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ADES International's valuation gap 'hard to justify'

Utilisation rates rose to 83% helped by the acquisition of three jack-up rigs from Nabors.
oil rig
Revenues have picked up sharply

Oil prices might still be volatile but the environment for companies serving the sector is much brighter than a year ago.

Rig providers are on the front line of exploration activity and a sharp increase in revenues in the latest quarter for ADES International Limited (LON:ADES) suggests things are moving again.

WATCH: Nabors and Kuwait acquisitions gives ADES International a boost in its third quarter

The last three months were a strong quarter said Mohamed Farouk, chief executive.

Utilisation rates rose to 83% helped also by the acquisition of three jack-up rigs from Nabors.

Revenues, meanwhile, rose 23% quarter -on- quarter to US$47mln with a 52% increase over the same period a year ago.

Focused on the Middle East, ADES had an order backlog worth US$437mln at the end of September while net debt was US$204mln.

Farouk said: “When combined with the recently acquired assets from Weatherford, our current cumulative backlog has reached $1 billion.

“We have increasing confidence in delivering material growth into 2019, which is underpinned by our significant and growing backlog."

Shares attractive says broker

The shares are attractive says broker Canaccord especially if a line is drawn through another recent deal in the sector.

Baker Hughes paid $550mln for a 5% stake in ADNOC Drilling, valuing the whole business at around $11bn.

Canaccord analyst Alex Brooks, in a note, highlighted that ADES is due to complete its deal to acquire rigs from Weatherford in the fourth quarter and after that, he says, the company’s fleet will similar to that of ADNOC Drilling.

“We believe that comparing ADNOC Drilling to ADES is fair, with appropriate caveats,” Brooks said.

“ADNOC Drilling is being valued by BHI - one of the leading companies in the oil industry - at around ten times the current enterprise value of ADES.

“By simple number of rigs, ADES is one-half the size of ADNOC Drilling; taking into account capability, ADES has perhaps one-quarter the capability.

“This still leaves a large valuation gap, and helps to underscore our continued bullishness on ADES.”

Describing ADES, the analyst added: “This is a low cost, high margin drilling business that is able to create value through operating drilling rigs at far lower costs than its industrial peers, but has at least as good safety & operating performance, and an expansion strategy that centres on adding rigs with a proven track record and secure backlog.”

Canaccord’s ‘buy’ recommendation comes with a $22.00 per share price target, suggesting some 50% upside to the current price.

At the current price, ADES is rated at half the value of its industrial peers – “A rating which we struggle to understand or justify,” Brooks said.

“The next trigger is the likely completion of the Weatherford acquisition.”

Weatherford deal to double ADES fleet

In July, ADES announced the $288mln deal to acquire 31 onshore drilling rigs located in North Africa and the Middle East from Weatherford International.

The deal doubles ADES operational drill fleet and includes contracts, management systems and approximately 2,300 staff throughout Algeria, Kuwait and Saudi Arabia.

At present, twenty of the rigs are under contract with the rest to be used as inventory and for tenders.

Revenues from the Weatherford rigs are expected to be US$150mln a year and they will add US$750mln to ADES' order backlog.

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ADES International Holding PLC Timeline

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May 03 2019
The order backlog at the end of February totalled US$1.5bn

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