logo-loader

Enteq Upstream - strong balance sheet maintained

Last updated: 08:30 08 Apr 2020 BST, First published: 08:48 08 Apr 2020 BST

Enteq Upstream - strong balance sheet maintained
Trading update

Enteq Upstream (LON:NTQ) has released a trading update for the year ending March 2020 and the outlook relating to COVID-19 and oil price declines. The company expects to report results broadly in line with market expectations for the year to March 2020, with revenues of around US$11mln, underlying adjusted EBITDA (earnings before tax interest depreciation and amortisation) of around US$3mln, and a year-end positive net cash balance of US$10mln.

For the year ahead, Enteq has suspended financial guidance. We believe this is unsurprising and we expect most companies in the oil & gas equipment sector will do likewise, as many customers have reduced or cancelled capital expenditure (capex) plans. The company will take a US$6mln non-cash write-down to its balance sheet relating to the reduced visibility.

Enteq has responded with immediate actions to reduce costs — cutting headcount in the core US operations, implementing salary reductions and switching more of the board remuneration to share-based payments.

Business mix and recovery potential

The company has indicated that it expects international markets (meaning outside North America) to show greater resilience. We believe this is likely to be the case due to North America’s production comprising higher cost extraction (e.g. shale). Some overseas markets are national strategic energy projects (Western China and some Russian projects) and others are low-cost producers (Middle East) that are likely to be more willing to sustain some of their capex projects. International markets made up 30% of Enteq’s revenues in the full-year (FY) to March 2020 (our estimate), compared with 10% in the previous year, with the increase arising from the company’s strategic initiative to broaden its revenue base. A recently announced partnership in Saudi Arabia further expands the international presence.

Enteq has also indicated that it will continue to invest in selected engineering development projects. One important programme is the Rotary Steerable Drilling system being developed under a licensing agreement with Shell. We believe that the expanded product base could enable Enteq to significantly exceed its FY Mar 2020 revenue run-rate once market conditions allow.

Cash position, valuation

The strong net cash position on Enteq’s balance sheet (US$10mln) is an important element of the investment proposition in our view. We believe that with its reduced cost base, the company will be able to trade through a very depressed revenue environment in 2020 (and 2021 if necessary) without needing to access fresh capital. We believe that some industry peers may prove less resilient, which could alter the competitive landscape going forward.

The shares now trade on an enterprise value (EV)/sales multiple of 0.24x (using trailing Mar 2020 revenues). While the market may be sceptical about any kind of valuation metrics applied to the energy sector at present, we believe that this multiple implies substantial upside potential for Enteq shareholders once the energy market enters a recovery.

NO INVESTMENT ADVICE

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities,...

FOR OUR FULL DISCLAIMER CLICK HERE
LEGAL NOTICE – IMPORTANT – PLEASE READ:

This document is published by Proactive Research and its contents have not been approved as a financial promotion by Proactive Investors Limited or any other FCA authorised person. This communication is made on the basis of the 'journalist exemption' provide for in Article 20 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and having regard to the FCA rules, and in particular PERG 8.12.

Where the note contains a ‘buy, sell, hold’ recommend, Proactive Investors Limited is authorised to provide investment advice as defined by Article 53 of the RAO

FOR OUR FULL DISCLAIMER CLICK HERE

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

10 minutes ago