Hughes Drilling sees revenue and profit growth continuing in 2013
Hughes Drilling ASX:HDX) has re-affirmed that revenue and rig utilisation expectations for FY13 "are broadly in line" with previous guidance with a "moderating but still positive growth trend."
Production Drilling operations are expected to contribute around 85% of group profits for FY13 while Express
Hydraulics (the agency and distribution business) and Reichdrill (rig manufacturer, for the 3months since acquisition) are expected to contribute a combined 15% of FY13 group profits.
Hughes small delineation business is in “run-off” with its assets to be sold as opportunities arise.
Production Drilling – Revenue and profit growth
Average comparable period revenue continues to grow and is broadly consistent with guidance. As advised in the Half Year Report, growth has continued, albeit at a lesser pace than 1HFY13.
Revenue growth is being driven by mine owners increasing coal production and hence increasing blast hole metres drilled.
Increased coal production arises for several reasons not least of which is an objective to reduce average cost per tonne (increased production reduces allocated fixed costs per tonne).
Hughes’ positioning as an essential service provider in the production process of operating mines largely shields it from the problems faced by other service providers with business models focused on the exploration, development or construction phases of new mines.
Key sources of production drilling FY13 earnings growth:
- Full year contributions from rigs that commenced operations part way through FY12.
- New blast hole contracts commencing in FY13 (utilising new rigs).
- Stable rate profiles for new and existing contracts.
- Some cost increases in employee unit costs and we anticipate emerging modest cost increases in some US$ consumables.
- Growth favourably impacts balance sheet and cash position:
- Recent and pending rig acquisitions are funded from cash, not debt.
- Lower cash cost of rigs following the acquisition of Reichdrill.
- More conservative balance sheet following recent capital raising.
- Total borrowings are falling progressively in line with the budgeted debt amortisation program.
Production rig utilisation:
- Utilisation of the expanded fleet continues at 97%.
- Clients have advised of an increase in required metres to be drilled reflecting a step-up in coal production. Consequently utilisation is expected to remain at or near 97%.
Production rig fleet size:
- All new rigs have work programmes to commence immediately following usual prestart activities.
- By 30 June 2013 Hughes expects that the production rig fleet will have reached 38 rigs (the September 2012 Financial
Briefing indicated 38 to 40 rigs). The 38th rig is expected to arrive in the last week of June.
- 2nd half FY13 rig growth is therefore expected to be 4 new rigs compared with the 7 new rigs in the 1st half FY13.
- New rig acquisitions will continue to be made following the securing of a new or expanding contract.
Growth of Hughes’ production drilling activities is attributed to:
- Australian coal production rising (exports are expected to rise 13% this financial year).
- Hughes operating in coal mines that are generally lower on the cost curve.
- Hughes’ blast hole operations being a key part of an operating mine’s production process.
- Expanded demand from Hughes core “blue-chip” client base who’s objective is to reduce their average cost per tonne.
- Availability of quality equipment from highly productive service providers such as Hughes remains limited.
Significantly, Hughes’ blast hole service is a key part of the production process of open cut coal mines.
It is not exploration drilling, nor are exploration rigs suitable for coal sector blast hole drilling. Consequently, Hughes has not experienced the dramatic changes in activity that affected companies operating in the exploration sector.
Critically, Hughes’ share of the Queensland and New South Wales production drilling markets, which produce 96% of Australia’s coal exports, is estimated at 47%.
Reichdrill: Growth in demand from non-Hughes rig buyers (mostly for US and African mines) in FY14.
- FY14 budget/order book indicates 25+% growth over 2012 – majority of orders coming from USA & Africa.
- FY14 budget/orders excluding those from Hughes Production Drilling up ~40% over third party orders in 2012.
- Reichdrill expected to represent ~30% of FY14 HDX group revenue.
- Growth reflects the Hughes assisted restructuring of Reichdrill’s distribution network. Growth of the distribution
network to key international markets is an ongoing project – key targets are Indonesia (the world’s largest coal
exporter), Africa, and Russia.
- Growth Capex minimal and self-funded from Reichdrill cash flow.
- Reduction of manufacturing cost base with Hughes assisted renegotiation of key supply arrangements.
- A summary of the Reichdrill business is provided at the end of this announcement.
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