000psi wellheads.

 

Having secured a leading position in jack-up exploration drilling, the directors believe Plexus is well placed to pursue its strategy of breaking into the significantly larger and more mainstream volume production wellhead and subsea markets both organically and in conjunction with partners including licensees.  In line with this, the Company announced in September 2017 that it had been awarded a contract with Centrica North Sea Limited to supply its POS-GRIP "HG" 10,000psi adjustable production wellhead for a gas production well in the UK Southern North Sea.  Plexus had previously supplied Centrica with equipment for a number of exploration wells in the North Sea.  This latest order was particularly encouraging for the Company, as production wellheads are required for entire field life conditions particularly suited to POS-GRIP technology and seals, and the size of the market for production wellheads is many times that of jack-up exploration.

 

Strategy

Plexus' long-term goal is to establish POS-GRIP technology as a new industry standard for wellhead and metal sealing designs, whilst continuing to develop new products, which can also offer multiple benefits and advantages to the industry in terms of improved safety, functionality, and cost and time savings.  An example of such extensions for POS-GRIP technology is the Company's connector technology which is ideal for high integrity, low fatigue applications.  The directors believe wellhead connectors, riser connectors, subsea jumper connectors, pipeline connectors, tether tensioners and even vessel mooring connectors can all benefit from the simplicity of POS-GRIP. 

 

The sale of the Jack-up Business to TFMC represents a clear endorsement of Plexus' proprietary technology and marks a significant strategic step for the Company.  It realigns Plexus as an IP-led research and development business and will enable greater resources and focus on the development of new and existing POS-GRIP applications outside jack-up drilling, particularly through the collaboration agreement to be signed with TFMC, which establishes a framework for the two parties to work together on potential new applications.

 

Having proven the significant advantages of Plexus POS-GRIP wellheads for jack-up exploration applications to a wide range of mostly international oil companies ('IOCs'), and having completed the sale of the Jack-up Business to TFMC, Plexus will be able to focus on extending its business activities into the volume land, platform and subsea sectors.  This strategy will be pursued both organically (as highlighted by the Centrica production wellhead order in September 2017) and also through licensees and partners. 

 

Following the pending completion of the sale of the Jack-up Business to TFMC, Plexus will be focused on:

 

1.  Continued operation of remaining business, contracts and products

The Company will continue to focus on current projects which are not part of the sale, and will pursue the development of opportunities with existing products such as POS-GRIP "HG" production wellheads.  Plexus will continue to target international customers in other territories including Gulf of Mexico, India, Middle East and Russia, where it is thought there will be opportunities due to ongoing and planned drilling activity.  The recent award of an exploration contract with new customer Rosneft Vietnam, a subsidiary of leading Russian oil and gas company Rosneft, is anticipated to help raise the profile of Plexus with Rosneft and other operators in Russia and the CIS (which is a territory that Plexus has retained the rights to).

 

2.  Maximisation of Earn-out from the Jack-up Business

The Company intends to prioritise the maximisation of three years' worth of earn-out revenues from the Jack-up Business through the provision of, inter alia, sales and technical support to TFMC.

 

3.  Work with TFMC through the scope of the Collaboration Agreement and the joint steering committee on key POS-GRIP products

The Company and TFMC have reviewed certain topics that can be suited for joint work under the Collaboration Agreement. Should discussions progress successfully this could lead to further commercial IP-led opportunities.

 

4.  Design/Development of new and existing POS-GRIP products/applications

The Company has identified a number of products and applications which it believes would benefit from the integration of POS-GRIP technology.  The Company intends to selectively apply its resources to capitalise on these opportunities, examples of which include:

 

·     Existing applications of POS-GRIP HG® Wellheads, such as HPHT Production Wellheads and Adjustable Production Wellheads

·     New applications of POS-GRIP HG Wellheads and other IP, such as land wellheads, fracking heads, geothermal systems and well abandonment and decommissioning

·     Existing applications for the Python subsea wellheads system, such as deepwater exploration drilling and HPHT subsea production

·     Further developments around the Python subsea system, such as Annulus Access remedial capability and subsea Xmas Trees.

 

5.  Research & Development

Plexus has always been an innovative IP-led business and the Board intends to devote appropriate resources to continue its ongoing innovative and proprietary technology driven approach.

 

Key Performance Indicators

The Directors monitor the performance of the Group by reference to certain financial and non-financial key performance indicators.  The financial indicators include revenue, EBITDA, profit and loss, earnings per share and working capital resources and requirements.  The analysis of these is included in the financial results section of this report.  Non-financial indicators include Health and Safety statistics, equipment utilisation rates, geographical diversity of revenues and customers, geo political considerations, effectiveness of various research and development initiatives; for example in relation to new patent activity and inventions and appropriate employee headcount numbers and turnover rates.

 

Following the sale of the jack-up exploration wellhead equipment and services business described in Note 11 the key performance indicators of the Group will change to reflect the strategy of the business in relation to the exploitation of its proprietary technology, with the focus on non-financial key performance indicators expected to be on research and development initiatives and commercialisation objectives. 

 

Principal Risks and Risk Management

 

There are a number of potential risks and uncertainties that could have an impact on the Group's performance which include the following.

 

 (a)  Political, legal and environmental risks

        Plexus participates in a global market where the exploration and production of oil and gas reserves and even the access to those reserves can be adversely impacted by changes in political, operational, and environmental circumstances.  The current global political landscape continues to demonstrate how any combination of such factors can generate risks and uncertainties that can undermine stable trading conditions, such as Iran making efforts to return to the world hydrocarbon supply stage, America continuing to aggressively pursue its fracking activities, extreme financial and economic deterioration in Venezuela, the speed and scale of reform recently announced in Saudi Arabia and wide-ranging sanctions on Russia.  A specific example of political risk are the aforementioned sanctions, and in extreme circumstances even regime change or a military coup.  As a supplier to the global oil and gas industry it is clear that Plexus can be adversely impacted by such events, which can disrupt the markets and compromise the ability to execute work for customers and/or collect payment for services performed.  Such risks also extend to legal and regulatory issues and it is important to understand that these can change at short notice.  To help address and balance such risks, the Group has sought to broaden its geographic footprint and customer base, as well as actively looking to forge commercial relationships with larger industry players.

 

         Looking closer to home, 'BREXIT' continues to generate much speculation and uncertainty about its timing and eventual impact in terms of for example staff recruitment from abroad, export negativity if duties were to apply and potentially volatile exchange rates.  Our current thinking is that staff recruitment when activity levels pick up is not currently a major concern, and weaker Sterling actually makes our products and services cheaper to customers outside of the UK.  In addition, some of our sales are in Euros and this could generate a small currency gain opportunity when converted to Sterling.  Also, as we see our equipment as being a unique option for customers we would anticipate that BREXIT is likely to have a lesser impact for Plexus than it may have on other companies and industries.  However, if we need to manufacture more equipment for rent or sale, the cost of raw material, and in particular steel may increase if Sterling's weakness continues.

 

 (b)    Oil and Gas Sector Trends

          It is readily understood that the world continues to move away from coal as part of the COP21 climate change objectives and the ongoing need to reduce CO2 emissions.  However, the commercial and environmental dynamics between traditional hydrocarbons in terms of coal, oil and gas is not the only trend to consider.  New technologies, particularly in relation to renewables, alternative energies and developments such as the increasing use of electric vehicles and corresponding improvements in battery storage life, wind and wave energy, could all in the future prove very disruptive to the traditional oil and gas industry and therefore demand for exploration and production equipment and services.  

 

 (c)  Technology

        The Group is now beginning to turn towards the commercialisation, marketing and application of its POS-GRIP friction-grip technology beyond jack-up rental exploration wellhead equipment, both with regard to expanding into the surface land and platform production market sector, as well as the subsea market where the Plexus POS-GRIP Python subsea wellhead offers numerous operational and performance benefits.  Current and future contract opportunities may be adversely affected by technology related factors outside the Group's control, especially where new product developments are concerned.  These may include unforeseen equipment design issues, test delays during a contract and final testing, and delayed acceptances of deliveries, as well as the slow uptake by operators which could lead to possible abortive expenditure and write downs, reputational risk and potential customer claims or onerous contractual terms.  Such risks may materially impact on the Group.  To mitigate this risk, the Group continues to invest in developing and proving the technology and has a policy of on-going training of our own personnel and where appropriate our partners and customers.

 

 (d)  Competitive risk

        The Group operates in highly competitive markets and often competes directly with large multi-national corporations who have greater resources and are more established, and who are more resilient to extended adverse trading conditions.  Major oil service and equipment company consolidations that have taken place over the last few years have magnified such issues as competitors reduce in number but increase in size.  Unforeseen product innovation or technical advances by competitors could adversely affect the Group and lead to a slower take up of the Group's proprietary technology.  To mitigate this risk Plexus maintains an extensive suite of patents and trademarks, and actively continues to develop and improve its IP to ensure that it continues to be able to offer unique superior wellhead design solutions.

 

 (e)  Operational

        Plexus, like many other oil service companies, has had to make significant reductions in its workforce numbers since 2015 when the oil price and corresponding drilling activity fell significantly.  Therefore, when the anticipated upturn comes in drilling activity, it is possible that the industry and Plexus could experience difficulties in rehiring past or new employees and this could deprive Plexus of the key personnel necessary for expanding operational activities, as well as research and development initiatives at the rate that may be required.  To help mitigate this risk Plexus has developed effective recruitment and training procedures, which combined with the appeal of working in a company with unique technology and engineering solutions will hopefully minimise this risk.

 

 (f)   Liquidity and finance requirements

        In an economic climate that remains in many ways uncertain it has become increasingly possible for both existing and potential sources of finance to be closed to businesses for a variety of reasons that have not been an issue in the past.  Some of these may even relate to the lender itself in terms of its own capital ratios and lending capacity.  Furthermore, after a sustained period of record low interest rates signs are emerging that the cost of money will increase and this could also have a negative impact on business activity.  Although access to capital could be an issue, completion of the disposal of the Plexus jack-up business Plexus will deliver additional cash to add to its existing reserves.  In addition, the Group successfully renewed bank facilities with Bank of Scotland.

 

 (g)       Credit

     The main credit risk is attributable to trade receivables.  As the majority of the Group's customers are large international oil companies the risk of non-payment is significantly reduced, and therefore is more likely to be related to client satisfaction and/or trade sanction issues.  Customer payments can involve extended periods of time especially from countries where exchange control regulations can delay the transfer of funds outside those countries.  As Plexus begins to establish international licensee relationships there may be instances whereby certain capital payments could be due some way into the future and as such greater credit risk than exists under normal payments terms could apply.  The Group's exposure to credit risk is monitored continuously.

 

  (h)   Risk assessment

     The Board has established an on-going process for identifying, evaluating and managing the more significant risk areas faced by the Group.  One of the Board's control documents is a detailed "Risks assessment & management document" which categorises risks in terms of - business (including IT), compliance, finance, cash, debtors, fixed assets, other debtors/prepayments, creditors, legal, and personnel.  These risks are assessed and updated on a regular basis and can be associated with a variety of internal and external sources including regulatory requirements, disruption to information systems including cyber-crime, control breakdowns and social, ethical, environmental and health and safety issues.

 

 

G Stevens

Director

15 November 2017

 

 

Consolidated Statement of Comprehensive Income

for the year ended 30 June 2017

 

Notes

2017

£'000

2016

£'000

Revenue

1

4,749

11,227

Cost of sales

 

(3,770)

(5,994)

 

 

 

 

Gross profit

 

979

5,233

 

 

 

 

Administrative expenses

 

(7,941)

(11,276)

Restructuring costs

 

(69)

(755)

 

 

 

 

Operating loss

 

(7,031)

(6,798)

Finance income

 

     59

     69

Finance costs

 

(61)

(187)

 

 

 

 

Loss before taxation

 

(7,033)

(6,916)

Income tax credit

3

1,331

1,126

 

 

 

 

Loss attributable to the owners of the parent

 

(5,702)

(5,790)

Other comprehensive income

 

-

-

 

 

 

 

Total comprehensive income for the year attributable to the owners of the parent

 

(5,702)

(5,790)

 

 

 

 

Loss per share

4

 

 

Basic

 

               (5.41p)

               (6.39p)

Diluted

 

(5.41p)

(6.39p)

 

 

 

Consolidated Statement of Financial Position

at 30 June 2017

 

 

2017

2016

 

Notes

£'000

£'000

Assets

 

 

 

Goodwill

 

767

767

Intangible assets

5

13,678

14,080

Property, plant and equipment

6

11,976

15,567

Deferred tax asset

 

287

-

 

 

 

 

Total non-current assets

 

26,708

30,414

 

 

 

 

Asset held for sale

7

396

-

Inventories

 

6,840

6,726

Trade and other receivables

 

1,008

1,747

Current income tax asset

 

966

229

Cash and cash equivalents

 

7,178

15,863

 

 

 

 

Total current assets

 

16,388

24,565

 

 

 

 

Total Assets

 

43,096

54,979

 

 

 

 

Equity and Liabilities

 

 

 

Called up share capital

8

1,054

1,054

Share premium account

 

36,893

36,893

Share based payments reserve

 

767

766

Retained earnings

 

2,575

8,277

 

 

 

 

Total equity attributable to equity holders of the parent

 

41,289

46,990

 

 

 

 

Liabilities

 

 

 

Deferred tax liabilities

 

-

468

Bank loans

 

375

675

 

 

 

 

Total non-current liabilities

 

375

1,143

 

 

 

 

Trade and other payables

 

1,132

1,546

Bank loans

 

300

5,300

 

 

 

 

Total current liabilities

 

1,432

6,846

 

 

 

 

Total liabilities

 

1,807

7,989

 

 

 

 

Total Equity and Liabilities

 

43,096

54,979

 

 

 

Consolidated Statement of Changes in Equity

for the year ended 30 June 2017

 

  Called    Up

Share

Capital

£'000

 

 

Share

Premium

Account

£'000

 

 

Share

Based

Payments

Reserve

£'000

Retained

Earnings

£'000

 

Total

£'000

 

 

Balance as at 30 June 2015

849

20,141

1,862

15,628

38,480

Total comprehensive income for the year

-

-

-

(5,790)

(5,790)

Share based payments reserve charge

-

-

21

-

21

Current year credit on share option exercise to share based payment reserve

-

-

5

-

5

Transfer of share based payments reserve charge on exercise of options

-

-

(3)

3

-

Issue of ordinary shares (net of issue costs)

205

16,752

-

-

16,957

Net deferred tax movement on share options

-

-

(1,119)

-

(1,119)

Dividends

-

-

-

(1,564)

(1,564)

Balance as at 30 June 2016

1,054

36,893

766

8,277

46,990

 

 

 

 

 

 

Total comprehensive income for the year

-

-

-

(5,702)

(5,702)

Net deferred tax movement on share options

-

-

1

-

1

 

 

 

 

 

 

Balance as at 30 June 2017

1,054

36,893

767

2,575

41,289

 

 

 

Consolidated Statement of Cash Flows

for the year ended 30 June 2017

 

Notes

2017

£'000

2016

£'000

Cash flows from operating activities

 

 

 

Loss before taxation

 

(7,033)

(6,916)

Adjustments for:

 

 

 

 Depreciation, amortisation and impairment charges

 

4,472

4,471

 Gain on disposal of property, plant and equipment

 

(1)

(2)

 Charge for share based payments

 

-

21

 Investment income

 

(59)

(69)

 Interest expense

 

61

187

Changes in working capital:

 

 

 

 Increase in inventories

 

(114)

(175)

 Decrease in trade and other receivables

 

739

5,554

 Decrease in trade and other payables

 

(414)

(1,750)

 

 

 

 

Cash (used) / generated from operating activities

 

(2,349)

1,321

Income taxes (paid) / refunded

 

(160)

34

 

 

 

 

Net cash (used) / generated from operating activities

 

(2,509)

1,355

 

 

 

 

Cash flows from investing activities

 

 

 

Purchase of intangible assets

 

(632)

(1,900)

Purchase of property, plant and equipment

 

(287)

(1,956)

Proceeds of sale of property, plant and equipment and intangibles

 

45

61

Interest received

 

59

69

 

 

 

 

Net cash used in investing activities

 

(815)

(3,726)

 

 

 

 

Cash flows from financing activities

 

 

 

Repayment of loans and banking facilities

 

(5,300)

(300)

Interest paid

 

(61)

(187)

Net proceeds from issue of new ordinary shares

 

-

16,923

Proceeds from share options exercised

 

-

34

Equity dividends paid

 

-

(1,564)

 

 

 

 

Net cash (outflow) / inflow from financing activities

 

(5,361)

14,906

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(8,685)

12,535

Cash and cash equivalents at 1 July 2016

 

15,863

3,328

 

 

 

 

Cash and cash equivalents at 30 June 2017

10

7,178

15,863

 

 

 

 

 

Notes to the Consolidated Financial Statements

1.   Revenue

 

2017

£'000

2016

£'000

By geographical area

 

 

UK

475

1,241

Europe

3,099

7,636

Rest of World

1,175

2,350

 

4,749

11,227

 

The revenue information above is based on the location of the customer. Substantially all of the revenue in the current and previous periods derives from the rental of equipment and the provision of related services.

 

2.     Segment reporting

The Group derives revenue from the sale of its POS-GRIP technology and associated products, the rental of wellheads utilising the POS-GRIP technology and service income principally derived in assisting with the commissioning and on-going service requirements of our equipment.  These income streams are all derived from the utilisation of the technology which the Group believes is its only segment.

 

Per IFRS 8, the operating segment is based on internal reports about components of the group, which are regularly reviewed and used by the board of directors being the Chief Operating Decision Maker ("CODM").

 

All of the Group's non-current assets are held in the UK.

The following customers each account for more than 10% of the Group's revenue:

 

2017

£'000

2016

£'000

Customer 1

1,159

3,696

Customer 2

1,706

1,328

Customer 3

691

-

 

3.     Income tax expense

(i)

The taxation charge for the year comprises:

2017

£'000

2016

£'000

 

 

UK Corporation tax:

 

 

 

 

 Current tax on income for the year

-

5

 

 

 Adjustment in respect of prior years

(526)

(383)

 

 

 

(526)

(378)

 

 

Foreign tax

 

 

 

 

 Current tax on income for the year

2

61

 

 

 Adjustment in respect of prior years

(52)

56

 

 

 

(50)

117

 

 

Total current tax credit

(576)

(261)

 

 

 

 

 

 

 

Deferred tax:

 

 

 

 

 

Origination and reversal of timing differences

(1,054)

(628)

 

 

Short term timing differences

-

64

 

 

Difference between qualifying fixed assets and capital allowances

-

(643)

 

 

Share based payments charged to the Income Statement

-

151

 

 

Adjustment in respect of prior years

298

   193

 

Total deferred tax

(756)

(863)

 

 

 

 

 

 

 

Total tax credit

(1,331)

(1,126)

 

 

The effective rate of tax is 19% (2016: 16%)

 

 

 

(ii)

Factors affecting the tax charge for the year

2017

£'000

2016

£'000

 

 

Loss on ordinary activities before tax

(7,033)

(6,916)

 

 

Tax on (loss) / profit at standard rate of UK corporation tax of 19.75% (2016: 20%)

(1,389)

(1,383)

 

 

Effects of:

 

 

 

 

Expenses not deductible for tax purposes

229

554

 

 

Effect of change in tax rate

114

(61)

 

 

Tax adjustments on share based payments

(8)

151

 

 

Foreign tax rates

2

108

 

 

Adjustments in respect of prior year

(279)

(192)

 

 

Group income not subject to tax

-

(303)

 

 

Total tax (credit) / charge

(1,331)

(1,126)

 

               

 

(iii)

Movement in deferred tax (asset)/liability balance

2017

£'000

2016

£'000

 

Deferred tax liability at beginning of year

468

212

 

(Credit) / charge to Statement of Comprehensive Income

(756)

(863)

 

Deferred tax movement on share options recognised in equity

1

1,119

 

 

 

 

 

Deferred tax (asset)/liability at end of year

(287)

468

 

 

 

 

 

(iv)

Deferred tax (asset)/ liability balance

2017

£'000

2016

£'000

 

The deferred tax liability balance is made up of the following items:

 

 

 

Difference between depreciation and capital allowances

643

1,001

 

Share based payments

(96)

(88)

 

Tax losses

(705)

(445)

 

Tax provisions

(129)

-

 

Deferred tax (asset)/liability at end of year

(287)

468

 

4.     Loss per share

 

2017

£'000

2016

£'000

Loss attributable to shareholders

(5,702)

(5,790)

 

Number

Number

Weighted average number of shares in issue

105,386,239

90,597,415

Dilution effects of share schemes

1,108,692

2,135,987

 

 

 

Diluted weighted average number of shares in issue

106,494,931

92,733,402

 

 

 

Basic Loss per share

(5.41p)

(6.39p)

Diluted Loss per share

(5.41p)

(6.39p)

 

 

 

Basic loss per share is calculated on the results attributable to ordinary shares divided by the weighted average number of shares in issue during the year.

Diluted earnings per share calculations include additional shares to reflect the dilutive effect of employee share schemes and share option schemes. As a loss was made in the current year the option schemes are considered to be anti-dilutive.

 

5.     Intangible fixed assets

 

Intellectual

 Property

£'000

Patent and

Other

Development

£'000

Computer

Software

£'000

Total

£'000

Cost

 

 

 

 

As at 30 June 2015

6,440

11,193

294

17,927

Additions

-

1,860

37

1,897

Disposals

-

(4)

-

(4)

 

 

 

 

 

As at 30 June 2016

6,440

13,049

331

19,820

Additions

-

632

-

632

As at 30 June 2017

6,440

13,681

331

20,452

 

 

 

 

 

Amortisation

 

 

 

 

As at 30 June 2015

3,021

1,543

196

4,760

Charge for the year

330

612

38

980

On Disposals

-

-

-

-

 

 

 

 

 

As at 30 June 2016

3,351

2,155

234

5,740

Charge for the year

330

668

36

1,034

As at 30 June 2017

3,681

2,823

270

6,774

 

 

 

 

 

Net Book Value

 

 

 

 

As at 30 June 2017

2,759

10,858

61

13,678

 

 

 

 

 

As at 30 June 2016

3,089

10,894

97

14,080

                                                                                                                                                     

6.     Property, plant and equipment

 

Buildings

£'000

Tenant

Improvements

£'000

Equipment

£'000

Assets under

Construction

£'000

Motor

Vehicles

£'000

Total

£'000

Cost

 

 

 

 

 

 

As at 30 June 2015

4,379

432

28,544

174

48

33,577

Additions

-

168

588

1,200

-

1,956

Transfers

-

-

1,316

(1,316)

-

-

Disposals

-

-

(318)

-

(14)

(332)

 

 

 

 

 

 

 

As at 30 June 2016

4,379

600

30,130

58

34

35,201

Additions

-

132

65

90

-

287

Transfers

-

-

126

(126)

-

-

Reclassified to assets held for sale

(455)

-

-

-

-

(455)

Disposals

-

(26)

(1,489)

-

(2)

(1,517)

 

 

 

 

 

 

 

As at 30 June 2017

3,924

706

28,832

22

32

33,516

 

 

 

 

 

 

 

Depreciation

 

 

 

 

 

 

As at 30 June 2015

558

182

15,650

-

33

16,423

Charge for the year

250

68

3,164

-

6

3,488

On disposals

-

-

(263)

-

(14)

(277)

 

 

 

 

 

 

 

As at 30 June 2016

808

250

18,551

-

25

19,634

Charge for the year

250

72

3,112

-

4

3,438

On disposals

-

(26)

(1,453)

-

(2)

(1,481)

Reclassified to assets held for sale

(51)

-

-

-

-

(51)

As at 30 June 2017

1,007

296

20,210

-

27

21,540

 

 

 

 

 

 

 

Net Book Value

 

 

 

 

 

 

As at 30 June 2017

2,917

410

8,622

22

5

11,976

 

 

 

 

 

 

 

As at 30 June 2016

3,571

350

11,579

58

9

15,567

               

 

       

7.     Asset Held for sale

 

2017

£'000

2016

£'000

Cost

455

-

Accumulated depreciation

(51)

-

Net book value

404

-

Fair value adjustment

(4)

-

Cost of sale

(4)

-

 

396

-

                                                  

The asset held for sale relates to a property that was sold on 14 July 2017.  The Group had entered into a sale agreement prior to the year end.  In line with IFRS5 the asset is held for sale at fair value less costs of sale.

 

8.     Share Capital

 

2017

£'000

2016

£'000

Authorised:

 

 

Equity: 110,000,000 (2016: 110,000,000) Ordinary shares of 1p each

1,100

1,100

Allotted, called up and fully paid:

 

 

Equity: 105,386,239 (2016: 105,386,239) Ordinary shares of 1p each

1,054

1,054

 

9.     Reconciliation of net cash flow to movement in net cash/(debt)

 

2017

£'000

2016

£'000

(Decrease)/Increase in cash in the year

(3,385)

12,835

 

 

 

Movement in net (debt)/cash in year

(3,385)

12,835

Net cash/(debt) at start of year

9,888

(2,947)

Net cash at end of year

6,503

9,888

 

 

10.   Analysis of net cash/(debt)

 

At beginning

of year

£'000

Cash flow

£'000

At end

of year

£'000

Cash in hand and at bank

15,863

(8,685)

7,178

Bank loans

(5,975)

5,300

(675)

Total

9,888

(3,385)

6,503

 

11.   Subsequent Events

On 19 October 2017 the Group announced the sale of its wellhead exploration equipment and services business for jack-up applications (the "Jack-up Business") to FMC Technologies Limited ("TFMC"), a subsidiary of TechnipFMC (Paris:FTI) (NYSE:FTI) one of the leading oil & gas service and equipment companies (the "Disposal").

 

In addition and as part of the Transaction, Plexus, Plexus' subsidiary POSL and TFMC will also be entering into a Collaboration Agreement ("CA") which establishes a framework to work together both on the development of existing POS-GRIP IP for applications outside of jack-up exploration, as well as future new technologies.

 

The Disposal follows the signing of a conditional Business Purchase Agreement ("BPA") by Plexus, POSL and TFMC.  Under the terms of the BPA, the Plexus Group will receive an initial gross cash consideration of £15,000,000, subject to certain adjustments, with an additional sum of up to £27,500,000 payable dependent on the future performance of the Jack-up Business during a three-year earn-out period.  The earn-out has the potential to increase the total cash gross consideration to £42,500,000.

 

The tables below summarise the financial impact of the disposal on the reported results of the Group:

 

Year ended 30 June 2017 

 

 

Disposal

£'000

Remaining

£'000

Reported

£'000

Revenues

4,545

204

4,749

Loss before taxation

(2,312)

(4,721)

(7,033)

Net assets

13,830

27,459

41,289

 

Year ended 30 June 2016 

 

 

Disposal

£'000

Remaining

£'000

Reported

£'000

Revenues

11,193

34

11,227

Loss before taxation

(1,415)

(5,501)

(6,916)

Net assets

16,208

30,782

46,990

 

The financial information above does not constitute the company's statutory accounts for the year ended 30 June 2017 but is derived from those statements.

 

The statutory financial statements and this preliminary statement for the year ended 30 June 2017 were approved by the Board on 15 November 2017.  On the same date the company's auditors, Crowe Clark Whitehill LLP issued an unqualified report on those financial statements.  The audit report did not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report or contain a statement under section 498(2) or (3) of the Companies Act 2006.  

 

The financial information for the year ended 30 June 2016 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies.  The auditors reported on those accounts; their report was unqualified and did not draw attention to any matters be way of emphasis and not contain a statement under s498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation.  The Company's financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the EU.  A copy of the statutory accounts will be delivered to the Registrar of Companies in due course.

 

The Annual Report will be circulated to all shareholders and thereafter, copies will be available from the registered office of the company, 42-50 Hersham Road, Walton-on-Thames, Surrey, KT12 1RZ.

 

 

 

 

 


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