Aberdeen firm facing 'significant challenges'
Plexus to unveil cuts as oil price slump leads to profits alert
After a robust 12 months to last June, the Aberdeen-based company says the slump in the oil price has created “extremely challenging trading conditions”.
In a trading update, the AIM quoted business says it 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.”
It adds: “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.”
It plans “significant cash conservation steps”, which will mean cutting expenditure on the workforce, capital and operating activities.
Chief executive Ben Van Bilderbeek (pictured) said the company faced “extremely challenging trading conditions, which have severely impacted the oil and gas industry worldwide.”
He added: “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.
Cenkos Securities responded by downgrading its recommendation on the stock. It said: “The severity of this update is disappointing and clearly exacerbated by the dramatic fall in the oil price to under $30 bbl.
“We have made significant cuts to our revenue and cost forecasts that result in our forecast EBITDA falling to -£2.1m (vs £6.0m) in 2016 and initiate £0.4m for 2017, also moving to a hold recommendation.”
In the financial year ending 30 June 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 exploration wellhead systems to an increased range of blue-chip oil and gas companies worldwide.
But it has been hit by the “ongoing global economic downturn and in particular the unprecedented oil price decline” which fell from circa $50 in October to as low as US$27 per barrel this month.
“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 Plexus’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’.”
The company adds that the slowdown is happening elsewhere in the world, 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 said it anticipates that revenues for H1 FY16 will be below £7 million, and revenues for H2 FY16 are expected to be approximately 20% 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 said it is 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”.
The directors say they have every expectation that once activity in the sector resumes Plexus will see a recovery in its order book.
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. The company has been extending its global presence to emerging growth markets such as China, Malaysia and West Africa and is also actively pursuing additional licensing agreement opportunities in other key markets.
These initiatives should 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. This month it received an order from Premier Oil in the UK North Sea worth £180,000.
Van Bilderbeek added: “We are hopeful 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.
“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 licensing agreements to avoid additional investment in capital intensive assets such as manufacturing.
“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.
“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.”