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Trading Update – what are the details?
Plexus Holdings PLC, the AIM quoted oil and gas engineering services business and owner of the proprietary POS-GRIP friction-grip method of wellhead engineering, has issued a trading update ahead of its half year results for the six months ending 31 December 2015 which will be announced in March 2016.
In the financial year ending 30 June 2015 Plexus delivered a robust financial performance reporting strong growth in revenue and profits during what was a period of substantial progress in terms of renting its best in class POS-GRIP exploration wellhead systems to an increased range of blue-chip oil and gas companies worldwide; new product launches including its new and safer Python Subsea Wellhead® which was supported by the likes of Shell, BG, Total and Maersk; and a licensing agreement with major Chinese oil and gas manufacturing company Yantai Jereh Oilfield Services Group Co., Ltd to help distribute and market POS-GRIP products to the wider global market, in line with Plexus’ global expansion strategy.
Notwithstanding last year’s progress, in light of the ongoing global economic downturn and in particular the unprecedented oil price decline which in just three months fell from circa US$50 in October 2015 to as low as US$27 per barrel in January 2016, Plexus has seen a significant slowdown in planned activity by its customers to the extent that it cannot see the reduced activity levels being recovered in the current financial year as a result of a number of projects being delayed, postponed or cancelled. This has affected the Company’s performance in H1 FY16 and will have a very significant impact on the financial results for the full year to 30 June 2016.
This downward cycle has accelerated sharply towards the end of 2015 and into the beginning of 2016 throughout the oil and gas industry. Schlumberger Limited, a world leading oil and gas services company, recently reported that “negative market sentiments intensified in the fourth quarter” prompting customers to make “unscheduled and abrupt activity cancellations”. In the North Sea, where the Company’s jack-up exploration drilling wellhead equipment has an almost 100% market share, specialist consultancy Hannon Westwood reported two weeks ago that only six exploration wells (jack-ups and semis) are expected to be drilled in 2016, the lowest number since 1964. These negative trends have been reflected in the Company’s order book and levels of visibility, and as a result its traditional organic rental exploration wellhead business, particularly in the UK North Sea, and to a lesser extent the European Continental Shelf, which together accounted for circa 87% of Plexus’ sales in FY 2015, have been severely impacted by this downturn in activity. Notably the chief executive of the Cromarty Firth Port Authority in Scotland went on record last week to say that the North Sea “doesn’t work at $30 a barrel” and that activity has “pretty much fallen off a cliff”.
There is also a slowdown in Plexus’ rest of the world, non-European North Sea activities, although this is anticipated to be at a much smaller level of year on year decline which reflects the Company’s efforts to focus on sales opportunities outside of Europe both organically and with Plexus’ partners.
The Board therefore anticipates that revenues for H1 FY16 will be below £7 million, and revenues for H2 FY16 are expected to be approximately 20 per cent below those for H1 FY16. To place the revenue reduction in perspective, the last quarter sales for calendar year 2015 were circa 50% below those of the previous quarter with the fall off accelerating in November and December 2015 as indicated in the Company’s December AGM Statement. Although H2 FY16 will be weaker than H1 FY16 it is anticipated that sales will stabilise going into the 2017 financial year prior to what the Directors and other commentators expect to be a strong recovery in relation to exploration drilling activity when the oil price recovers to sustainable levels. As a result of this, the Company’s financial results for the year to 30 June 2016, which are subject to external audit, will be very significantly below market expectations.
As a result of the disappointing financial performance, Plexus is currently taking significant cash conservation steps in terms of reduced capex, opex and personnel expenditure, which the Board believes will stabilise the Company during this difficult oil market cycle. In addition, the Company is currently considering the optimal allocation of its resources to enable it to continue to progress the existing range of future opportunities which are broader and more international than ever before. This is important as the Company needs to be able to continue to invest in ongoing R&D and POS-GRIP product extensions at a time when the industry continues to actively pursue innovative cost saving disciplines and safety driven initiatives.
The Directors believe that Plexus’ POS-GRIP technology enables the Company to deliver best in class solutions to the industry, and that this clearly remains the case despite the current position within the oil price cycle. Furthermore, the Directors have every expectation that once activity in the sector resumes Plexus will see a recovery in its order book. The Company holds a fast response rental wellhead inventory and has a strong reputation with a large number of blue chip customers around the world which recognises the benefits and significant cost savings achievable through the use of Plexus’ POS-GRIP® technology. Plexus has the only wellhead technology which has passed the new higher Shell standard, which has already resulted in additional interest in the Company’s wellhead designs. Plexus has been extending its global presence to emerging growth markets such as China, Malaysia and West Africa and is also actively pursuing additional licencing agreement opportunities in other key markets. These initiatives will enable the Company to pursue its global expansion strategy of building on its traditional niche jack-up exploration business and moving into new, larger markets such as the production, subsea and decommissioning markets without the need to invest its capital in its own manufacturing facilities.
Despite the downturn, the Company is currently in discussions regarding a number of potentially significant projects worldwide. In January 2016 Plexus received a purchase order from Premier Oil, a leading oil & gas operator, which will see Plexus supply its POS-GRIP® rental jack-up exploration wellhead system to Premier for a 10,000 psi standard pressure exploration well in the UK North Sea which demonstrates that Plexus will continue to win business when operators are active despite the global downturn in oil and gas activity. The value of the order from Premier is £180,000 with revenues expected to commence in March 2016.
Plexus’ CEO Ben Van Bilderbeek said, “The combination of the oil price sitting at unprecedented lows of circa US$30 per barrel and ongoing geo-political tensions have resulted in extremely challenging trading conditions, which have severely impacted the oil and gas industry worldwide. Although Plexus is not, as we have said before, immune to the current oil price decline we had anticipated that the non-UKCS territories would prove more resilient, and therefore we are naturally extremely disappointed to have had our financial performance impacted to such a degree. We are hopeful however that the growing concerns regarding the downside overshooting and related worries about a ‘supply crunch’ and resultant spike in oil prices in the future if levels of drilling activity do not improve will lead to a consensus of what is the “right price” for oil. Already various parties including Saudi Aramco and BP out of Davos are talking about $50 oil by the end of 2016, and such developments continue to provide support for Shell’s acquisition of BG.
“Oil price aside it is important to remember that one of the key drivers behind the use and mix of hydrocarbons is climate change, and in particular the recent Paris agreement in terms of limiting global temperatures to a maximum increase of 2 degrees Celsius. It is beginning to be understood that coal, and indeed oil are far dirtier than gas in relation to CO2 emissions and that targets can be met through the use of more gas as well as alternative fuels. Statoil, one of our customers only recently reported that demand for natural gas is expected to grow in Europe in 2016 “as countries seek to reduce emissions”. This is an important trend for Plexus as the technical benefits of our HG metal sealing technology and through the BOP wellhead design for high pressure/high temperature (‘HP/HT’) applications are widely recognised by the industry.
“For many years we have enjoyed a dominant position in the North Sea, thanks to our Aberdeen headquarters, superior POS-GRIP wellhead technology and the region’s best and safest practices and early adoption of new products. While the North Sea will always remain an important market for us, over the years we have adopted a more international focus based around organic business wins and strategic licencing agreements to avoid additional investment in capital intensive assets such as manufacturing. Furthermore we have invested in extensive research and product development which sees our POS-GRIP product suite extend over oil and gas exploration, production and now subsea drilling, all of which have strong economic outlooks for the future.
“We view the current situation as cyclical and we therefore expect to see the oil price strengthen as and when demand supply dynamics enter equilibrium. While we cannot predict how long the current downturn will last, the one thing we remain certain of is the inherent and fundamental value of our intellectual property and the unique proven technical and safety advantages it offers. These advantages deliver a new superior standard of wellhead, and provide the only metal to metal sealing system that can match premium coupling test standards. We are therefore going into this cycle owning a superior proprietary wellhead technology in terms of safety, operational, time and importantly cost saving efficiencies, and we will emerge from it being able to offer the same unique benefits, and will have a wellhead rental fleet inventory ready to deploy. When the oil and gas sector recovers I am confident that our blue chip customer portfolio will ensure long-term growth and success for Plexus and its shareholders.”
