ADES International Holding Provides Results For Six-Month Period Ending 30 June 2017

Announced Date :  Sep 12, 2017


ADES International Holding ("ADES" or "the Group"), the London-listed company providing offshore and onshore oil and gas drilling and production services in the Middle East and Africa through its subsidiaries, announced today its results for the six-month period ended 30 June 2017.
Financial Highlights

- Revenue increased 45.6% year-on-year to USD 87.8 million in 1H2017, driven by high utilisation of the Group's employed rigs, the ramp up of the Group's operations in the Kingdom of Saudi Arabia ("KSA"), commencement of operations of ADES 3 in Algeria and the introduction of Mobile Offshore Production Unit (MOPU) services.

- Gross profit rose 28.5% year-on-year to USD 41.0 million in 1H2017 (USD 31.9 million in 1H2016), with an associated gross profit margin impacted by the introduction of three offshore units in the KSA. 

-  Adjusted EBITDA increased by 42.7% year-on-year to USD 45.0 million in 1H2017 (USD 31.6 million in 1H2016) aided by the devaluation of the Egyptian pound.

- Net profit decreased by 6.0% year-on-year to USD 17.3 million in 1H2017 as the Group incurred a one-time expense in relation to its IPO in May 2017 totalling USD 4.6 million.

- Normalised net profit excluding the one-time USD 4.6 million IPO expense in 1H2017 was USD 21.9 million in 1H2017, an 18.8% year-on-year increase, and generating a net profit margin of 24.9%.

- Cash balances stood at USD 163.5 million at 30 June 2017, supported by funds raised at the IPO.

- Net debt stood at USD 65.6 million as at 30 June 2017.

Operational Highlights

- Continued exemplary safety performance, achieving over 22.3 million man hours with a Recordable Injury Frequency Rate ("RIFR") (per 200,000 working hours) at 0.45, below the IADC worldwide standard rate of 0.58.

- Total backlog reached USD 430 million as at 30 June 2017 compared to USD 501 million as at 31 December 2016, reflecting the realisation of USD 88 million in contractual agreements and the addition of new contract awards and renewals.

- New contract awards for Admarine 88 with Belayim Petroleum Co. (Petrobel), a joint venture between ENI IEOC and Egyptian General Petroleum Corporation (EGPC), for a three-month drilling campaign. Additionally, Admarine VIII was awarded a farm-in agreement with Fanar Petroleum Company. Operations and revenue generation for both contracts will commence upon rig deployment.

- Contract renewals for Admarine VI with General Petroleum Company (GPC) for a one-year period to March 2018, and for Admarine V with Petrobel for one year (including an optional six-month extension).

- Finalised exclusive marketing agreements with leading shipyards enabling ADES to market new build offshore jack-up rigs, including high specification rigs to deploy these assets on a revenue-sharing basis. This innovative approach broadens ADES' service offerings and allows it to penetrate new markets and capture a larger market share, while simultaneously maintaining our low-cost model.

Current Trading and Outlook

- Scaling existing operations and penetrating new markets through participation in a substantial pipeline of active tenders across the Middle East, in existing geographies as well as the UAE and onshore Iraq. Management expect a number of these tenders to close during 2H2017 with revenue contribution to commence in 1H2018.

·  2H2017 expected to witness organic double-digit revenue growth while maintaining similar margins to 1H 2017. ADES now expects certain contracts won during 1H2017 to commence in early 2018. As a result, 2H2017 performance is currently expected to be broadly in line with 1H2017 performance.

- Acquisition opportunities continue to be reviewed in line with the Company's strategy set out at IPO with the ADES well placed due to its strong cash position.

Commenting on the half-year performance, Dr. Mohamed Farouk, Chief Executive Officer of ADES International said:

 

"The first half of 2017 was a milestone period for ADES. We joined the ranks of internationally recognised oil and gas services companies listed on the London Stock Exchange following our successful IPO in May, and announced multiple contract awards and renewals for our assets. Our sustained operational performance and exemplary safety performance with an RIFR5 of 0.45 has allowed us to deliver strong financial results and stands as a testament to the success of our business model. Our revenue grew by 46% year-on-year while maintaining our standard low-cost base, resulting in an EBITDA margin of 51% highlighting the continued activity in development and production operations in the geographies in which we operate.

 

ADES' ability to deliver strong operational results is underpinned by its three-pillar strategy, including the build-up of our current backlog through contract extensions, significant participation in tender activity to increase our market share in existing and new markets, and targeting smart acquisition opportunities. Execution of this strategy is made possible thanks to our lean cost structure, operational excellence, impeccable safety record and robust balance sheet.

 

As new contracts won in 1H2017 are expected to commence operations in 2018, we believe 2H2017 will be broadly in line with 1H2017, with the business continuing to deliver organic double-digit revenue growth while maintaining similar margins in the current financial year.



Closing our IPO during this critical time in our growth trajectory has provided the necessary liquidity that will help us take advantage of acquisition opportunities.

 

We will continue to capitalise on our recent successes during the first half of the year by leveraging our established platform, expanding our presence in existing markets, entering new markets in the GCC through active participation in tenders and executing profitable acquisitions aimed at securing long-term growth.

 

In parallel, ADES aims to continue leveraging its lean cost structure and low operating expenses to maximise profitability and continue delivering exceptional shareholder value."

Chief Executive Officer's Report

The first half of 2017 saw ADES join the ranks of internationally recognised oil and gas services companies listed on the London Stock Exchange in May, and announce multiple contract awards and renewals. Our sustained operational performance and exemplary safety performance with an RIFR6 of 0.45 has allowed us to deliver strong financial results and stands as a testament to the success of our business model. Our revenue grew by 46% year-on-year while maintaining our standard low-cost base, resulting in an EBITDA margin of 51% highlighting the continued activity in development and production operations in the geographies in which we operate.

 

ADES' ability to deliver strong operational results is underpinned by its three-pillar strategy, including the build-up of our current backlog through contract extensions, significant participation in tender activity to increase our market share in existing and new markets, and targeting smart acquisition opportunities. Execution of this strategy is made possible thanks to our lean cost structure, operational excellence, impeccable safety record and robust balance sheet.

 

While rig utilisation worldwide has remained low on the back of stagnating recovery in global oil prices, we have maintained our fleet utilisation at an average rate of over 90% since 2012, well above the current average Middle East Jack-up utilisation rate of 66% and Global average of 58%7. The assets we purchased in 2016 - including four jack-up rigs and one onshore drilling rig - are all either currently operational or have been contracted and are waiting to come online in the near future. Our key strength lies in our ability to purchase legacy assets at a fraction of their market price if new. On the back of our comprehensive market intelligence and our ability to swiftly act on opportunities we are able to turn legacy assets into high-quality rigs that are subsequently offered at competitive day-rates due to our low-cost base.  

 

Our operations in the KSA, which began at the end of 2016 with the deployment of three offshore jack-up rigs to Saudi Aramco, generated USD 29 million or 33% of total revenue in 1H2017. This represents only the start of the significant potential for our business in the country - as well as the wider GCC region - that we are looking to capture going forward. Entering the KSA market has allowed us to demonstrate our ability to deliver superior services, and as a result, we have received new invitations to participate in tenders for turnkey jobs in the Kingdom.

 

In Egypt, where we maintain a market-leading position, our commitment to our clients has allowed ADES to maintain long-term relationships with high-profile local and international energy companies, ensuring the continuity of our business during challenging times. Contracts for Admarine V and Admarine VI, both of which expired during the reporting period, have been renewed with Petrobel and GPC, respectively, during the first half of 2017. Meanwhile, Admarine VIII and Admarine 88's new contracts are scheduled to commence in early 2018.

 

As new contracts won in 1H2017 are expected to commence operations in 2018, we believe 2H2017 will be broadly in line with 1H2017, with the business continuing to deliver organic double-digit revenue growth while maintaining similar margins in the current financial year.

 

We are currently participating in new tenders to further scale up our operations in both existing and new markets, including Egypt, KSA, Algeria, UAE and Iraq. Additionally, we have finalised exclusive marketing agreements with a number of shipyards for the rights to utilise 8 rigs in active tenders. The agreements enable the Group to obtain new contracts and generate additional revenue without incurring the additional capital expenditure associated with a high-spec rig.

 

Closing our IPO during this critical time in the life of the Group has provided necessary liquidity that will help the Group take advantage of acquisition opportunities. We have identified a number of prospects and have also been approached by multiple sellers in our field, and are in the process of evaluating these opportunities with a focus on the medium-term and the objective of scaling up our operations in existing and target markets. ADES is in a strong position to finance these acquisitions, both from the funds raised at IPO, as well from our existing banking relationships. It is these strong relationships with multiple stakeholders, from rig owners and brokers to regulators and banks, that provide ADES with a unique position to grow in the region.

 

Our focus during the second half of 2017 will be on capitalising on our recent successes during the first half this year through expanding our presence in existing markets, entering new high growth markets in the GCC, and executing profitable acquisitions aimed at securing long-term growth. The regional scale of ADES, combined with our global industry-leading practices, will help us unlock value across our segments and markets.

Operational & Financial Review

Revenue

Consolidated revenue increased 45.6% year-on-year to USD 87.8 million in 1H2017, driven by high utilisation of the Group's employed rigs, including the full impact of new rigs in the KSA and Algeria which came online during the latter half of 2016 and the full six-month impact of introducing MOPU services.

The Group's top line was primarily driven by the ramp up of operations in KSA (three offshore rigs deployed in November 2016), the launch of MOPU services in Egypt with Admarine I (February 2016) and the commencement of operations by ADES 3 in Algeria (October 2016).

 

Egypt contributed 53.3% of total revenue at USD 46.8 million in 1H2017, down from 91.4% in 1H2016, as new geographies increasingly contribute to the Group's top-line. The Group's revenue in Egypt decreased by 15.1% year-on-year due to upgrade projects performed on Admarine II and Admarine VI during 1H2017.

 

In Algeria, where the Group currently has two onshore rigs, revenue increased 137.0% year-on-year from USD 5.2 million to USD 12.4 million due to the commencement of ADES 3's contract in October 2016.

 

KSA, where operations commenced in November 2016, was the highest contributor to the Group's top-line growth year-on-year. Revenue from KSA reached USD 28.7 million in 1H2017, as the Group realised the full impact of its first full six months of operations in the country. With the Group's successful venture into the KSA market and its operations in the Kingdom increasingly contributing to top-line earnings, management reiterates its forward-looking strategy that will see it further expand in the GCC and continue driving long-term revenue growth.

Drilling & Workover (77.2% of revenues in 1H2017)

Maintaining our focus on providing services to customers in the development and production phases, particularly well maintenance and workover services, has allowed the Group to enjoy long-term contracts that are largely sustainable in a sub-sector that is less susceptible to oil price fluctuations. Drilling & Workover, which includes onshore and offshore drilling as well as workover services, is the Group's main source of revenue, contributing 77.2% to total revenue in 1H2017. Drilling & Workover revenue grew by 44.9% year-on-year to reach USD 67.8million in 1H2017, due to the introduction of the KSA rigs in November 2016 as the Company realised the impact of its first full six months of operations in the country.

 

MOPU (14.6% of revenues in 1H2017)

MOPU services, which contributed 14.6% to total revenue during 1H2017, were introduced by ADES in February 2016 with Admarine I, a converted modified jack-up rig equipped with production and process facilities and an FSO, which is used as a storage unit. Admarine I, located in Egypt, is currently under contract with Petrozenima to process, store and offload crude oil. Admarine I was not production-ready until October 2016, when an additional production-related day rate was added to its original day rate. As a result of this, MOPU revenue grew by 121.1% year-on-year to reach USD 12.9 million in 1H2017 as the full impact of its revenue is realised.

 

Jack-Up Barge & Projects (6.2% of revenues in 1H2017)

As part of its offshore offerings, ADES owns an offshore jack-up barge, Admarine II, which is currently leased to GUPCO in the Gulf of Suez area in Egypt. Projects revenue is primarily generated from contracting fees charged to clients for outsourcing various operating projects, such as maintenance, construction and repair services, to third party personnel. Revenue from the Group's jack-up barge and projects, which combined contributed 6.2% to total revenue, fell from USD 7.1 million to USD 5.4 million between 1H2016 and 1H2017, representing a decrease of 23.5% year-on-year. This decrease was attributed in part to planned upgrade work on Admarine II which meant it was taken out of operation, and a decrease in revenue from project work performed during the period.

Others (2% of revenues in 1H2017)

Other revenue includes catering revenue and the rental of essential operating equipment that the client has not supplied. Between 1H2016 and 1H2017 other revenue remained at 3.3-3.4% of drilling & workover revenue, growing in proportion to the growth of new rigs coming online. As a result, other revenue reached USD 2.3 million in 1H2017, representing a year-on-year increase of 35.3% and contributing 2.6% to total revenue.

Gross Profit

Gross profit rose 28.5% year-on-year to USD 41.0 million in 1H2017 (USD 31.9 million in 1H2016), with an associated gross profit margin of 46.7% versus 52.9% in 1H2016. Margin contraction was mainly attributed to the growth in crew salaries as a percentage of revenue by 4.8 percentage points following the introduction of the three offshore units operating in the KSA, where salary costs are higher than in Egypt.  Management is actively working to ensure costs are kept in line with the wider group and is implementing a plan to ensure more Saudi nationals are employed in the KSA and at the same time reduce the number of foreign workers on rigs in the Kingdom.

The addition of four new rigs to the Group's fleet since June 2016 saw depreciation expense climb 81% year-on-year in 1H2017, recording a 3.3 percentage point increase for the expense as a percent of revenue.

Operating Profit

Top-line growth led to a 35.9% year-on-year increase in operating profit to USD 29.4 million in 1H2017 versus USD 21.6 million a year earlier. The continued use of a predominantly local administrative team largely remunerated in local currencies in relation to mainly USD-denominated revenue saw the November 2016 devaluation of the Egyptian pound dampen the effect of increased costs in KSA. Despite a 6.2 percentage point decline in gross profit margin, the Group's operating profit margin fell by 2.4 percentage points to 33.4% compared with 35.8% a year earlier.



The devaluation of the Egyptian pound allowed the Group to reduce administrative expenses as a percentage of revenue from 13.6% to 11.7%. This saw adjusted EBITDA increase by 42.7% year-on-year to USD 45.0 million in 1H2017 (USD 31.6 million in 1H2016), with EBITDA margin maintained at 51.3%.

 

Finance Cost

ADES recorded a finance cost of USD 8.3 million in 1H2017, representing a year-on-year increase of 113.5% from USD 3.9 million in 1H2016 due to the expansion of the Group's financing facilities with the addition of a new KSA syndication loan of USD 55 million.

 

IPO-Related Expenses

One-time IPO expenses, in relation to the successful completion of ADES' IPO in May 2017, stood at USD 4.6 million.

 

Income Tax

Income tax expenses recorded in 1H2017 amounted to a credit of USD 687 thousand compared to an expense of USD 295 thousand in 1H2016, due to an adjustment in tax accruals.

 

Normalised Net Profit

Normalised net profit, which excludes the one-time USD 4.6 million IPO expense in 1H2017, reached USD 21.9 million in 1H2017, reflecting a year-on-year increase of 18.8%. ADES' normalised net profit margin fell by 5.6 percentage points over the period due to i) higher interest expenses associated with the addition of new financing facilities; and ii) higher depreciation expenses associated with the growth of our fleet by 4 new rigs since June 2016.

 

Balance Sheet

Assets

Noncurrent Assets stayed relatively stable between 31 December 2016 and 30 June 2017, decreasing slightly from USD 292.6 million to USD 289.6 million due to the effects of depreciation of property and equipment.

Current assets grew from USD 106.2 million as at 31 December 2016 to USD 290.5 million as at 30 June 2017. This growth is mainly attributed to cash & cash equivalents, which grew from USD 5.2 million to USD 163.5 million due to proceeds from ADES' IPO. Accounts receivable increased from USD 50.8 million to USD 71.3 million during the same period on the back of increased revenue, with its days-on-hand increasing by approximately one month, from 92 days to 126 days. Management are working to ensure this is reduced back to historic levels.

Liabilities

Noncurrent liabilities consist solely of the Group's long-term loans, which saw a slight decrease between 31 December 2016 and 30 June 2017 from USD 189.9 million to USD 172.5 million, in association with the repayment of USD 12.4 million of the medium-term loans.

Current Liabilities increased slightly from USD 104.0 million as at December 31, 2016 to USD 116.8 million as at 30 June 2017. The increase in current liabilities is due to a USD 5.2 million overdraft facility drawn by the Group and the increase in the current portion of long-term debt by USD 5.6 million associated with the Group's new KSA syndicated loan. Trade and other payables has slightly increased from USD 51.2 million to USD 51.5 million over the period, despite the substantial growth in the Group's top-line and cost of sales, due to the decrease of the Group's days payable outstanding from 170 days to 161 days over the period.

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