‘Underground GPS’ is how chief executive Martin Perry describes Enteq Upstream PLC’s (LON:NTQ) oil well technology.
The AIM-listed group specialises in measurement and directional equipment to get the optimal production from a well.
WATCH: Enteq Upstream expands into the Middle East 'now lean years are over'.
Its sensors and electronic controllers sit behind the motor driving the drill bit, measuring direction, where it is and parameters about rocks, vibration and temperature.
In short, essential pieces of kit to make sure a well goes to the place the geologist wants.
The big three oilfield service groups Schlumberger, Halliburton and Baker-Hughes all have their own in-house capability and account for half of the market.
Enteq has a good share of the rest.
The problem up until the middle of last year, however, was that fewer and fewer wells overall were being drilled in the US.
Rig count above 1,000 again
Drilling is closely linked to the price of crude and when the US benchmark West Texas Intermediate tumbled to US$36 per barrel at the start of 2016, US rig activity stalled.
By January 2017, fewer than 600 rigs were in operation, which predictably had an adverse effect on all oilfield services providers including Enteq.
Perry calls them the lean years, but things are looking much better now
Having rallied to more than US$70 per barrel in October, the crude price has settled at around US$55-57.
Anything about US$45 is more than enough to keep oil companies drilling, says Perry, something borne out by the latest Baker Hughes rig count that showed 1,051 rigs in operation in the US.
And that increased activity has already started to show through in Enteq’s numbers.
Both sales and profits are running well ahead of expectations, the company said in a trading update.
Results well ahead of expectations
Turnover in the year to March 2019 will be 50% up from the US$6.5mln seen in 2017/18.
House broker Investec, meanwhile, raised its forecast for underlying earnings for the year by 10% to US$1.95mln.
Growth accelerated through 2018, said the broker, while there is good visibility into the March year-end.
The share price also picked up but is still well short of what Perry expected when he floated Enteq on AIM in 2011.
Previously he had set up and run oilfield services group Sondex, which was sold to GE for £289mln in 2007.
The intention was to follow a similar buy and build strategy with Enteq.
Buy and Build
That ambition was halted by the oil price slide but having spent the last couple of years battening down the hatches, Perry is looking up again.
Around 90% of revenue comes from the US and some 250 of the drill rigs currently in operation there have at least one key part supplied by Enteq.
He wants now to broaden the geographic reach of the business and strengthen its technological base.
In particular, he is looking at the Middle East, China and elsewhere in the Far East, where he feels that with the right local partner Enteq can challenge the dominance of the big three.
In Saudi Arabia, for example, there is an opportunity in the gas that the country wants to develop for its own domestic use.
Opportunities overseas
Enteq works with many of the US shale producers and China is keen to develop its own unconventional gas assets.
Perry says the technology is agnostic to whether a well is conventional or unconventional, but nearly all its business is onshore and there is another opportunity in offshore contracts.
The cost and logistical difficulties with offshore wells mean they require much more monitoring, something known as ‘logging while drilling’.
That is well-suited to Enteq’s technology, believes Perry, and it is spending to upgrade its capability for this market.
The technology can also be applied to other areas such as geo-thermal power while Perry hints he might also dust-off the buy and build plans and look at acquisitions to strengthen the business.
Plenty of firepower
Enteq has the firepower for a deal. Net cash is around US$11mln, a figure, ironically, that was boosted by the slowdown in rig activity as it supplied customers from stocks.
Some of that money is earmarked to build its rental fleet to help smaller customers.
There are 28 rentals currently, with several more kits likely to be added before year-end, according to Investec.
The cash balance is worth 13p per share, added the broker, which has a price target of 46p compared to 28.5p today.
Perry adds that all its other assets are ‘real’ with the only intangible, the ongoing R&D project.
Add the cash and the market value of £17.9mln looks pretty well covered.
Throw in the expansion and recovery potential and the recent share price bounce looks set to continue.