Plexus Regulatory News (POS)

Plexus Holdings PLC / Index: AIM / Epic: POS / Sector: Oil equipment & services

This announcement contains inside information

Plexus Holdings PLC ('Plexus' or 'the Company')

Trading and Corporate Update

Plexus Holdings PLC, the AIM quoted oil and gas engineering services business and owner of the proprietary POS-GRIP® friction-grip method of wellhead engineering, known for its safety, time and cost saving capabilities, provides a corporate update in relation to the global COVID-19 pandemic and associated oil market and price volatility. This includes updates on trading for the year to 30 June 2020, operations, and strategy.

Trading and Market Developments

In the Company's Interim Results released on 27 March 2020, the Board highlighted the ongoing disruption to the general global economy and resultant uncertainty for companies and workforces caused by COVID-19 and how this could impact Plexus. In addition, the Company noted the actions of Saudi Arabia and Russia in terms of increasing production of crude oil to record levels, which, in conjunction with the global pandemic induced demand collapse, resulted in sharp falls in oil prices. At their worst, WTI futures prices fell into unprecedented negative price per barrel territory due to storage capacity constraints, eventually bottoming out at circa negative US$40 at the end of April 2020.

It is clear the impact of COVID-19 on the global economy and specifically the oil and gas industry has been far worse than had been anticipated. Unprecedented measures, including the enforced lockdown of entire countries around the world, have been put in place to curb the spread of the virus. At the time of writing, lockdown measures are being eased at various speeds around the world, but it remains to be seen how quickly societies and economies, particularly manufacturing can recover. Despite an agreement among the major producers, both those in and outside OPEC, to drastically cut production from elevated levels, oil prices remain in the US$35 to US$40 per barrel range, approximately 50% lower than the US$70 prices seen as recently as January 2020. In response, oil and gas operators have moved quickly to realign budgets to the low oil price environment, with significant cuts being made to capex, resulting at the current time in a major reduction in exploration and production activity.

Based on discussions with operators at the time of the interims, the Board anticipated Group revenues for the 12 months to 30 June 2020 ("FY20") would be in line with market expectations. In light of current oil markets and the ongoing impact of COVID-19, a number of these operators have since taken the decision to defer awarding contracts. However, the Company remains confident that a number of these orders will be forthcoming, but that these will inevitably move into the next financial year 2020/21 ("FY21").

While licence income opportunities continue from the CIS operations and the Company's 49% investment in UK based engineering business KMS, the Directors now anticipate that FY20 revenues will therefore be materially below expectations. EBITDA and PBT losses will be less than anticipated due to the Company's ongoing management of its cost base, which recently has included the furloughing of a number of employees. The Company's cash position is expected to be broadly in line with expectations.

On an encouraging note the Company's operations team is actively engaged with a number of operators in relation to actual and prospective tender opportunities covering the next three years, the value of which is larger than any target pipeline Plexus has pursued in the past.

Plexus continues to benefit from having a robust balance sheet with net cash and no debt. 

Operations

The Company is focused on the design and development of oil and gas equipment based around its proprietary POS-GRIP friction grip method of engineering. POS-GRIP addresses performance limitations associated with conventional technology particularly in terms of leak proof metal-to-metal sealing, and this has led to POS-GRIP raising safety standards for HP/HT wellhead applications to those in line with or higher than premium couplings, while delivering significant operational and cost advantages. Plexus firmly believes these same benefits can be extended to other sectors and markets, including geothermal and nuclear. Such market penetration can be achieved organically by Plexus or through licencees - essentially 'partners in POS-GRIP'. The ongoing development of Plexus' extensive IP suite to fully capitalise on its POS-GRIP technology continues to be a priority for the Board.

Following the 2018 sale of the Company's POS-GRIP jack-up exploration wellhead business to TechnipFMC, a key corporate objective for Plexus has been to establish a market for its POS-GRIP enabled production, rather than exploration wellhead equipment. One important difference however is that production wells are permanent and have to last many years, and therefore wellhead equipment that can deliver seal integrity over the life of the well, and significantly reduce or indeed eradicate seal related maintenance and shut in costs has a special value.

While low oil prices have led to a major reduction in investment and activity in the sector, the Company remains focused on breaking into the multi-billion surface production market, where even a small increase in market share for Plexus will result in a significant increase in revenue. In addition, the Company continues to support its licensees efforts to secure orders for jack-up exploration wellhead equipment via the earn-out agreed with TechnipFMC as part of the sale of the jack-up exploration wellhead business in 2018, and also via the licensing agreement with Gusar, its partner for the large Russian and CIS market where a first well was successfully completed late 2019 for Gazprom. 

Since the TechnipFMC transaction, management has sought to strike the right balance between actively managing the corporate cost base and maintaining sufficient operational capacity, its ability to undertake valuable research and development work and to support its licensing partners. In response to the impact of COVID-19, the Company is looking to reduce overheads wherever possible but no action will be taken that is inconsistent with the Board's priority which is to preserve its key and valuable proprietary POS-GRIP IP, the value of which, in the Board's view, has the potential to significantly grow not just operationally, but also by securing additional licensees and by expanding into new sectors. This is in line with management's view that the Company's IP has never been more relevant, especially in terms of its ability to deliver a 'green solution' when addressing methane leaks at the wellhead which is of increasing importance as natural gas grows as a power source over other hydrocarbons.

Even before the COVID-19 outbreak, the oil and gas industry faced a period of major upheaval as it was confronted with the challenge of satisfying the world's demand for energy while at the same time playing its part in helping the world move towards becoming carbon neutral. This challenge has not gone away with COVID-19. Arguably, it has become even more pressing as the positive impact on the environment as a result of the enforced lockdowns has highlighted to activists and investors what can be achieved if carbon emissions are significantly reduced. 

Once global economic activity recovers from the COVID-19 induced -downturn, the Directors believe that, more than ever, operators will be required to embrace superior technical solutions, such as POS-GRIP enabled equipment, that are not only cost-effective but also help meet their environmental responsibilities. Thanks to superior metal to metal sealing, POS-GRIP wellheads provide a leak-proof solution that eliminates harmful methane emissions at the well-site even at the high temperatures and pressures which can be associated with natural gas production. This is key as, due to lower carbon emissions when combusted, natural gas is widely viewed as a transition fuel in the battle to combat climate change, and these positive benefits are seriously undermined when unburnt gas leaks releasing toxic methane into the atmosphere. In addition to providing a leak-proof solution, Plexus' IP delivers significant cost savings for the operator due to reduced non-productive installation and maintenance time. 

Strategy

With a debt free balance sheet and significant resources at its disposal, Plexus is well placed to withstand the current global economic crisis and deliver a future which enables the significant value of its IP to be harvested. Indeed, the time that has been lost since COVID-19 impacted the industry has consumed some of the lead times associated with tendering for projects, and as referenced above this has meant that the Plexus sales team now finds itself actively engaged in pursuing sales opportunities (for both hydrocarbon and geothermal applications) where the Company's wellhead equipment offers unique technical advantages over conventional equipment, particularly for gas service applications.

However, the Board does not wish to stand back and simply wait for business to come its way, so with limited visibility on when global economic activity will normalise and when investment levels in the energy industry will pick up, the Board is currently considering the optimal composition and structure of the business to ensure the Company remains robust during the current economic environment and Plexus' existing and future new IP is protected. A further update will be provided in due course.

Plexus' CEO Ben Van Bilderbeek said, "As a supplier of high performance wellheads and other specialist equipment to the oil and gas industry, Plexus has not been immune to the major scaling back of capex and general activity that has taken place across the industry in response to the COVID-19 induced global downturn. With the timing of production wellhead contracts that we have been tendering for pushed out into the future, our FY20 revenues will not meet expectations.

"We expect to report a narrower year on year loss at the EBITDA and PBT levels which, we believe, is testament to the resilience of the licensing business model we adopted post the sale of our jack-up exploration rental business and the tight management of our cost base. Together with a debt free balance sheet, strong partnerships with Gusar and TechnipFMC, a capability to supply package solutions covering key markets, and a broadening product suite based around our innovative IP, Plexus is, in our view, not just well placed to withstand the downturn but also to play an active role in the recovery when it comes.

"Without clear visibility on when a recovery will take place or what it will look like, we are not prepared to sit on our hands and wait for the oil and gas cycle to turn. We are actively looking at how best to structure our business to ensure that we can capitalise on the opportunities which we anticipate will become available to us and, importantly, to protect the value of POS-GRIP's IP.

"Our innovative IP remains core to Plexus and we are determined to not only protect this valuable asset but also to grow it further. Our leak proof technology has already been used on a large number of wells worldwide by a host of blue-chip operators but, with climate change increasingly setting the energy industry's agenda and POS-GRIP ideally suited to the high pressures and temperatures associated with natural gas, we firmly believe POS-GRIP's best years lie in the future and not in the past. If the new normal for the energy industry post COVID-19 is to be one of heightened scrutiny of operators' carbon and methane emissions and reducing operating costs, then POS-GRIP ought to be viewed as a go-to technology that delivers on both counts, a view that has already been clearly endorsed by one of the world's major oil services companies - TechnipFMC."

**ENDS**

For further information please visit www.posgrip.com or contact:

NOTES:

AIM-traded oil and gas engineering services company Plexus (AIM: POS) is an IP led company that has developed a range of products and applications based on its patent-protected POS-GRIP method of engineering.

POS-GRIP is a friction grip technology which squeezes a pressure vessel from the outside to hold and seal components in place. In wellheads, this provides the capability to very simply secure casing and tubing hangers in the well. POS-GRIP can also be used to energise "HG" Seals directly between the contacting components, rather than introducing a separate sealing element as with conventional technology. When combined, these features provide for high-integrity gas-tight sealing which guarantees leak-free and maintenance-free performance. The benefits of this are reduced installation costs due to the simplicity, enhanced performance to guarantee safety, zero hydrocarbon leaks to the environment as well as major potential cost savings in eliminating remedial work and scheduled maintenance. POS-GRIP has potential applications in connectors, geothermal applications and the nuclear industry.

Plexus is focused on establishing its technology and equipment in markets beyond jack-up exploration drilling, including surface production wellheads, subsea and de-commissioning. Its suite of ongoing products and applications include: "HG" wellheads, which combine POS-GRIP technology with gas tight metal sealing; the Python® subsea wellhead (a new standard for subsea wellheads - developed in a Joint Industry Project supported by Royal Dutch Shell, BG (now owned by Shell), Wintershall, Total, Maersk (now owned by Total), Tullow Oil, eni, Senergy (now Lloyds register), and Oil States Industries Inc); the POS-SET™ connector for the growing de-commissioning and abandonment market; and Tersus-PCT, an innovative HP/HT tie back connector product.