Titan Energy Services Limited and the rapidly shifting CSG market

Titan Energy Services Limited and the rapidly shifting CSG market

This blog post follows on from a piece I wrote back in July, on Titan Energy Services (ASX: TTN).

Titan provides services to the oil and gas, mining, pipeline, road and infrastructure sectors. Its main division, Atlas Drilling, provides coal seam gas drilling services from three company-owned and one leased production rigs. The rigs are located in and around the Surat Basin area. The Resources Camp Hire division has grown the number of available rooms for hire from 674 to 1138 over the past year. These two divisions account for around 80 per cent of the company’s revenue and the Hofco Oilfield Equipment Services and Nektar Remote Hospitality (catering, waste and water) accounts for the balance.

On 10 July 2014, Titan announced a cut to its earnings before interest and tax (EBIT) guidance to $18.5 million for the year to June 2014, on the back of a delayed camp contract, lower camp room rates and the unexpected cancellation of a drilling contract for Atlas Rig 3. This forecast was down around 15 per cent on previous expectations ($22 million), but nevertheless up $4 million (or 28 per cent) on EBIT for the year to June 2013 ($14.5 million).

At the FY14 results presentation held on 7 August 2014, Managing Director Jim Sturgess expected FY15 EBIT to exceed $21.0 million (+13.5 per cent) after taking “a measured approach to our guidance, based on current contract positions of the Atlas business”.

Admittedly, we had been very cautious when it came to the short-term nature of Titan’s drilling contracts given the following extract from the company’s trading update, published July 10.  “In the Atlas drilling business, Rig 1 is contracted until the end of August (2014), plus a three-month option. Rig 2 has just been re-contracted for three months, plus a three-month option. Rig 3 and Rig 4 are currently being marketed to prospective clients”.

By the August 7 announcement, we read: “Rig 1 and 2 contracted however Rig 1 due to complete its current work package this month”. Rigs 3 and 4 were still “being marketed to customers”.

On the executive front, the experienced Christine Hayward was appointed Chief Financial Officer and Company Secretary effective 8 September and her predecessor, David Thornton, “moves into an operational role as General Manager of the RCH temporary accommodation business”.

In the 15 September announcement – Atlas secures new drilling contract and receives existing contract extension – the $21 million EBIT guidance for FY15 was reconfirmed.

The announcement by Titan on October 2 was particularly disturbing, and the vulnerability of short-term nature of this contractor’s business model was well and truly highlighted.

“Two important RCH contracts including water, waste and catering have not been renewed.  One 212-room camp contract was terminated early and a 183-room camp concluded its contract term. The 183-room camp was expected to be taken over by another client, however this did not eventuate. Separately, two significant contract tender decisions for RCH which were expected in October 2014, have been deferred into the second half”.

TTN Managing Director Jim Sturgess said what we are seeing is the Queensland CSG market rapidly shifting into a new phase. “The CSG market is transitioning from a high growth, start-up phase that we’ve experienced for the past three years, into an operation and production phase”.

“In light of the recent changes we expect a full year EBIT of $10 million – $12 million”. This excludes a contingent liability of $1.9 million, and if realised, the EBIT guidance would be cut further to $8.1 million – $10.1 million.

In the two-and-half-week period between 15 September and 2 October, TTN’s EBIT guidance had approximately halved; while at the time of writing, the TTN share price was down $1.20 or 70 (per cent) to $0.52.

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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