Plexus Holdings Plc: BUY at 82p

IT’S JUST OVER a year ago that we last looked at Plexus Holdings the brainchild of one Ben van Bilderbeek.

A decade ago he patented his POS-GRIP oil and gas wellhead technology and floated his company on AIM.

For many years it was just another runner in a crowded field, the company’s undoubted class obscured by the fact that the shares were always pretty pricey; and that very few lay investors are capable of assessing the verisimilitude of claims of technical excellence in so many different fields (though readers with good memories might remember that it didn’t stop us from trying).

However there came a palpable change in status as the following figures demonstrate:

Here are the claims made for POS-GRIP wellheads:

• Enhanced safety
• Larger metal-to-metal seal areas
• Virtual elimination of movement between the sealing parts • Fewer components
• Simplified design and assembly
• Enhanced corrosion resistance
• Simpler to manufacture
• Reduced installation cost
• Lower unit cost
• Increased reliability

The initial application of the new technology in the oil and gas industry was through the introduction of an adjustable wellhead system for jack-up exploration drilling. These systems have now become key products for Plexus as oil and gas exploration and production shifts to more extreme operational environments necessitated by the access to more difficult reserves.

We must not lay claim to an understanding of technology that we do not possess. Nevertheless we’re impressed by the founder’s assertion that, post the 2010 Gulf of Mexico incident, there is an increased awareness among regulators and operators of the need for improved safety procedures and of heightened standards and practices.

July 2013 marked 25 years since the Piper Alpha tragedy (and the ruination of so many hapless ‘names’ at Lloyds). The Cullen Inquiry that followed transformed the approach to oil and gas safety in the North Sea, helping UK standards to be recognised as among the best in the world.

However Mr van Bilderbeek asserts that, although operators are required to demonstrate that they have reduced the risks of operation to ‘as low as reasonably practical’, there is still room for ambiguity with regard to certain key practices and equipment selection options. For example, unlike POS-GRIP wellheads, which are known as “through the blow out preventer”, some designs carry clear dangers.

Plexus’ has gained market share by winning over blue-chip oil and gas producers from major multi-national wellhead competitors. It has done this by convincing its customers that its proprietary POS- GRIP wellhead technology is superior when compared to conventional technology, with wellhead integrity a priority in a heightened safety and regulatory environment. Read what the inventor has to say:

“…our wellheads not only deliver significant cost savings for operators, which can total millions of pounds, but uniquely and critically deliver a controlled and reversible gripping force, which holds casing hangers and metal seals rigid…..

This ‘out of sight’ procedure makes it ever so more important that the system is designed to be assembled in a controlled manner, in accordance with a calibrated procedure, to be verified and recorded (which POS-GRIP wellheads are able to do). Proof must be delivered that ‘face to face’ seals are stressed within Hertzian contact stress limits, otherwise metal to metal sealing which is critical to HP/HT operations cannot be claimed.

The ability to deliver true metal sealing means that particularly in subsea applications Plexus offers unique capability. We can guarantee metal sealing up to 20,000 psi at high temperature, because we measure the force delivered remotely to the seal interface, through the application of hydraulics.

The system is fully reversible, which means many wells can be drilled in various directions from a single location, saving millions of dollars in exploration costs – a true industry first.“

If you’re still struggling to understand the technology, there’s a nifty 2-second animation on the home page of the Plexus website, which will help.

In July 2015 Plexus signed a licence agreement with Jereh in China to facilitate the rental, sale, and manufacture of Plexus’ wellhead equipment to supply the major Chinese, wider Asian, Brazil, Indian and Middle East oil and gas markets.

It announced a further strategic initiative in the region shortly afterwards, namely a collaboration agreement with China Oilfield Services Limited, a major integrated oilfield service solution provider, majority-owned by Chinese state owned company CNOOC Group (the largest producer of offshore crude oil and natural gas in China) and with Red Sea Technologies Ltd, a leading oilfield design and services company in South East Asia, and Jereh, to explore commercial opportunities for shallow water subsea and crossover wellhead production systems for oil and gas field activities in China.

In July 2015 Plexus Products (Asia) Sdn Bhd (‘PPA’), the Company’s Malaysian joint venture (‘JV’) secured a local Petronas licence to manufacture and supply Plexus’ POS-GRIP wellhead equipment in Malaysia. With this licence it is expected that PPA will be able to develop and grow the supply of Plexus POS-GRIP rental exploration and production wellhead equipment to the Malaysian market. The Plexus board believes this offers significant growth opportunities for the company.

Most recently, in January 2016, the Company confirmed that it had entered into an exclusive licence agreement with Gusar and Konar, two independent Russian oil and gas equipment manufacturers, to undertake 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.

This was a significant strategic milestone for Plexus as it provides Plexus with low cost access to these important oil and gas regions without the requirement to make significant investment in capital intensive assets such as manufacturing.

Further encouragement came in the shape of an equity investment in Plexus by Gusar, who subscribed $5 million for a 7% stake in the Plexus.

At the same time, Plexus entered into a commercial agreement with Gusar and Konar, designed to, inter alia, accelerate the arrangements set out in the existing licence agreement to enable Gusar and Konar to manufacture and sell POS-GRIP surface production well- head systems in the Russian Federation and other CIS states. This was followed by a visit to the market to raise £6 million.

But you can’t fight totally adverse conditions and the continuing low oil prices resulting in global exploration drilling activity falling to 60-year lows and the North Sea reporting the lowest levels recorded.

These factors have significantly impacted the performance of the core business of renting its proprietary technology, resulting in a 61% fall in full year revenues – and a £7 million loss.

A realignment of the cost base in response to lower revenues was said to have been achieved without compromising on-going ability to service customers, whilst retaining a commitment to R&D so as to support the ongoing technology-driven focus.

It has slashed annualised personnel costs by nearly 50%, and general overheads from £14 million to £7.5 million. R&D spend in the period, excluding costs of building test fixtures, totalled £2 million compared to £4 million in the same period of the previous year. There are no forecasts.

So why are we buying Plexus?

We think that all the evidence points to a quality product serving the needs of both safety and efficiency. We think that whatever happens to the price of crude ‒ currently in uptrend ‒ oil wells dry up, and even if they do not, equipment both waters out and becomes obsolete.

We think that the building of an international sales capability is expensive and exhausting but that most of the wounds are taken up front. We think that the time to buy shares like this is when no-one else wants them. We know that nobody rings a bell to tell you when falls have bottomed out but we hope that this is the cusp and we are in it.

(BUY (82p; yield: nil; market capitalisation: £82 million; initial stop-loss: 65p; EPIC: POS; sector: Oil Equipment Services and Distribution; classification: AIM; website: www.plexusplc.com; tel: 0207 795 6890).

This report is an extract from the Premium Trendwatch newsletter.