Preliminary Results
Plexus Holdings PLC / Index: AIM / Epic: POS / Sector: Oil equipment & services
31 October 2016
Plexus Holdings plc ('Plexus', 'the Company' or 'the Group')
Preliminary Results for the Year to 30 June 2016
Plexus Holdings plc, the AIM quoted oil and gas engineering services business and owner of the proprietary POS-GRIP® method of wellhead engineering, announces its preliminary results for the year ending 30 June 2016.
Financial Results
· Sales revenue £11.23m (2015: £28.53m)
· Adjusted EBITDA (£1.56m) loss (2015: £9.53m profit)
· Loss after tax (£5.79m) (2015: £5.43m profit)
· Basic loss per share (6.39p) (2015: 6.40p profit per share)
· Net cash of £9.9m (2015: net debt £2.9m)
· No proposed final dividend (2015: 1.75p per share)
Whist the Company remains committed to distributing dividends to its shareholders, the Directors believe that in view of the challenging oil price environment and resulting reduction in exploration drilling activity and resultant financial performance it is prudent to continue the suspension of the payment of dividends. The Company will look to reinstate the dividend at the earliest opportunity.
Overview
· Continuing low oil prices resulting in global exploration drilling activity falling to 60 year lows, with the UK North Sea reporting the lowest levels recorded, significantly impacted the performance of the Company's core business of renting its proprietary POS-GRIP® friction-grip exploration wellhead equipment to major international oil and gas customers - resulting in a 61% fall in full year revenues
· Significant realignment of Company's cost base in response to lower revenues achieved without compromising ongoing ability to service customers, whilst retaining a commitment to Research and Development ('R&D') so as to support ongoing Plexus innovative and proprietary technology driven focus:
o Near 50% reduction in annualised personnel costs and general overheads from £14.0m to £7.4m
o R&D spend in the period, excluding costs of building test fixtures, totalled £1.98m compared to £4.12m in the same period last year, a reduction of 52%
· Focus on diversifying revenues away from the Company's traditional shallow water exploration jack-up market in the Scottish and European North Sea continental shelf where Plexus is the dominant supplier. Progress being made in expanding both Plexus' geographical footprint and the number of POS-GRIP based products:
o Licence agreement signed with Yantai Jereh Oilfield Services Group Co., Ltd ('Jereh') in China to facilitate the rental, sale, and manufacture of Plexus' wellhead equipment
o Licence agreement signed with LLC Gusar (OOO Gusar) Ltd ('Gusar'), and CJSC Konar (ZAO Konar) ('Konar'), two independent Russian oil and gas equipment manufacturers, for the rental, manufacture and servicing of Plexus' jack-up drilling wellhead exploration equipment into the Russian Federation and the other CIS states oil and gas markets
o Winning of a local Petronas licence to manufacture and supply Plexus' POS-GRIP wellhead equipment in Malaysia through Plexus Products (Asia) Sdn Bhd ('PPA'), the Malaysian company set up with a local partner as part of an Asian business hub
o Python® Subsea Wellhead launched in September 2015 as a result of a successful Joint Industry Project ('JIP') supported by BG, Royal Dutch Shell, Wintershall, Maersk, Total, Tullow Oil, eni, Senergy, and Oil States Industries Inc., as a new best in class and safest standard for the multi-billion dollar subsea market sector - the next milestone for this project will be an initial order for the deployment of the prototype
o Collaboration with Aquaterra Energy to develop lightweight HPHT dual barrier marine risers to provide a safer, technically superior and cost efficient solution for use on jack-up rigs as an alternative to semi-submersible installation
o Tersus™ Mudline equipment supplied to Masirah Oil Limited where the safety and time savings of POS-GRIP were evaluated against traditional slip and seal systems which cannot offer installation through the blow out preventer
· Reduction in capital investment in POS-GRIP rental wellhead assets as part of cash conservation measures to £1.76m (2015: £2.53m) - prior years capex spend on rental wellhead inventory has resulted in surplus capacity during the current down cycle. As a result Plexus will be able to respond quickly when drilling activity picks up and will avoid the need for further investment for the foreseeable future
· Four purchase orders for rental wellhead equipment awarded in the second half of the year, including two outside the North Sea
o US$0.6m initial well contract with new customer Masirah Oil Limited ('Masirah'), majority owned by leading technology driven oil and gas company REX International Holdings Limited (REXIH: Singapore) for oil exploration offshore Oman; a new country and new region
o £0.9m purchase order with Talisman Malaysia Limited ('Talisman'), part of integrated global energy group REPSOL (MC: REP), for an exploration well offshore Malaysia
o £0.6m purchase order with Det norske for HPHT rental exploration equipment offshore Norway
o £0.6m additional purchase order with Det norske for an exploration well offshore Norway
Corporate Highlights
· Initiatives taken to strengthen balance sheet to navigate the current challenging low oil price environment and support specific initiatives:
o Subscription by Jereh China in new shares of the Company, representing 5% of the new issued share capital of Plexus for c. £8m net of expenses
o Subscription by Gusar in new shares of the Company, representing 7% of the new issued share capital of Plexus for c. US$5m net of expenses
o £6m placing of new shares of the Company with new and existing shareholders which included CEO Ben van Bilderbeek investing £200,000 in new Ordinary Shares - proceeds to enable Plexus to pursue global opportunities and support target activities in new regions; supporting Python subsea wellhead prototype trial programme; strengthen working capital position and support targeted R&D spend towards complementary products
· Board changes:
o Appointment of Ms Kunming Liu to the Board as a Non-Executive Director in place of another Non-Executive Director
· Post period end the Bank of Scotland Corporate have agreed to renew facilities for a two year £5m revolving credit facility - in addition the Group has a reducing five year £1.5m term loan (with a current balance of £0.9m) which was put in place in September 2014 to part fund the purchase of an additional building in Aberdeen and which runs to August 2019
For further information please visit www.posgrip.com or contact:
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Chief Executive Ben van Bilderbeek said:
"As Plexus is an IP led engineering services company supplying the global oil and gas sector, our year end results reflect the sharp drop in oil prices which fell to a 13 year low of c.US$27 per barrel in January 2016. These trading conditions have in turn led to a widely reported and unprecedented fall in exploration activity, particularly in Plexus' core North Sea UKCS and ECS markets which are relatively expensive regions for E&P companies to operate in. With the global energy market experiencing a surplus of production, and profit margins proving elusive in higher cost regions cutting exploration budgets represents an easy win, and this has translated in significantly lower order levels for our best in class rental exploration jack-up wellheads. Whilst we are disappointed with this set of results, particularly following on from a record prior year we regard the current cyclical downturn as just one backwards step in what we believe will prove to be a highly rewarding journey for our shareholders. It is important to note that strategic progress continues to be made in turning Plexus from an Aberdeen based supplier of a ground breaking technology to the local North Sea oil and gas industry jack-up exploration drilling operators, to a global business setting a new industry standard for wellheads across a range of applications in terms of performance, reliability and safety; one which conventional alternatives cannot attain.
"Despite the current difficult trading environment, thanks to the proven superiority of our rental wellheads, together with the growing number of blue chip operators such as eni, Maersk, Royal Dutch Shell, Statoil, and Total, which all have first-hand experience of the unique benefits our equipment delivers, we are confident we will over time continue to win market share and that we will increasingly be viewed by the industry as the supplier of choice due to the proven superior nature of our metal sealing technology and the major time savings that we can deliver. Cycles will come and go within our sector, however the benefits of our POS-GRIP technology will endure meaning that demand for Plexus' wellhead equipment should increase as the global demand for hydrocarbons continues to rise. Operators are continuing to target resources in challenging and hostile environments, while having to meet more stringent safety and regulatory requirements and keep a tight rein on costs, and it is precisely this combination of factors that we address to the extent that our equipment can be cost negative to the operator as a result of the value of time savings. Certain parts of the world such as the Arctic particularly embody such concerns and requirements and we are confident that in time, through our Russian partners we will be able to play an important role in the supply of both exploration and production wellheads to the region. Furthermore, as the industry works to find ways to curb global CO2 emissions, natural gas, which is the cleanest fossil fuel by some distance when compared to coal and oil will have to account for a larger proportion of the hydrocarbon fuel mix going forward. As a recognised HPHT wellhead specialist this is a positive trend for our company.
"Plexus is ideally placed to help the oil and gas industry meet the challenges of drilling in the 21st century. One such example was our contract win last year to supply the Total operated ultra-HPHT Solaris well, offshore Norway; believed to be the highest pressure well ever drilled in the North Sea and which has now been successfully completed. In addition Plexus equipment now meets a tough new set of higher industry test standards proposed by a major IOC which are designed to establish casing hanger system qualification procedures that better reflect the requirements of actual applications. The testing involves numerous additional combined temperature, load, and pressure cycles which delivers a much more robust qualification programme; much closer to true field life conditions. By contrast, I believe conventional wellheads with their many moving parts, and their operational limitations and capabilities belong in the past when general standards for safety, reliability and performance were arguably not set as high as they are today and we anticipate will continue to be in the future.
"It was for such reasons that a group of leading oil and gas operators approached Plexus in 2011 to develop a new subsea wellhead design based on our POS-GRIP friction-grip method of engineering which has to date been successfully used on over 400 jack-up exploration wells across the world. Working with our blue chip Joint Industry Partners, BG, eni, Royal Dutch Shell, Maersk, Total, Wintershall, Tullow Oil, Senergy, and Oil States Industries Inc. Plexus launched the Python subsea wellhead at the SPE Offshore Europe Exhibition, Aberdeen in September 2015. Python provides a range of unique and technologically superior advanced features with increased safety, reduced cost and operational efficiency capabilities. Thanks to our patent protected POS-GRIP technology, Python offers 'instant casing hanger lockdown' and provides direct, metal to metal, weld quality, high integrity sealing. In contrast to current technologies, Python eliminates the need for many components used in conventional subsea wellhead designs such as lock rings and wear bushings, resulting in enhanced reliability and fewer installation trips which translates into significant cost savings that can run to millions of dollars for operators. As an example, on a standard pressure subsea well, the Python subsea wellhead may only require eight installation trips compared to up to 15 for a conventional wellhead. With each trip costing circa US$750,000, Python could therefore offer savings of over US$5m per well. This combination of enhanced performance, increased safety and significant cost savings is, in our view particularly compelling in the current cost and safety conscious environment, and provides me with great confidence that we will over the coming years be able to replicate the success we have enjoyed with our exploration jack-up drilling in the much larger and more valuable subsea market.
"I do recognise however, that before our disruptive technology can realise its full potential across a range of applications, we first have to ensure Plexus emerges from the current downturn ready to continue to play an important role in the oil services marketplace. The 'lower for longer oil prices' mantra has dominated market sentiment during the past year and with "longer" unfortunately seemingly prevailing over "lower" inevitably this has dominated our organic and strategic planning. The only certainty that can be used for planning purposes is that no one can truly claim to know how long or damaging the current cyclical downturn will be. With this in mind, during the year under review we initiated in March a significant reduction in our cost base including an annualised 54% reduction in personnel costs. The full effect of this rationalisation programme will of course be seen in the 2016/17 financial year, and is intended to move the Company towards a neutral cash consumption position, assuming no further sharp deterioration in trading. As a further buffer against the current market conditions and to strengthen our balance sheet, we raised US$5m via a share subscription in April as a way of further strengthening our licence relationship with our new Russian partner, Gusar, and a further £6m via a share placing with new and existing shareholders in June. Both exercises were priced close to the prevailing share price at the time. In our view the lack of need to offer new shares at a heavy discount, as many in the sector have had to do, is testament to the strength of our technology and our successful track record prior to the collapse in exploration activity in our traditional markets.
"Having a strong balance sheet, along with a cost base that more fully matches the reduced level of revenues, was not just undertaken to ensure we navigate the cycle from a position of strength. It will also enable Plexus to continue with its international expansion initiatives, as we look to repeat the success we have had in the North Sea and establish Plexus as the go to provider of best in class wellhead equipment globally. Despite the challenging trading conditions, much progress has been made in terms of Plexus beginning to address the far larger subsea and volume surface production multi-billion dollar wellhead markets, as well as the establishment of international relationships and licensees. We are focusing on such international initiatives being the first of a number of similar agreements which have the advantage of being able to enter new markets without incurring up front capital costs. Such a business model means that if current trading conditions continue for a long time we always have the opportunity to consider becoming a pure licencing marketing company rather than an operational one, which would enable us to focus full time on selling and promoting our patented method of engineering so as to maximise licensing royalty opportunities rather than our equipment. The licensing agreements we already have in place, and those we are looking to secure in major markets that to date remain untapped by us, are therefore a key part of our strategy to accelerate the global uptake of our POS-GRIP technology.
"Thanks to the steps we have taken over the course of the year, we believe Plexus today is in a stronger position than it was when the downturn set in, albeit that we have had to restructure the business. Encouragingly there are signs that some stability is beginning to return to the oil price as a result of recent OPEC meeting initiatives designed to better balance production levels with demand, and once these are better understood by the market we would expect operators to begin planning the recommencement of their exploration drilling programmes. Such new activity is of course key for avoiding a 'supply crunch' as it must not be forgotten that fields deplete on average up to 9% per annum and the combination of the large drop off in drilling activity whilst demand is stable or growing is a toxic mix, which could well lead to a price shock in the upwards direction. Crucially, we entered this challenging trading period as the owners of unique patented IP, and we will come out of it with the same unique patented IP, which means that the same opportunities always open to us continue to be available; not the case for a number of "me too" companies. When activity recovers I am confident that Plexus will more than make up lost ground especially as we have inventory on the ground ready to deploy at short notice, and will be able to go on and fulfil our potential to become a major supplier of the best in class wellhead equipment for types of drilling applications around the world."
Summary of Results for the year ended 30 June 2016
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2016 £'000 |
2015 £'000 |
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Revenue |
11,227 |
28,526 |
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Adjusted EBITDA |
(1,558) |
9,531 |
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(Loss) / Profit before taxation |
(6,916) |
5,938 |
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Basic (Loss) / earnings per share (pence) |
(6.39) |
6.40 |
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Chairman's Statement
Business progress
This year's results are in stark contrast to the prior year which delivered record sales and profits and resulted in a 60.6% decrease in revenue to £11.23m for the year to 30 June 2016 (2015: £28.53m) with the UK and European revenues decreasing by 64.6%; an EBITDA loss of £1.56m (2015: profit £9.53m); a loss after tax of £5.79m (2015: profit £5.43m) and a basic loss per share of 6.39p (2015: 6.40p profit per share). The trading climate, particularly for exploration drilling has been extremely difficult with the International Energy Agency ('IEA') reporting in September that oil discoveries have slumped to their lowest level since 1952. Annual investment in oil and gas projects has fallen from $780bn to $450bn over the last two years in an unprecedented collapse, with a recovery not expected until 2017 onwards. The IEA's World Energy Investment 2016 report went as far as stating that "There is evidence that cuts in exploration activities have already resulted in a dramatic decline in new oil discoveries, dropping to levels not seen in the last 60 years". Such industry trends have been acutely felt in the North Sea where costs are higher than many other regions, and as Plexus is the major supplier of jack-up drilling wellheads in the North Sea we have been particularly affected. The extent to which the North Sea has deteriorated is evidenced by Government figures published in August which confirmed a 96% plunge in Scotland's North Sea oil revenue, tumbling from £1.8bn in 2014-15 to just £60m in 2015-16. The only silver lining in such pronouncements for the industry, if not the consumer, is that it is widely reported that with drillers not finding enough oil to replace what is being depleted the ground is being prepared for an oil price spike. Plexus has wellhead inventory on standby and are therefore in a strong position to react quickly and regain and indeed exceed our past activity levels. Despite the existence of such challenging trading conditions, which are impacting not only operators and service companies, Plexus has continued to pursue a number of R&D and international trading development initiatives as we look to move away from our traditional North Sea orientated business activities. Such initiatives range from licence agreements, to new product developments and launches including our new Python subsea wellhead design, collaboration with Aquaterra Energy, gaining a new customer in the new territory of Oman, and supplying one of our X-HPHT wellheads to Total for their Solaris well in the North Sea which we believe to be the highest pressure well yet drilled in that location.
Overview
Plexus has to date supplied its best in class wellhead equipment to blue chip operators including BG, BP, ENI, GDF, Maersk, Shell Statoil and Total for use on over 400 wells worldwide. Being able to offer unique and patented equipment that is superior in terms of performance, reliability and safety has seen Plexus become the go to provider for wellheads for wells located in some of the harshest and most challenging environments in the world, including the North Sea, where Plexus has become firmly entrenched as the dominant supplier of HPHT and X-HPHT wellheads. The June 2015 award to Plexus of a £3.3m contract from Total E&P Norge AS to supply the Solaris exploration well, a technically challenging Ultra HP/HT well offshore Norway, believed to be the highest pressure well drilled in the North Sea to date, is testament to our high standing in this region.
Like all providers of critical equipment to the oil and gas industry, our full year financial results reflect the major retrenchment seen in the price of oil (over) the last two years. The 50% plus fall in Brent Crude from the US$100 level it traded at consistently for the best part of five years has led to operators of all sizes increasing their focus on cash preservation. Due to the higher levels of risk and capital involved and the ability to rely on shorter contract commitments with suppliers, scaling back exploration activity is the low hanging fruit for operators looking to reduce budgets in the midst of a downturn. This cycle has been no different, aside from the speed and severity of the cut backs which has seen investment in exploration falling to 60 year lows. According to global consultancy group Wood MacKenzie, 2015 saw US$40bn invested globally into exploration (including seismic and drilling activity) a mere 40% of 2014's US$100bn. In terms of well count, in 2016 Wood MacKenzie further reported that just 209 wells were drilled up to August, compared to 680 in 2015, 1,167 in 2014 and an historic long term average of 1,500 per annum. Similarly, in the UKCS, a region where Plexus has a dominant market position, exploration is estimated to have dropped to a 45-year low after Oil & Gas UK reported just 13 wells were drilled in 2015. As Plexus' historic focus has been supplying wellhead equipment for exploration wells in the North Sea we have been heavily impacted with the 12 months under review seeing the Company's last five-year sequence of reporting strong growth in term of revenues, EBITDA and dividends come to an abrupt halt.
Importantly, Plexus was able to take swift and decisive action during the year to not only realign the business to the lower oil price environment and the associated lower levels of exploration, but to also accelerate our 'capital light' strategy to seek to expand into new geographies and sub sectors of the oil and gas industry, such as the high volume land and platform production market. Significantly downsizing the cost base to match lower activity levels while at the same time expanding into new markets do not ordinarily go hand in hand. We have been able to make progress on both these fronts because, unlike many suppliers to the oil and gas industry, Plexus is first and foremost a proprietary IP technology company. This means that we can scale back our infield operational activities and related overheads without compromising the value and relevance of our POS-GRIP IP, whilst being able to continue to work on communicating the unique benefits of the technology to potential trading partners and licensees without having to commit large amounts of capital.
In an era where cash conservation and a strong balance sheet is important it is helpful to note that like many companies operating in the technology space, Plexus' investment profile has largely been front ended: an initial R&D led IP development and inventory build-up phase which required significant capital investment is now largely complete. Plexus has incurred circa £22m of capex over the last five years, and today we have 62 rental wellhead sets which if fully utilised are capable of supporting sales revenues of up to £40m per annum. Furthermore, thanks to having a long working life, we do not envisage having to set aside significant funds to replace our wellheads for the foreseeable future as they are subject to rolling refurbishment programmes. From a cash consumption perspective investment requirements going forward can therefore be viewed as being essentially discretionary rather than a critical component of our growth strategy which combined with being debt free, helps ensure the maintenance of a strong balance sheet. Moreover, being a provider of equipment which we maintain is superior to all other available conventional alternatives opens up a number of different avenues for Plexus to get its equipment to market, including the direct rental and sale of equipment and services to operators, as well as the licensing out of our technology to third party manufacturers, a non-capital intensive route to market which can fast track growth once initial traction is gained.
With our equipment tried and tested by a number of international blue chip oil and gas operators we believe that Plexus is now in an excellent position to pursue licensing opportunities with suitable partners, and in the process accelerate the take-up of our technology in new geographies that to date we have not chosen to pursue such as Brazil, GOM, India and the Middle East. Licensing agreements are typically used by IP led companies to break into new markets without the need to invest in expensive manufacturing, distribution and sales networks and can help to secure local partners with established relationships in the respective target markets they serve. With this in mind, during the year under review we completed a licence agreement with Yantai Jereh Oilfield Services Group covering China and other territories. We followed this up with an agreement to partner with two independent Russian oil and gas equipment manufacturers, Gusar and Konar, which saw us enter the important market of the Russian Federation and other CIS states. Under the terms of the agreement, Gusar and Konar will rent, manufacture and service our jack-up drilling wellhead exploration equipment in return for paying Plexus a licence fee based on a multiple of EBITDA generated by Gusar's POS-GRIP related business as well as royalties based on the value of sales. No licence revenue has arisen in the current year however we are hopeful this will be an important income stream in future years as Russia is one of three main global producers. We are keen to secure similar licensing agreements in other areas of the world and we are currently in discussions with potential partners covering the significant Middle Eastern and Mexican markets.
The expansion of our geographic footprint over the period has not been limited to the licensing agreements we have struck in China and Russia. During the year, Plexus Products (Asia) Sdn Bhd ('PPA'), a Malaysian company we established with a local oil and gas partner as part of our strategy to create a fully operational Asian business hub, secured a local licence with PETRONAS, the Malaysian National Oil Company, to manufacture and supply POS-GRIP wellhead equipment in Malaysia. Although this region is experiencing the same significant slowdown in activity as many other territories, in February 2016 it won first order worth an estimated £0.9m with Talisman Energy.
Gaining access to the Russian market via our agreement with Gusar is a milestone development and has the potential to generate significant value for Plexus. In addition to being ranked the third largest producer of petroleum in 2014 by the EIA alongside the USA and Saudi Arabia, it has been estimated that Russia holds almost a quarter of the world's proven natural gas reserves and 5% of global crude reserves. As well as the size of the reserve numbers, the bias towards gas in the reserve mix makes Russia a very important target market for Plexus, as our equipment is ideally suited to the high pressures and high temperatures associated with gas wells. Furthermore, the Russian energy sector is among the most active in the world. This is particularly the case in the huge land and platform production sector as major operators in the region focus on drilling production wells to maintain, let alone increase output. Indeed, this month it was reported that as a result of the launch of several greenfields, Russian oil output gained around 200,000 barrels per day in September alone to a post-Soviet record of 11.18m barrels per day. In terms of well numbers and drilling activity levels it was further reported in September that Rosneft alone plans to drill 1,700 new wells every year from 2017 up from 750 in 2014, and that it is also increasing the use of advanced drilling techniques.
As well as marking Plexus' entry into Russia, the Gusar jack-up wellhead equipment licensing agreement is anticipated to extend to entering into the huge land and platform production well market and in the process deliver a key strategic objective for the Company. It has always been our intention to prove our equipment and technology in exploration before tackling the larger and more valuable production wellhead sector which is estimated as being over ten times the size of the jack-up market. In addition to being a much larger market than exploration equipment, production equipment can also be viewed as being a more defensive area of the upstream sector, which could provide a degree of protection in any future downturn as exploration activity is typically the first to be cut back by operators keen to conserve cash. As Statoil ASA Chief Executive Officer Eldar Saetre said earlier this year: "Exploration activity is among the easiest of things to regulate, to take up and down. It's not necessarily the right way to think. We need to keep a long-term perspective and maintain exploration activity through downturns as well, and Statoil has." By contrast, a production well is likely to have already been significantly de-risked and typically starts generating revenues within a much shorter time frame. The promise of early revenues can therefore protect a late stage development/production project from being deferred or worse. Our entry into the production market is therefore significant as it will reduce our exposure to the more cyclical areas of the upstream sector and is in line with our strategy to have a more balanced product mix for Plexus, one that serves the whole life cycle of a project from exploration to abandonment and is thus less exposed to future downturns.
A further market opportunity that we have taken our POS-GRIP technology into, and one which arguably is more defensive than exploration and production applications, is the increasingly important decommissioning market. Here too, we are confident that Plexus is well placed to win market share based on the uniquely enabling capabilities and solutions that we can offer operators. Progress is already being made, and in March 2015 we announced a purchase order to supply Centrica Energy Exploration and Production ('Centrica') with our POS-SET Connector™ for abandonment operations on a gas well originally drilled 32 years ago in 1982, offshore Holland. The Connector, which utilises POS-GRIP friction grip engineering, facilitates abandonment operations as it enables operators to re-establish a connection onto rough conductor casing that has been previously cut above the seabed. In full scale testing, the Plexus connector can achieve 80% of the bending and tensile strength of the parent pipe, which is significantly better than conventional alternatives. We anticipate that this order will prove to be the first of many for Plexus as the abandonment market opens up, which we believe will grow significantly as a large number of ageing wells reach the end of their lives in the North Sea and other regions. The latest Activity Survey published by Oil & Gas UK shows how resilient spending has been in this sub-sector despite the volatile trading conditions: £1bn was spent on decommissioning in the UKCS in 2015, the same figure as 2014. Encouragingly the same report forecasts spend in this sub-sector will rise to £1.5bn in 2016 and £2bn in 2017.
Outperforming conventional technology in terms of operational efficiencies, time savings, and safety is a consistent theme which runs through our growing family of POS-GRIP enabled products. Our new Python subsea wellhead, launched in September 2015, is no different. With the support of our Joint Industry Partners, BG, eni, Royal Dutch Shell, Maersk, Total, Wintershall, Tullow Oil, Senergy, and Oil States Industries Inc., we set out to establish a new safer and best in class standard for subsea wellheads. Four years on and we believe we have done just that after our Python subsea wellhead successfully passed the new tougher test standards proposed by a major international operator for use by the industry. In our view, our new subsea wellhead design addresses the key technical issues and requirements highlighted by regulators following the Gulf of Mexico incident in April 2010; delivering substantial efficiencies and time savings, and taking key metal-to-metal sealing functions to a standard that we believe uniquely meets or exceeds those of premium couplings. Python offers a unique set of features including instant casing hanger lockdown eliminating the need for many complex components that our competitors' designs require including lock rings, lockdown sleeves and wear bushings which often prove problematic in the field. For Plexus, Python will give us access to the multi-billion dollar subsea exploration and production market. Were we to have the same level of success we have to date enjoyed in our traditional jack-up exploration and production market, where we have a circa 10% global share, the impact on the Company would be transformational.
Our Python subsea wellhead is not the only new product we have launched during the year under review. Our Tersus-PCT HPHT Tie-Back connector product with its unique operational and cost saving advantages is also now being marketed to the industry. Like Python, the Tie-Back connector is based on our POS-GRIP technology being able to offer operators significant capital cost savings thanks to being the first product on the market which allows HPHT exploration and pre-drilled production wells to be converted to either subsea or platform producing wells.
Following a period in which we have been able to announce and launch a number of new product and achieve a number of higher test standard milestones, we believe that awareness is growing about our POS-GRIP technology making drilling activity safer while at the same time offering considerable time and cost savings to the operator. Indeed, other suppliers to the oil and gas industry have approached us to incorporate POS-GRIP into their product offering, as demonstrated by our partnership with Aquaterra Energy ('AE') to offer a light-weight, low-cost, high pressure riser ('HPR') system for use from jack-up rigs. The combination of AE's riser products and Plexus' POS-GRIP technology enables an inner liner to be installed inside a conventional HPR to provide full 15,000 PSI capability. These systems allow for safe effective drilling, completion, work over and abandonment activities to be completed on subsea wells from jack-up rigs. The HPR provides a structurally sound, pressure retaining conduit between the subsea wellhead and the rig's surface BOP and is capable of withstanding environmental and operational conditions expected during the HPR service life. We are keen to pursue further partnerships with suitable companies such as Aquaterra both within and outside the oil and gas industry, and such a strategy fits with one of our earlier goals of applying the POS-GRIP method of engineering to a range of products both within and outside of the oil and gas industry.
Staff
On behalf of the Board I would like to thank all our employees both past and present for their dedication and hard work during a challenging oil and gas industry trading environment which, like with many other E&P and service companies across the world necessitated Plexus initiating a redundancy programme. Such cost control measures are regrettable and I look forward to the level of exploration and production activity increasing and Plexus once again being in a position to expand its valued workforce.
Outlook
The significant fall in exploration activity and investment to 60 year lows is clearly unwelcome, specifically in terms of the impact it has had on our financial performance during the year under review and the current financial year, and has driven the necessary measures we have had to take to realign our cost base closer to the reduced levels of orders and order visibility, which continues at the current time. On a more positive note however we, like many other interested observers believe that the sharp fall seen in the number of exploration wells drilled across the world has sown the seeds for the next upturn due to an impending 'supply crunch' which has the potential to result in a strong recovery in the price of oil that could go a long way to match the steepness of the decline.
On the supply side it is no coincidence that with fewer exploration wells being drilled, fewer discoveries are being made. According to the consultant group Wood MacKenzie, 2015 saw only 2.7 billion barrels of new supply discovered, the lowest number since 1947. 2016 could well see exploration plumb new depths, as up to the end of August, just 736 million barrels of conventional crude had been found. Nils-Henrik Bjurstroem from Oslo-based consultants Rystad Energy AS said such a low number of discoveries "will definitely be a strong impact on oil and gas supply, and especially oil." For now, the lack of new finds is being masked by the huge volumes of oil being pumped into the market as part of the policy adopted by OPEC and Russia to defend market share. With fewer discoveries being made to replenish reserves however, the supply glut that is currently occupying the markets could quickly go into reverse.
Meanwhile on the demand side, the U.S. Energy Information Administration estimates that the daily global demand for oil will grow to 105.3 million barrels in 2026 from 94.8 million barrels this year. Such sentiment was supported by Ben Van Beurden, the CEO of Royal Dutch Shell Plc who recently stated that he sees demand rising by between 1 million to 1.5 million barrels a day and that in order to meet these growth estimates oil companies will need to invest about US$1 trillion a year. If the run rate of oil discoveries does not pick up, Wood Mackenzie estimates there will be a 4.5 million barrel per day shortfall in global supplies by 2035. When combining the lack of new discoveries and the removal of approximately 5% of global supply from the market each year due to natural decline rates it is easy to forecast considerably higher oil prices in the future. Paal Kibsgaard, chief executive of Schlumberger, the world's largest oil services company, would appear to agree: "The magnitude of the E&P investment cuts are now so severe that it can only accelerate production decline and the consequent upward movement in [the] oil price."
When looking to the future it must be noted that oil and gas markets are not just cyclical in nature; structural changes also play a role in driving the industry forward. One of these is the increased regulatory scrutiny faced by operators around the world following well-documented disasters such as Macondo in the Gulf of Mexico in 2010. As Plexus' wellheads can be proven to be superior in terms of performance, reliability and safety in all operating environments from standard to extreme HPHT conditions, we feel Plexus is ideally placed to benefit in a world of heightened regulatory oversight. We believe that it was for this reason that Total selected us as the wellhead supplier for its ultra-HPHT Solaris well in the North Sea, and also why Royal Dutch Shell approached us four years ago to take our surface designs and develop a POS-GRIP enabled subsea wellhead. In short the heightened levels of regulation being seen across the industry play to Plexus' strengths and therefore bode well for the future.
A further key structural driver set to play an increasing role in the oil and gas industry in the years ahead is environmental. If oil and gas companies are to manage the conflicting pressures of maximising production and revenues for their shareholders while making a contribution towards reducing carbon dioxide ('CO2') emissions, then a move away from dirtier fossil fuels such as coal to cleaner hydrocarbons such as natural gas is needed. The numbers speak for themselves: on a CO2 emitted per unit of energy output or heat content basis, the EIA calculates natural gas emits 117 pounds of CO2 per million British thermal units ('Btu') of energy. This is around half the 228.6 pounds of CO2 emitted by coal. Meanwhile diesel fuel and heating oil emit 161.3 pounds of CO2; and gasoline 157.2 pounds. Interestingly, we are already seeing a renewed focus on natural gas among the majors. Such considerations are already impacting on the industry hydrocarbon mix, and in the UK as an example in the three-month period April to June this year coal accounted for just under 6% of electricity generation down from over 20% in the same period in 2015, and gas increased from just under 30% to more than 45%. At the corporate level Royal Dutch Shell's recent acquisition of BG Group can partly be explained by the latter's strong presence in global LNG markets. In addition, as was reported in a recent article in the Wall Street Journal, Total SA has set itself a target to increase its LNG production capacity by 50% by 2020; while BP is aiming for gas to account for around 60% of its production by the end of the decade, compared to 44% in H1 2016. With Plexus having the best metal to metal sealing system technology available for gas we believe the Company is in an excellent position to capitalise on such a trend.
When considering the outlook for both Plexus and the oil and gas industry it is pertinent to remember that many of the key geopolitical drivers for the oil price and related investment decisions can be decided by a handful of individuals and organisations. Whether it has been the significant increase in shale drilling and oil and gas production in the USA; Saudi Arabia wanting to maintain market share even at the cost of consuming a significant share of its own foreign reserves as it makes up the shortfall between revenues and expenditure; or Iran wanting to regain its place in the global supply chain such drivers are all out of our control. However, one key and eagerly awaited recent positive development was this month's OPEC deal and the sign of shifting attitudes that it conveyed. OPEC seems to have finally accepted reality and the fact that the market forces behind unconventional production in the USA, Canada and elsewhere are not going to go away and that in the case of Saudi Arabia and others their foreign reserves were just not large enough to outlast such pressures. This means that OPEC appears to have accepted that low prices are just not sustainable and that a rebalancing now needs to take place, which again can only be helpful for the future of Plexus and the wider industry. Further evidence of such changing sentiment by the major producers was in evidence at this month's World Energy Congress in Istanbul where President Putin of Russia said that Russia supports "the recent initiative by OPEC to fix oil production limits" and that the era of oil and gas will not come to an end in the foreseeable future. Perhaps even more encouragingly at this month's Oil and Money Conference in London Rex Tillerson, Chief Executive ExxonMobil and several other senior oil executives told the conference that fossil fuels would be needed for decades to come to meet the energy needs of a growing world population.
Looking to the future, in order to ensure Plexus maximises its potential in the years ahead, and in the process firmly establishes itself as the standard bearer for delivering best in class wellhead equipment in terms of performance, reliability and safety all over the world, it has been necessary for us to firstly ensure that we were in a strong position to navigate the sharp downturn in the current cycle. From the outset we assumed the worst case scenario that oil prices would stay 'lower for even longer' rather than just 'lower for longer' and we have taken appropriate action. This included a comprehensive restructuring of our cost base which included a regrettable near halving of our workforce, as well as a major strengthening of our balance sheet firstly via a subscription for new ordinary shares with a value of US$5m by Gusar, our partner in Russia, which was then followed by a placing of £6m with new and existing shareholders. We were delighted that despite the challenging markets, both capital raising exercises were priced close to the prevailing market price of our shares. We view this as testament to the strength of our technology and the potential for Plexus to deliver significant shareholder value over the coming years.
J Jeffrey Thrall
Non-Executive Chairman
28 October 2016
Strategic Report
Principal Activity
The Group markets a patented friction grip method of engineering for oil and gas field wellheads and connectors, named POS-GRIP. This involves deforming one tubular member against another within the elastic range to effect gripping and sealing. This superior method of engineering for wellheads offers a number of important advantages to operators, particularly for HPHT applications and can include improved technical performance, improved integrity of metal seals, significant installation time savings, reduced operating costs and enhanced safety. Revenues predominantly derive from the rental of POS-GRIP wellheads for jack-up exploration, although the range of commercial and safety benefits of POS-GRIP also apply to surface land and platform production and subsea wellheads which are significantly bigger market sectors which Plexus is now actively pursuing organically and with international partners such as Gusar, Russia. Furthermore, the Directors believe that the Company's proprietary technology has additional wide ranging applications both within and outside the oil and gas industry.
Financial Results
Revenue
Revenue for the year was £11.23m, down 60.6% from £28.53m in the previous year. The decline in sales was most acute in the UKCS where the year on year reduction was 88.3% and was a direct result of the significant slowdown in exploration drilling activities not only in the North Sea but also across the world. Revenues derived from a number of on-going and new contracts from customers around the world including Asia and the Americas. On a positive note Asia generated just over £2m of sales and accounted for 18.2% of total sales which was up as a percentage of sales from 9.2% in the prior year. The extent of the decline in the UKCS was highlighted by Government data released a few months ago which reported that there was a 96% plunge in Scotland's North Sea oil revenue and this situation has resulted in a quarter of North Sea jobs being lost and a number of independent oil explorers and oilfield services companies going out of business.
The rental of exploration wellhead and related equipment and services accounted for approximately 91% of revenue reflecting the fact that the Company's organic business model remained focused on the supply of jack-up rental surface exploration wellhead equipment and services. It is anticipated that as Plexus' strategy to widen its scope of activities to include the surface production, subsea, and decommissioning markets both in the North Sea and internationally then this weighting towards the jack-up market will decline as Plexus becomes more diversified. HPHT rental equipment and related services continued to account for the majority of sales revenues declining to £8.22m down from £25.23m last year, a decrease of 67.4%, and accounted for 73.2% of total sales, compared to 88.4% in the prior year. Standard pressure equipment sales decreased by 7.1% to £1.79m from £1.94m in the prior year, and accounted for 7.1% of total sales compared to 6.8% in the prior year. This year re-billable expenses revenues made up £0.68m compared to £1.24m last year for items such as freight, shipping and equipment hire. Despite the major fall in oil and gas prices and resulting decline in sales, we continued to invest for the future and incurred capital expenditure on rental assets of £1.76m as compared to £2.53m in the prior year, a year on year decrease of 30.4%.
Margin
Gross margins reduced to 46.6% (compared to 69.9% in the previous year) as a result of higher depreciation, project costs, and pricing constraints. The majority of rental activity sales continued to be HPHT which delivers higher margins than lower pressure equipment contracts.
Overhead expenses
In line with the reduction of sales revenues it was necessary and important to conserve cash and reduce personnel and infrastructure related overheads which decreased to £11.28m from £14.93m in the previous year, a reduction of 20.16%. The cost reduction exercise was initiated in January and implemented from March and therefore these are not annualised savings. The full effect of the overhead reduction programme will be seen in the current 2016/17 financial year, where it is estimated that on a like for like 12 month equivalent basis when looking at pre and post the full savings effect overheads would be approximately 50%. In the year being reported salary staff costs reduced to £6.56m from £9.87m, whilst the employee headcount at the year-end was 81 compared to 157 for the prior year, a decrease of 48.4%. Other items which decreased year on year as a result of the decreased activity levels, staff decreases, and reduction of infrastructure were recruitment fees, training, health and safety, overseas base costs, advertising and marketing, and travel and subsistence.
Adjusted EBITDA
Adjusted EBITDA for the year (before IFRS 2 share based payment charges of £0.02m and non-recurring restructuring costs of £0.76m) was a loss of £1.56m, compared to £9.53m profit (before IFRS 2 share based payment charges of £0.02m) the previous year. Adjusted EBITDA is calculated as follows:
|
|
2016 £'000 |
2015 £'000 |
|
Operating (Loss) / profit |
(6,798) |
5,020 |
|
|
|
|
|
Add back: |
|
|
|
-Depreciation |
3,488 |
3,070 |
|
-Amortisation |
980 |
811 |
|
-Restructuring costs |
755 |
- |
|
-Share based payments charges |
21 |
21 |
|
-(Gain) / loss on disposal |
(6) |
20 |
|
-Share of profit of associate |
- |
236 |
|
-Gain on disposal of associate |
- |
352 |
|
-Rounding |
- |
1 |
|
|
|
|
|
Adjusted EBITDA |
(1,560) |
9,531 |
Loss before tax
Loss before tax of (£6.92m) compared to a profit last year of £5.94m. This loss was after absorbing higher depreciation and amortisation charges of £4.47m, up from £3.88m last year, the largest component being depreciation of rental assets which increased by 13.6%, reflecting the continued investment in Plexus' wellhead rental inventory. The loss before tax is stated after an IFRS 2 charge for share based payments under reporting standard IFRS 2; the charge for the full year is £0.02m compared to £0.3m last year.
Tax
The Group shows an income tax credit of £1.13m for the year as compared to a tax charge of £0.51m for the prior year. The income tax credit for the year is driven by the loss incurred during the financial period.
The Group has an effective tax rate for the year of 16% (2015: 9%). The effective rate of tax is lower than the current standard UK corporation rate of 20% as a result of SME enhanced R&D tax credits, which arise from the Group's ongoing R&D programme. In addition there has been a significant reduction in the deferred tax computation in relation to share options recognised in equity following a decline in the share price during the financial year to 63.3p on 30 June 2016 compared to 220p on 30 June 2015.
EPS
The Group reports basic earnings per share loss per of 6.39p compared to earnings per share of 6.40p in the prior year.
Cash and Statement of Financial Position
The statement of financial position reflects the investment in operations during the year and in particular on-going capital expenditure and funds received as a result of share subscriptions by strategic partners and a share placing. The net book value of property, plant and equipment including items in the course of construction was £15.57m compared to £17.15m last year. Capital expenditure on tangible assets decreased to £1.96m compared to £7.02m last year. The higher spend last year included the acquisition of a 36,000 sq.ft work shop and office facility in Aberdeen in September 2014 for £2.04m. The net book value of intangible assets, including IP rights, R&D and software, increased by 6.6% to £14.08m compared to £13.17m last year. Capital expenditure on intangibles totalled £1.90m compared to £3.54m last year, a decrease of 43.2%. Receivables decreased to £1.7m compared to £7.3m last year. Net cash closed at £9.89m (cash and cash equivalents of £15.86m less bank loans of £5.98m compared to net borrowings of £2.95m last year (bank loans £6.28m less cash and cash equivalents of £3.3m) reflecting net cash inflow for the year of £12.84m (net increase in cash of £12.54m per Statement of Cash Flows plus net decrease in bank borrowings of £0.30m). This closing net cash position changed materially year on year at positive £9.9m compared to negative £2.9m, and reflects the subscription by Jereh in July 2015 for new ordinary shares representing 5% of the issued share capital of Plexus for circa £8m; the subscription by Gusar in April 2016 for new ordinary shares representing 7% of the new issued share capital of Plexus for circa US$5m and a £6m placing in June 2016 of new shares with new and existing shareholders. Post period end the Groups bank - Bank of Scotland Corporate - has agreed to provide facilities for a two year £5m revolving credit facility. In addition the Group has a reducing five year £1.5m term loan (with a current balance of £1.0m) which was put in place in September 2014 to part fund the purchase of the additional building in Aberdeen and which runs to August 2019. These facilities combined with cash balances are anticipated to be adequate to meet current on-going working capital, capital expenditure, R&D and related project commitments.
Intellectual Property ('IP')
The Group carries in its statement of financial position goodwill and intangible assets of £14.85m, an increase of 6.6% from £13.93m last year, reflecting the Group's on-going investment in and commitment to the development of its proprietary POS-GRIP technology, the most important elements of which continued to be in relation to the POS-GRIP friction-grip method of engineering and the new Python subsea wellhead. The Directors have considered whether there have been any indications of impairment of its IP and have concluded, following a detailed asset impairment review, that there is no impairment. The Directors therefore consider the current carrying values to be appropriate. Indications of impairment are considered annually.
Research and Development
R&D expenditure including patents was reduced by 46.4% year on year from £3.47m to £1.86m. This reduction must not be taken as a sign that R&D ceases to be an important and necessary part of our activities, as such investment is key to protecting, developing, and broadening the range of proprietary POS-GRIP friction-grip method of engineering applications and related IP. There are two main drivers for this reduction - one was the coming to the end of the JIP to design and develop the new Python subsea wellhead, and the other was the decision to focus on essential R&D as part of our strategy to control expenditure during the current challenging trading period. Such essential R&D, and the patent protections that can form part of it is arguably even more important where an industry continues to look to reduce costs in the supply chain, combined with the need for ever greater safety disciplines, both of which Plexus wellhead equipment is able to fulfil, especially in relation to unconventional drilling. In the case of Russia, the Deloitte "2016 Russian Oil & Gas Outlook Survey" highlighted the importance of R&D for operators where one of the questions posed was how compared to 2015 the respondents saw their R&D costs changing, and 75% of the industry experts thought they will increase. Such investment has culminated, in addition to the Python subsea wellhead which offers operators a unique range of operational and cost saving advantages, in a range of POS-GRIP products which include the Tersus-PCT HPHT Tie-back connector which for the first time allows HPHT exploration and pre-drilled production wells to be converted to either subsea or platform producing wells; the new POS-SET Connector which is designed to enable operators to re-establish a connection onto rough conductor casing for the expanding abandonment market; a low cost wellhead system for the volume production market - WellTree™ and HPHT dual barrier marine risers in collaboration with Aquaterra. All of these product innovations have been made possible through combining ongoing investment with the proven nature of POS-GRIP, and we are confident that along with our partners we will continue to identify new ways to develop and deploy our technology.
IFRS 2 (Share Based Payments)
IFRS 2 charges have been included in the accounts, in line with reporting standards. The fair value of share based payments has been computed independently by specialist consultants and is amortised evenly over the expected vesting period from the date of grant. The charge for the year was £0.02m which compares to £0.02m last year.
Dividends
While the Company remains committed to distributing dividends to its shareholders, the Directors believe that in view of the challenging oil price environment and resulting reduction in exploration drilling activity and resultant financial performance it is prudent to continue the suspension of the payment of dividends. The Company will look to reinstate the dividend at the earliest opportunity.
Operations
The major operational driver for the year being reported on as well as the current year to date, is the material decline in operator's capital expenditure and drilling activity levels, particularly in exploration drilling; a result of the collapse in the oil price which is only just beginning to see signs of a mild recovery. Although this has been particularly marked in the North Sea, these are global issues and cannot be avoided, although we are increasing our efforts to pursue sales opportunities outside of Europe with some success such as a new customer win in Oman. In response to such hostile trading conditions Plexus initiated a range of cash conservation and significant cost reduction measures in the second half of the year; the most important of which was personnel related. Unfortunately, after over ten years of expansion, headcount was reduced to 81 from 157 on a year-end comparison basis. This reduction, along with other cost reduction measures, was carefully planned to ensure that the lower level of sales anticipated for the foreseeable future will support the reduced headcount and cost structure, and if necessary further adjustments will be made. On a positive note our fully invested rental wellhead inventory is capable of being deployed at short notice which can support sales of circa £40m. Efforts are now being increased to move into the land, platform and subsea arenas, although jack-up drilling remained our core activity and contracts awarded by existing and new customers included the following:
· June 2015 - a £3.3m ultra HP/HT wellhead equipment order was received from new customer Total offshore Norway - believed to be the deepest and highest pressure well ever drilled in the North Sea estimated at 17,000 - 19,000psi, was successfully completed during the year
· July 2015 - local Petronas licence secured by Plexus' Malaysian joint venture company Plexus Products (Asia) Sdn Bhd
· September 2015 - official launch of Python subsea wellhead prototype at SPE Offshore Europe in Aberdeen following the culmination of a successful JIP with a number of oil majors participation - efforts now ongoing to secure a first order for this important product development
· September 2015 - collaboration agreement signed with Aquaterra Energy Ltd to jointly supply an industry first jack-up deployable (as opposed to semi-submersible rigs) HPHT dual barrier marine riser utilising POS-GRIP technology
· January 2016 - US$0.6m standard pressure contract win with new customer Masirah Oil Limited in new territory Oman - initially for one well with a possible two additional wells to follow
· February 2016 - £0.9m contract secured by Plexus Malaysian joint venture Plexus Products (Asia) Sdn Bhd with Talisman Malaysia Limited, part of Repsol Group for an exploration well offshore Malaysia
· March 2016 - £0.6m contract win for the supply of HPHT wellhead equipment with long term customer Det norske for an exploration well offshore Norway
· May 2016 - £0.6m further purchase order from Det norske for a standard pressure exploration well utilising HPHT equipment for offshore Norway
Plexus continues to invest in R&D and although such expenditure reduced by 46.4% compared to the prior year, R&D remains an important operational activity and underpins the value of our IP and ability to further develop POS-GRIP technology based products. Innovation in the oil and gas industry continues to be an essential part of developing ever safer drilling methods, and Plexus is confident that it can play an important role in delivering such solutions whilst raising wellhead standards to a level that conventional technology cannot reach, such as passing test standards equivalent to those used for premium couplings.
Staff and staff development are important disciplines for a service company whether we are expanding or not, and correctly trained and motivated staff are key. Unfortunately during the second half of the year being reported, the focus concentrated on managing the staff redundancy programme and further cost saving exercises, including salary reductions and a reduction to employee benefits. Consequently, following the consultation period, which commenced early February during the three month period March to May 45 staff were made redundant from both our UK head office and international locations and a companywide salary reduction based on a percentage reduction, dependent on salary band was implemented. Furthermore, a consultation process was undertaken during June to reduce the employee benefits package. All cost reduction initiatives were successfully implemented and the desired cost saving outcomes were achieved. The rightsizing exercise across the business has now placed a focus on redistribution of some tasks/responsibilities across the business, with a number of employees absorbing additional tasks. To document this and ensure all required tasks are covered, an exercise was undertaken to review all job descriptions to ensure all new job descriptions are issued to staff in Q3 calendar year of 2016. Alongside these staff reduction programmes the Competency Management System has continued to be developed, and an additional department within the business has recently developed and implemented full competency standards for their discipline. We are continuing to roll out this system, with an ambition to have all safety critical disciplines develop and implement standards within the competency system by Q1 calendar year of 2017. Staffing figure total at the end of June 2016 was 81 employees which compares to the prior year closing staff number of 157.
Health and Safety is important for all companies and industries, but is a critical discipline in the oil and gas industry. Plexus remains fully committed to delivering the highest safety standards possible despite implementing a range of cost cutting initiatives, and continues to maintain a positive safety culture which is aligned with our Company Safety Values evident throughout the organisation. This discipline is achieved by continual development and implementation of a programme of initiatives, engaging with all levels of staff and sharing our safety messages and performance, via our health and safety branding STAR SAFETY. A recertification audit by LRQA (our system certifying body) in December 2015 and subsequent surveillance audit of our ISO 9001 and BS OHSAS 18001 Management Systems, had a positive outcome resulting in our certification being extended until 2018. This is a tangible demonstration that we are operating to the recognised industry and national standards and we continue to collaborate with our clients and industry bodies to share HSE best practice and information. We continue to manage our safety risks through assessment, implementation of controls, continual monitoring, and engaging and developing staff to meet the competency levels required. We always reinforce the compelling message that the health and well-being of our employees is the crucial feature of our HSE and HR strategy, as our workforce is key to the successful delivery of our services. We encourage our personnel to get involved and have confidence to intervene and to challenge any unsafe act or condition, suggest improvements, and to ensure transparent reporting that meets our desired safety culture.
IT services and support are key operational areas for Plexus. Plexus relies on a variety of IT systems, both in-house and proprietary, to manage and deliver safe and secure services for the business. Importantly, like many companies Plexus continues to be at risk of cyber-security threats. During the past year we have begun working towards ISO 27001 accreditation which will help ensure that both such internal and external risks are minimised. Certification provides customers and key stakeholders with the confidence that security risks are taken and addressed seriously. The IT infrastructure has again undergone significant upgrades to ensure that the systems are capable of reacting quickly to the ever changing demands put on it by the business and its suppliers and customers. The main improvements have included networking and telecommunication upgrades as well as improvements to our cyber security intrusion detection systems. These upgrades have combined to increase our security from external risks whilst increasing employees' access to data from any location worldwide. Business support solutions carried out during the year were mainly focused on the development of the in-house Manufacturing Requirements Planning system. This system will help to provide an optimal use of resources and allow for enhanced collecting and formation of business data which in turn will allow improved and more efficient planning of work through the system.
Strategy and Future Developments
Technology
Plexus' unique and patented POS-GRIP technology is a simple concept which involves applying compressive force to the outside of a wellhead or pipe, to flex it inwards. As the bore of the vessel moves inwards, it makes contact with an inner pipe (or hanger) on the inside. Sufficient contact force is generated to hold the inner member (hanger) in place through friction between the two components, and creates a superior metal-to-metal seal. The Company's strategy is primarily focused on delivering the highest standard of wellhead design for the upstream oil and gas markets around the world, and one which is already proven to be uniquely advantageous in terms of safety features, operational efficiency, and cost savings for jack-up drilling especially HPHT applications.
POS-GRIP wellhead designs deliver many advantages over conventional "slip and seal" and "mandrel hanger" wellhead technologies for surface exploration and land and platform production applications. These include larger metal-to-metal seal areas, virtual elimination of movement between parts, fewer components, simplified design and assembly, enhanced corrosion resistance, simpler manufacture, long term integrity, annulus management, and reduced installation cost. Key components of Plexus wellheads can include proprietary superior HG seals; robust metal-to-metal seals which can be machined directly into the hanger, and are energised by use of the external POS-GRIP mechanism. Plexus has recently added both the new Python subsea wellhead to its product suite as well as the POS-SET Connector™ for use in the growing decommissioning market which is designed to re-connect to bare conductor pipe for well re-entry or permanent abandonment operations. The POS-SET Connector creates a solid connection with reliable sealing directly against the pipe, and retains bend and load capabilities at 80% of pipe strength. The Python subsea wellhead eliminates the need for wear bushings, pack-offs, lock-rings, and lockdown sleeves, whilst delivering instant rigid lock-down in all directions, fully reversible for ease of workover, side-tracking or abandonment. These design simplifications and features not only reduce the risk of installation problems and safety issues, they also significantly reduce installation time and the number of trips that are needed such that it has been independently estimated that up to US$10m of savings are possible for a deep water well. The directors believe Plexus' wellhead equipment sets a new standard which can include matching and even exceeding those required for premium couplings and, having secured a leading position in jack-up exploration drilling, is well placed to pursue its strategy of breaking into the significantly larger and more mainstream volume production wellhead and subsea markets both organically and in conjunction with partners including licensees.
As with any game changing technology that has the potential to become a new global standard, there has to be sound and genuine reasons for customers to select the equipment. Apart from the operational time saving and related safety benefits, at an engineering level the Company has scientifically proven that its technology can uniquely raise the integrity of wellhead testing and sealing to that of premium couplings, which supports its claim that wellheads should not be, and indeed now do not need to be, the weak link in the well architecture chain.
POS-GRIP friction-grip technology has wide ranging applications both within and outside the oil and gas industry. As POS-GRIP is a method of engineering and not a product in its own right, where there is an opportunity for the technology to improve the performance of conventional products, the Company will look to integrate POS-GRIP so that the benefits together with HG sealing can be realised.
Business Model and Markets
Historically Plexus' has focused on supplying adjustable wellhead equipment and associated running tools on a rental basis for the relatively niche jack-up exploration drilling in the UK Continental Shelf ('UKCS') and has achieved a near 100% market share. This market has over the years expanded into the ECS (Norway, Netherlands and Denmark) and contracts have been secured as far afield as China, Russia, Egypt, Cameroon, Trinidad, Venezuela, and Morocco. The exploration wellhead contracts are supplied from a rental fleet of owned inventory of which the majority are HPHT as opposed to standard pressure 10,000psi wellheads as these are increasingly demanded where added benefits and features are appreciated. The wellhead equipment is typically rented for an agreed initial set period that may typically range from 60 to 180 days depending on pressure rating. Where a well runs on beyond the initial agreed period a pro-rata day rate is then charged to the operator until the well is completed and the equipment returned. The steep decline in exploration drilling activity in the North Sea has accelerated the need and goal of expanding the target markets beyond Europe. Plexus also provides service technicians to install and maintain its equipment at various stages during the drilling of a well.
Exploration rental contracts enable the customer to experience and learn about the many benefits of POS-GRIP technology on temporary wells, rather than those used for production where typically the wellhead equipment is in place for the life of the well and are therefore sold rather than rented. Renting wellheads also delivers a greater gross margin to Plexus as the cost of sales is essentials repairs and maintenance. However with new partners such as Gusar in Russia, the Company is looking to expand business activities to include the development of a Plexus POS-GRIP surface production wellhead suitable for the volume land production market working on a license royalty model. Renting equipment from an inventory enables Plexus to outsource all of its wellhead manufacturing to a select number of third parties, and as a result avoid having to invest in and develop in-house manufacturing capabilities with attendant fixed overheads. Such a business model has proven to be beneficial in the current trading climate as although Plexus revenues have declined significantly it is able to adjust and reduce its overhead which does not involve a factory.
The traditional Plexus jack-up wellhead exploration market is estimated to be worth circa USD$400m per annum. By contrast the combined value of the global land and platform production wellhead and subsea wellhead markets is many times greater and runs into billions of dollars. In the case of the overall subsea market a Douglas-Westwood analyst report last May calculated that deepwater expenditure will total US$137bn for 2016 to 2020, with Africa and the Americas accounting for 87% of this. Therefore, even with the well reported global decline in general capital expenditure and the deferral and cancellation of projects by operating companies, the business potential that these market sectors offer to Plexus and its partners is substantial.
Depressed oil markets saw Brent Crude fall during the financial year by 76% from circa USD$112 on 1 July 2014 to a low of USD$27 in January 2016. It is not surprising therefore that operators are focusing closely on securing significant cost savings across their operations which has resulted in an industry wide push for supply chain savings at all levels of drilling operations. As Plexus' equipment can deliver material cost savings to the operator at the same time as providing a superior wellhead solution, it is hoped that such trading conditions can have a silver lining in terms of capturing operator's interest due to the unique combination of enhanced safety and operational time and cost savings that Plexus wellheads offer. In the case of Plexus' surface jack-up wellheads these can be supplied at a rental cost that equates to less than the time savings for the operator, thereby making them cost negative. Similarly, the Company's new Python subsea wellhead will also deliver such substantial cost savings benefits, and can also be cost negative. Cost saving and safety features such as these underpin Plexus' business model and the value of its IP as it enters new international markets directly or through licensees.
Strategy
Having proven the significant advantages of Plexus POS-GRIP wellheads for jack-up exploration applications to a wide range of mostly international oil companies ('IOC's), the challenge now for Plexus whilst waiting for its organic exploration led business to recover is to extend its business activities into the volume land and platform and also the subsea sectors. This strategy can be pursued both organically and also through licensees and partners. It should not be underestimated however that the wellhead business is dominated by a small number of mostly American multi-national oil services companies such as GE who continue to dominate the industry. In fact, as a clear illustration of these market dynamics just five companies account for over 90% of the subsea wellhead business. Despite such challenges Plexus believes that its wellhead equipment is gaining traction and awareness among major operators of its wellhead systems is increasing which bodes well over the longer term.
Plexus' long-term goal is to establish POS-GRIP technology as a new industry standard for wellhead and metal sealing designs, whilst continuing to develop new products which can also offer multiple benefits and advantages to the industry in terms of improved safety, functionality, and cost and time savings. An example of such extensions for POS-GRIP technology is our connector technology which is ideal for high integrity, low fatigue applications. Wellhead connectors, riser connectors, subsea jumper connectors, pipeline connectors, and even vessel mooring connectors we believe can all benefit from the simplicity of POS-GRIP. To support this strategy a key milestone achieved during the year, which delivers significant credibility to the science based claims that we can make for our equipment, was the completion of our Python subsea wellhead design where an independent test report summary considered the combined thermal, pressure and axial load testing of a production casing hanger with our integral HG sealing system configured for use with the Python subsea wellhead design. This test which was put in place by a major IOC was initiated to establish qualification procedures that better reflect the true requirements of actual applications rather than the lower test standards required by current industry standards. This new more rigorous approach adds numerous additional combined temperature, load, and pressure cycles whilst requiring the testing of a complete hanger/sealing system, and requires testing at the extremes of the product tolerance ranges. We believe that successfully qualifying to these much more stringent test requirements uniquely places Plexus at the forefront of test standard passes, and supports our claim that we can match those standards required for premium couplings.
Alongside our various product and engineering led strategies we are also implementing a strategy to expand from our historically dominant position in the North Sea into new geographical areas and sizeable markets that to date have not been targeted such as the GOM and offshore Mexico, India and the Middle East.
R&D continues to be central to the Company's strategy of investing time and capital into new product development and improving the application of POS-GRIP technology, and underpins our product extension strategic initiatives. As part of the Group's strategy of conserving cash and reducing overheads R&D spend has been significantly reduced and excluding the cost of building test fixtures R&D spend decreased 46.4% to £1.86m during the last financial year. R&D was focused on such products as WellTree, the HP/HT Tie-Back connector, the new POS-SET Connector and the Python subsea wellhead. All of these product innovations are in line with Plexus' goal to extend the POS-GRIP product reach into new and commercially attractive markets which can be addressed organically or with partners. Relevant R&D activity adds value and leads to new inventions, product designs, and IP. Plexus continues to pursue an active strategy of protecting existing and securing new IP and patents and to date these remain unchallenged which underlines the uniqueness of our technical solutions.
Key Performance Indicators
The Directors monitor the performance of the Group by reference to certain financial and non-financial key performance indicators. The financial indicators include revenue, EBITDA, profit and loss, earnings per share and working capital resources and requirements. Non-financial indicators include Health and Safety statistics, equipment utilisation rates, geographical diversity of revenues and customers, effectiveness of various research and development initiatives for example in relation to new patent activity and inventions, and appropriate employee headcount numbers and turnover rates.
Principal Risks and Risk Management
There are a number of potential risks and uncertainties that could have an impact on the Group's performance which include the following.
a) Political, legal and environmental risks
Plexus participates in a global market where the exploration and production of oil and gas reserves and even the access to those reserves can be adversely impacted by changes in the political, operational, and environmental landscape. The last eighteen months have clearly demonstrated how any combination of such factors can be so detrimental and generate in many cases risks and uncertainties that can undermine stable trading conditions such as Iran making efforts to return to the world hydrocarbon supply stage, and Saudi Arabia implementing a strategy to maintain its market share goals at whatever cost. A specific example of political risk is the introduction of sanctions, and in extreme circumstances even regime change or a coup. As a supplier to the industry it is clear that Plexus can be adversely affected by such events which disrupt the markets and can compromise the ability to execute work for customers and/or collect payment for services performed. Such risks also extend to legal and regulatory issues and it is important to understand that these can change at short notice, especially as a result of incidents such as happened in the GOM. To help address and balance such risks, the Group has continued to broaden its geographic footprint and customer base.
Closer to home, following the UK Referendum result 'BREXIT' continues to generate a fair amount of speculation and uncertainty about timing and eventual impact in terms of for example staff recruitment, export negativity if duties were to apply and exchange rates. It is of course at an early stage and Article 50 has not yet been served. Our current thinking is that staff recruitment when activity levels pick up is not currently a major concern, and weaker Sterling actually makes our products and services cheaper to customers outside of the UK. In addition some of our sales are in dollars and this could generate a small currency gain opportunity when converted to Sterling. Also as we see our equipment as being a unique option for customers we would anticipate that BREXIT is likely to have a lesser impact for Plexus than it may have on other companies and industries. However if we need to manufacture more equipment for rent or sale, the cost of raw material, and in particular steel may increase if Sterling's weakness continues.
b) Oil and gas sector trends
It is readily understood that the world is actively moving away from coal as part of the COP21 climate change objectives and the need to reduce CO2 emissions. However the battle between traditional hydrocarbons in terms of coal, oil and gas is not the only trend to consider. New technologies particularly in relation to renewables, alternative energies and developments such as the increasing use of electric vehicles and corresponding battery life, wind and wave energy could all in the future prove very disruptive to the traditional oil and gas industry.
c) Technology
The Group is still at a relatively early stage in the commercialisation, marketing and application of its POS-GRIP friction-grip technology beyond jack-up rental exploration wellhead equipment, both with regard to expanding into the surface land and platform production market sector, and particularly the subsea market where the new Python subsea wellhead was only launched last September at the SPE Offshore Europe Exhibition, Aberdeen. Current and future contract opportunities may be adversely affected by technology related factors outside the Group's control, especially where new product developments are concerned. These may include unforeseen equipment design issues, test delays during a contract and final testing and delayed acceptances of deliveries, which could lead to possible abortive expenditure and write downs, reputational risk and potential customer claims or onerous contractual terms. Such risks may materially impact on the Group. To mitigate this risk, the Group continues to invest in developing and proving the technology and has a policy of on-going training of our own personnel and where appropriate our customers.
d) Competitive risk
The Group operates in highly competitive markets and often competes directly with large multi-national corporations who have greater resources and are more established, and who are arguably more resilient to extended adverse trading conditions. Unforeseen product innovation or technical advances by competitors could adversely affect the Group and lead to a slower take up of the Group's proprietary technology. To mitigate this risk Plexus maintains an extensive suite of patents and trademarks, and actively continues to develop and improve its IP to ensure that it continues to be able to offer unique superior wellhead design solutions.
e) Operational
Plexus, like many other oil service companies, has had to make significant reductions in its workforce numbers for the first time since being admitted to the AIM market in 2005. Therefore, when the anticipated upturn comes in drilling activity it is possible that the industry and Plexus could experience difficulties in rehiring past or new employees and this could deprive Plexus of the key personnel necessary for expanding operational activities as well as research and development initiatives at the rate that may be required. To help mitigate this risk Plexus has developed effective recruitment and training procedures, which combined with the appeal of working in a company with unique technology and engineering solutions which will hopefully minimise this risk.
f) Liquidity and finance requirements
In an economic climate that remains volatile and unpredictable it has become increasingly possible for both existing and potential sources of finance to be closed to businesses for a variety of reasons that have not been an issue in the past. Some of these may even relate to the lender itself in terms of its own capital ratios and lending capacity. Although this is a potential risk the Group took appropriate steps during the year to mitigate this risk by completing two share subscription events with strategic investors as well as a share placing with existing and new shareholders. In addition, the Group successfully renewed bank facilities with Bank of Scotland.
g) Credit
The main credit risk is attributable to trade receivables. As the majority of the Group's customers are large international oil companies the risk of non-payment is much reduced, and therefore is more likely to be related to client satisfaction and/or trade sanction issues. Customer payments can involve extended period of times especially from countries where exchange control regulations can delay the transfer of funds outside those countries. As Plexus begins to establish licensee relationships there may be instances whereby certain capital payments could be due some way into the future and as such greater credit risk than exists under normal payments terms could apply. The Group has credit risk management policies in place and exposure to credit risk is monitored continuously.
h) Risk assessment
The Board has established an on-going process for identifying, evaluating and managing the more significant risk areas faced by the Group. One of the Board's control documents is a detailed "Risks assessment & management document" which categorises risks in terms of - business (including IT), compliance, finance, cash, debtors, fixed assets, other debtors/prepayments, creditors, legal, and personnel. These risks are assessed on a regular basis and can be associated with a variety of internal and external sources including regulatory requirements, disruption to information systems including cyber-crime, control breakdowns and social, ethical, environmental and health and safety issues.
Ben van Bilderbeek
Chief Executive
28 October 2016
Consolidated Statement of Comprehensive Income
for the year ended 30 June 2016
|
|
Notes |
2016 £'000 |
2015 £'000
|
|
Revenue |
1 |
11,227 |
28,526 |
|
Cost of sales |
|
(5,994) |
(8,581) |
|
|
|
|
|
|
Gross profit |
|
5,233 |
19,945 |
|
|
|
|
|
|
Administrative expenses |
|
(11,276) |
(14,925) |
|
Restructuring costs |
|
(755) |
- |
|
|
|
|
|
|
Operating (loss) / profit |
|
(6,798) |
5,020 |
|
Finance income |
|
69 |
512 |
|
Finance costs |
|
(187) |
(182) |
|
Share of profit of associate |
|
- |
236 |
|
Gain on disposal of associate |
|
- |
352 |
|
|
|
|
|
|
(Loss) / profit before taxation |
|
(6,916) |
5,938 |
|
Income tax credit / (expense) |
3 |
1,126 |
(509) |
|
|
|
|
|
|
(Loss) / profit for the year attributable to the owners of the parent |
|
(5,790) |
5,429 |
|
Other comprehensive income |
|
- |
- |
|
|
|
|
|
|
Total comprehensive income for the year attributable to the owners of the parent |
|
(5,790) |
5,429 |
|
|
|
|
|
|
(Loss) / earnings per share |
5 |
|
|
|
Basic |
|
(6.39p) |
6.40p |
|
Diluted |
|
(6.39p) |
6.16p |
All income arises from continuing operations
Consolidated Statement of Financial Position
at 30 June 2016
|
|
|
2016 |
2015 |
|
|
Notes |
£'000 |
£'000 |
|
Assets |
|
|
|
|
Goodwill |
|
767 |
767 |
|
Intangible assets |
6 |
14,080 |
13,167 |
|
Property, plant and equipment |
7 |
15,567 |
17,154 |
|
|
|
|
|
|
Total non-current assets |
|
30,414 |
31,088 |
|
|
|
|
|
|
Inventories |
|
6,726 |
6,551 |
|
Trade and other receivables |
|
1,747 |
7,301 |
|
Current income tax asset |
|
229 |
- |
|
Cash and cash equivalents |
|
15,863 |
3,328 |
|
|
|
|
|
|
Total current assets |
|
24,565 |
17,180 |
|
|
|
|
|
|
Total Assets |
|
54,979 |
48,268 |
|
|
|
|
|
|
Equity and Liabilities |
|
|
|
|
Called up share capital |
8 |
1,054 |
849 |
|
Share premium account |
|
36,893 |
20,141 |
|
Share based payments reserve |
|
766 |
1,862 |
|
Retained earnings |
|
8,277 |
15,628 |
|
|
|
|
|
|
Total equity attributable to equity holders of the parent |
|
46,990 |
38,480 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Deferred tax liabilities |
|
468 |
212 |
|
Bank loans |
|
675 |
5,975 |
|
|
|
|
|
|
Total non-current liabilities |
|
1,143 |
6,187 |
|
|
|
|
|
|
Trade and other payables |
|
1,546 |
3,296 |
|
Current income tax liabilities |
|
- |
5 |
|
Bank loans |
|
5,300 |
300 |
|
|
|
|
|
|
Total current liabilities |
|
6,846 |
3,601 |
|
|
|
|
|
|
Total liabilities |
|
7,989 |
9,788 |
|
|
|
|
|
|
Total Equity and Liabilities |
|
54,979 |
48,268 |
|
|
|
|
|
Consolidated Statement of Changes in Equity
for the year ended 30 June 2016
|
|
Called Up Share Capital £'000
|
Share Premium Account £'000
|
Share Based Payments Reserve £'000
|
Retained Earnings £'000
|
Total £'000
|
|
Balance as at 30 June 2014 |
849 |
20,138 |
2,476 |
11,117 |
34,580 |
|
Total comprehensive income for the year |
- |
- |
- |
5,429 |
5,429 |
|
Share based payments reserve charge |
- |
- |
21 |
- |
21 |
|
Transfer of share based payments reserve charge on exercise of options |
- |
- |
(1) |
1 |
- |
|
Tax credit recognised directly in equity |
- |
- |
- |
2 |
2 |
|
Transfer of share based payments reserve charge on lapse of options |
|
|
(38) |
38 |
- |
|
Issue of ordinary shares (net of issue costs) |
- |
3 |
- |
- |
3 |
|
Net deferred tax movement on share options |
- |
- |
(596) |
- |
(596) |
|
Dividends |
- |
- |
- |
(959) |
(959) |
|
|
|
|
|
|
|
|
Balance as at 30 June 2015 |
849 |
20,141 |
1,862 |
15,628 |
38,480 |
|
Total comprehensive income for the year |
- |
- |
- |
(5,790) |
(5,790) |
|
Share based payments reserve charge |
- |
- |
21 |
- |
21 |
|
Current year credit on share option exercise to share based payment reserve |
- |
- |
5 |
- |
5 |
|
Transfer of share based payments reserve charge on exercise of options |
- |
- |
(3) |
3 |
- |
|
Issue of ordinary shares (net of issue costs) |
205 |
16,752 |
- |
- |
16,957 |
|
Net deferred tax movement on share options |
- |
- |
(1,119) |
- |
(1,119) |
|
Dividends |
- |
- |
- |
(1,564) |
(1,564) |
|
|
|
|
|
|
|
|
Balance as at 30 June 2016 |
1,054 |
36,893 |
766 |
8,277 |
46,990 |
Consolidated Statement of Cash Flows
for the year ended 30 June 2016
|
|
2016 £'000 |
2015 £'000 |
|
Cash flows from operating activities |
|
|
|
(Loss) / profit before taxation |
(6,916) |
5,938 |
|
Adjustments for: |
|
|
|
Depreciation, amortisation and impairment charges |
4,471 |
3,881 |
|
(Gain) / loss on disposal of property, plant and equipment |
(2) |
20 |
|
Charge for share based payments |
21 |
21 |
|
Investment income |
(69) |
(512) |
|
Interest expense |
187 |
182 |
|
Share of result in associate |
- |
(236) |
|
Gain on disposal of associate |
- |
(352) |
|
Dividend received from associate |
- |
37 |
|
Changes in working capital: |
|
|
|
Increase in inventories |
(175) |
(1,295) |
|
Decrease / (increase) in trade and other receivables |
5,554 |
(838) |
|
Decrease in trade and other payables |
(1,750) |
(1,678) |
|
|
|
|
|
Cash generated from operating activities |
1,321 |
5,168 |
|
Income taxes refund / (payment) |
34 |
(318) |
|
|
|
|
|
Net cash generated from operating activities |
1,355 |
4,850 |
|
|
|
|
|
Cash flows from investing activities |
|
|
|
Proceeds from disposal of associate |
- |
1,492 |
|
Acquisition of subsidiary |
- |
(7) |
|
Purchase of intangible assets |
(1,900) |
(3,541) |
|
Purchase of property, plant and equipment |
(1,956) |
(7,016) |
|
Proceeds of sale of property, plant and equipment and intangibles |
61 |
56 |
|
Interest received |
69 |
4 |
|
|
|
|
|
Net cash used in investing activities |
(3,726) |
(9,012) |
|
|
|
|
|
Cash flows from financing activities |
|
|
|
Drawdown of loans |
- |
2,500 |
|
Repayment of loans |
(300) |
(225) |
|
Net proceeds from issue of new ordinary shares |
16,923 |
- |
|
Proceeds from share options exercised |
34 |
3 |
|
Interest paid |
(187) |
(182) |
|
Equity dividends paid |
(1,564) |
(959) |
|
|
|
|
|
Net cash generated from financing activities |
14,906 |
1,137 |
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents |
12,535 |
(3,025) |
|
Cash and cash equivalents at 1 July 2015 |
3,328 |
6,353 |
|
|
|
|
|
Cash and cash equivalents at 30 June 2016 |
15,863 |
3,328 |
|
|
|
|
Notes to the Consolidated Financial Statement
1. Revenue
|
|
2016 £'000 |
2015 £'000 |
|
By geographical area |
|
|
|
UK |
1,241 |
10,591 |
|
Europe |
7,636 |
14,471 |
|
Rest of World |
2,350 |
3,464 |
|
|
11,227 |
28,526 |
The revenue information above is based on the location of the customer. Substantially all of the revenue in the current and previous periods derives from the rental of equipment and the provision of related services.
2. Segment reporting
The Group derives revenue from the sale of its POS-GRIP technology and associated products, the rental of wellheads utilising the POS-GRIP technology and service income principally derived in assisting with the commissioning and on-going service requirements of our equipment. These income streams are all derived from the utilisation of the technology which the Group believes is its only segment.
Per IFRS 8, the operating segment is based on internal reports about components of the group, which are regularly reviewed and used by the board of directors being the Chief Operating Decision Maker ("CODM").
All of the Group's non-current assets are held in the UK.
The following customers each account for more than 10% of the Group's revenue:
|
|
2016 £'000 |
2015 £'000 |
|
Customer 1 |
3,696 |
4,224 |
|
Customer 2 |
1,328 |
4,175 |
|
Customer 3 |
- |
3,593 |
|
Customer 4 |
- |
3,356 |
|
Customer 5 |
- |
3,342 |
3. Income tax expense
|
(i) |
The taxation charge for the year comprises: |
2016 £'000 |
2015 £'000 |
|
|
UK Corporation tax: |
|
|
|
|
Current tax on income for the year |
5 |
353 |
|
|
Adjustment in respect of prior years |
(383) |
(483) |
|
|
|
(378) |
(130) |
|
|
Foreign tax |
|
|
|
|
Current tax on income for the year |
61 |
263 |
|
|
Adjustment in respect of prior years |
56 |
9 |
|
|
|
117 |
272 |
|
|
Total current tax (credit)/charge |
(261) |
142 |
|
|
|
|
|
|
|
Deferred tax: |
|
|
|
|
Origination and reversal of timing differences |
(628) |
253 |
|
|
Short term timing differences |
64 |
- |
|
|
Difference between qualifying fixed assets and capital allowances |
(643) |
36 |
|
|
Share based payments charged to the Income Statement |
151 |
(3) |
|
|
Adjustment in respect of prior years |
191 |
81 |
|
|
Total deferred tax |
(865) |
367 |
|
|
|
|
|
|
|
Total tax (credit)/charge |
(1,126) |
509 |
|
|
The effective rate of tax is 16% (2015: 9%) |
|
|
|
(ii) |
Factors affecting the tax charge for the year |
2016 £'000 |
2015 £'000 |
|
|
(Loss) / profit on ordinary activities before tax |
(6,916) |
5,938 |
|
|
Tax on (loss) / profit at standard rate of UK corporation tax of 20% (2015: 20.75%) |
(1,383) |
1,232 |
|
|
Effects of: |
|
|
|
|
Expenses not deductible for tax purposes |
554 |
187 |
|
|
Income from and gain on sale of associate not subject to tax |
- |
(122) |
|
|
Derecognition of financial liability not subject to tax |
- |
(105) |
|
|
Effect of R&D tax credits |
- |
(521) |
|
|
Effect of change in tax rate |
(61) |
(10) |
|
|
Tax adjustments on share based payments |
151 |
1 |
|
|
Foreign tax rates |
108 |
240 |
|
|
Adjustments in respect of prior year |
(192) |
(393) |
|
|
Group income not subject to tax |
(303) |
- |
|
|
Total tax (credit) / charge |
(1,126) |
509 |
|
(iii) |
Movement in deferred tax liability balance |
2016 £'000 |
2015 £'000 |
|
|
Deferred tax liability / (asset) at beginning of year |
212 |
(751) |
|
|
(Credit) / charge to Statement of Comprehensive Income |
(865) |
367 |
|
|
Deferred tax movement on share options recognised in equity |
1,121 |
596 |
|
|
|
|
|
|
|
Deferred tax liability at end of year |
468 |
212 |
|
|
|
|
|
|
(iv) |
Deferred tax liability balance |
2016 £'000 |
2015 £'000 |
|
|
The deferred tax liability balance is made up of the following items: |
||
|
|
Difference between depreciation and capital allowances |
1,001 |
1,600 |
|
|
Share based payments |
(88) |
(1,361) |
|
|
Tax losses |
(445) |
(27) |
|
|
|
|
|
|
|
Deferred tax liability/(asset) at end of year |
468 |
212 |
4. Dividends
|
|
2016 £'000 |
2015 £'000 |
|
Ordinary Shares |
|
|
|
Interim paid for the period to 31 December 2015 of nil (2015: 0.51p) per share |
- |
433 |
|
Ordinary Shares |
|
|
|
Final dividend for the year ended 30 June 2016 of nil (2015: 1.75p) per share paid and recognised in 2016 |
- |
1,564 |
5. (Loss) / Earnings per share
|
|
2016 £'000 |
2015 £'000 |
|
(Loss) / profit attributable to shareholders |
(5,790) |
5,429 |
|
|
Number |
Number |
|
Weighted average number of shares in issue |
90,597,415 |
84,896,300 |
|
Dilution effects of share schemes |
2,135,987 |
3,205,091 |
|
|
|
|
|
Diluted weighted average number of shares in issue |
92,733,402 |
88,101,391 |
|
|
|
|
|
Basic (Loss) / earnings per share |
(6.39p) |
6.40p |
|
Diluted (Loss) / earnings per share |
(6.39p) |
6.16p |
|
|
|
|
Basic (Loss)/ earnings per share is calculated on the results attributable to ordinary shares divided by the weighted average number of shares in issue during the year.
Diluted earnings per share calculations include additional shares to reflect the dilutive effect of employee share schemes and share option schemes. As a loss was made in the current year the option schemes are considered to be anti-dilutive.
6. Intangible fixed assets
|
|
Intellectual Property £'000 |
Patent and Other Development £'000 |
Computer Software £'000 |
Total £'000 |
|
Cost |
|
|
|
|
|
As at 30 June 2014 |
6,440 |
7,720 |
226 |
14,386 |
|
Additions |
- |
3,473 |
68 |
3,541 |
|
|
|
|
|
|
|
As at 30 June 2015 |
6,440 |
11,193 |
294 |
17,927 |
|
Additions |
- |
1,860 |
37 |
1,897 |
|
Disposals |
- |
(4) |
- |
(4) |
|
As at 30 June 2016 |
6,440 |
13,049 |
331 |
19,820 |
|
|
|
|
|
|
|
Amortisation |
|
|
|
|
|
As at 30 June 2014 |
2,692 |
1,089 |
168 |
3,949 |
|
Charge for the year |
329 |
454 |
28 |
811 |
|
|
|
|
|
|
|
As at 30 June 2015 |
3,021 |
1,543 |
196 |
4,760 |
|
Charge for the year |
330 |
612 |
38 |
980 |
|
On Disposals |
- |
- |
- |
- |
|
As at 30 June 2016 |
3,351 |
2,155 |
234 |
5,740 |
|
|
|
|
|
|
|
Net Book Value |
|
|
|
|
|
As at 30 June 2016 |
3,089 |
10,894 |
97 |
14,080 |
|
|
|
|
|
|
|
As at 30 June 2015 |
3,419 |
9,650 |
98 |
13,167 |
7. Property, plant and equipment
|
|
Buildings £'000 |
Tenant Improvements £'000 |
Equipment £'000 |
Assets under Construction £'000 |
Motor Vehicles £'000 |
Total £'000 |
|
Cost |
|
|
|
|
|
|
|
As at 30 June 2014 |
974 |
430 |
25,393 |
260 |
44 |
27,101 |
|
Additions |
3,405 |
2 |
1,544 |
2,054 |
11 |
7,016 |
|
Transfers |
- |
- |
2,140 |
(2,140) |
- |
- |
|
Disposals |
- |
- |
(533) |
- |
(7) |
(540) |
|
|
|
|
|
|
|
|
|
As at 30 June 2015 |
4,379 |
432 |
28,544 |
174 |
48 |
33,577 |
|
Additions |
- |
168 |
588 |
1,200 |
- |
1,956 |
|
Transfers |
- |
- |
1,316 |
(1,316) |
- |
- |
|
Disposals |
- |
- |
(318) |
- |
(14) |
(332) |
|
|
|
|
|
|
|
|
|
As at 30 June 2016 |
4,379 |
600 |
30,130 |
58 |
34 |
35,201 |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
As at 30 June 2014 |
405 |
126 |
13,257 |
- |
29 |
13,817 |
|
Charge for the year |
153 |
56 |
2,854 |
- |
7 |
3,070 |
|
On disposals |
- |
- |
(461) |
- |
(3) |
(464) |
|
|
|
|
|
|
|
|
|
As at 30 June 2015 |
558 |
182 |
15,650 |
- |
33 |
16,423 |
|
Charge for the year |
250 |
68 |
3,164 |
- |
6 |
3,488 |
|
On disposals |
- |
- |
(263) |
- |
(14) |
(277) |
|
|
|
|
|
|
|
|
|
As at 30 June 2016 |
808 |
250 |
18,551 |
- |
25 |
19,634 |
|
|
|
|
|
|
|
|
|
Net Book Value |
|
|
|
|
|
|
|
As at 30 June 2016 |
3,571 |
350 |
11,579 |
58 |
9 |
15,567 |
|
|
|
|
|
|
|
|
|
As at 30 June 2015 |
3,821 |
250 |
12,894 |
174 |
15 |
17,154 |
8. Share Capital
|
|
2016 £'000 |
2015 £'000 |
|
Authorised: |
|
|
|
Equity: 110,000,000 (2015: 110,000,000) Ordinary shares of 1p each |
1,100 |
1,100 |
|
Allotted, called up and fully paid: |
|
|
|
Equity: 105,386,239 (2015: 84,902,196) Ordinary shares of 1p each |
1,054 |
849 |
|
Share issues during the year: |
Number of shares |
Share capital £'000 |
Share premium £'000 |
Total £'000 |
|
At 30 June 2015 |
84,902,196 |
849 |
20,141 |
20,990 |
|
On 7 July 2015 |
4,468,537 |
45 |
7,893 |
7,938 |
|
On 9 December 2015 |
19,843 |
- |
10 |
10 |
|
On 25 April 2016 |
6,764,893 |
68 |
3,250 |
3,318 |
|
On 29 June 2016 |
9,230,770 |
92 |
5,599 |
5,691 |
|
At 30 June 2016 |
105,386,239 |
1,054 |
36,893 |
37,947 |
During the period the Group issued new shares as a result of the following transactions:
|
|
Number of shares |
Price per share |
Aggregate nominal value £ |
Total aggregate value £ |
|
On 7 July 2015 |
|
|
|
|
|
- Share subscription |
4,468,537 |
180p |
44,685 |
8,043,367 |
|
9 December 2015 |
|
|
|
|
|
- Share options |
10,096 |
41p |
101 |
4,139 |
|
- Share options |
9,747 |
60p |
97 |
5,848 |
|
25 April 2016 |
|
|
|
|
|
- Share subscription |
6,764,893 |
52.05p |
67,648 |
3,521,127 |
|
29 June 2016 |
|
|
|
|
|
- Share placing |
9,230,770 |
65p |
92,307 |
6,000,000 |
The excess net proceeds have been credited to the share premium account.
9. Reconciliation of net cash flow to movement in net cash/(debt)
|
|
2016 £'000 |
2015 £'000 |
|
Increase/(decrease) in cash in the year |
12,835 |
(3,025) |
|
Cash inflow from increase in net debt |
- |
(2,275) |
|
Movement in net cash/(debt) in year |
12,835 |
(5,300) |
|
Net (debt)/cash at start of year |
(2,947) |
2,353 |
|
Net cash/(debt) at end of year |
9,888 |
(2,947) |
10. Analysis of net cash/(debt)
|
|
At beginning of year £'000 |
Cash flow £'000 |
At end of year £'000 |
|
Cash in hand and at bank |
3,328 |
12,535 |
15,863 |
|
Bank loans |
(6,275) |
300 |
(5,975) |
|
Total |
(2,947) |
12,835 |
9,888 |
The financial information above does not constitute the Company's statutory accounts for the year ended 30 June 2016 but is derived from those statements.
The statutory financial statements and this preliminary statement for the year ended 30 June 2016 were approved by the Board on 28 October 2016. On the same date the company's auditors, Crowe Clark Whitehill LLP issued an unqualified report on those financial statements. The audit report did not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report or contain a statement under section 498(2) or (3) of the Companies Act 2006. The financial information for the year ended 30 June 2016 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not draw attention to any matters be way of emphasis and not contain a statement under s498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation. The Company's financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the EU. A copy of the statutory accounts will be delivered to the Registrar of Companies in due course.
The Annual Report will be circulated to all shareholders and thereafter, copies will be available from the registered office of the company, 42-50 Hersham Road, Walton-on-Thames, Surrey, KT12 1RZ.
This information is provided by RNS
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