When shares in ADES International (ADES) were listed in May, it was a tough time for any offshore drilling company to go public. Some in the industry had been predicting a return to activity, but few anticipated an oil services outfit could successfully raise $165m (£125m), ostensibly to expand its business in Egypt, Saudi Arabia and Algeria. A few metrics explain why ADES was able to attract fresh capital. The first is that between 2014 to 2016, when the oil services industry was sharply contracting, its adjusted cash profits grew at an average of 46 per cent a year. Meanwhile, return on equity averaged 38 per cent. To do this, ADES has cheaply acquired jack-up drilling rigs from distressed third parties, or has matched idling rigs owned by shipyards with hydrocarbon explorers.
Rating at a wide discount to peers
Low-cost business model
Big-name contracts
Hedge funds are short selling
Low offshore drilling activity
The next step is to use cheap Egyptian labour, and keep a close eye on costs. An excellent example of this plan was demonstrated a year ago, when ADES spent $65m to buy out a three-rig contract between a bankrupt rival and Saudi Aramco. The rigs are both highly profitable for ADES - broker Canaccord estimates annual cash profits of $25m - and among the cheapest rates that the state oil group pays.
This cost competitiveness, together with management's experience and track record, explains why ADES is trusted by major names such as BP and Eni. And financial distress elsewhere in oil services - typified by the recent bankruptcy of Seadrill - should throw up more opportunities. This should be particularly useful in Egypt, the source of most of ADES' revenue and where the government has provided strong fiscal support for its oil and gas industry, a critical source of foreign currency.
Given this positive outlook, investors will want to understand the 23 per cent drop in the share price since the listing in May. First, immediately after ADES’ capital raising, the price of Brent crude dropped back to $45 a barrel, reigniting fears of another oil-price crash. Around the same time, a few hedge funds started short-selling the stock, casting a further pall over a relatively unknown company without the defence of a dividend. Encouragingly, the proportion of stock out on loan - an indication of the amount short sold - started to pair back at the start of this month, according to data from the Financial Conduct Authority. At the same time, the oil price appears to have found a trading range above $55 a barrel.
| ADES INTERNATIONAL (ADES) | ||||
| ORD PRICE: | 1,320¢ | MARKET VALUE: | £407m | |
| TOUCH: | 1,290-1,320¢ | 12-MONTH HIGH: | 1,750¢ | LOW: 1,180¢ |
| FORWARD DIVIDEND YIELD: | NIL | FORWARD PE RATIO: | 7 | |
| NET ASSET VALUE: | 689¢ | NET DEBT: | 23% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢)* | Dividend per share (¢)* |
| 2014 | 75 | 23.2 | 104 | 14.3 |
| 2015 | 101 | 25.6 | 80 | 17.9 |
| 2016 | 134 | 42.1 | 122 | 42.6 |
| 2017* | 167 | 37.3 | 97 | nil |
| 2018* | 268 | 80.2 | 176 | nil |
| % change | +61 | +115 | +81 | - |
| NMS: | 500 | |||
| Matched Bargain Trading | ||||
| BETA: | n/a | |||
| £1=$1.32 *Canaccord Genuity forecasts and adjusted profits. 2014-2016 figures are prior to listing. | ||||
