Titan Energy has leveraged off the upstream work generated by Queensland’s CSG boom – it is the old story of selling shovels to gold miners, and investors have backed the CSG exposure the stock provides.
The mining services sector is regarded – rightly – as an extremely tough place to make a living at the moment, but it seems that Titan Energy Services (TTN) did not get the memo.
Titan – not to be confused with oil and gas explorer Titan Energy (TTE) – delivered a very strong interim result, lifting revenue by 53% to $45.2 million, and net profit by 117% to $5 million. At the December 2013 half-year, return on assets (ROA) was running at 21%, while return on equity (ROE) came in at 31%.
Earnings per share (EPS) surged by 55%, to 10.17 cents, enabling the fully franked interim dividend to be increased by 75%, to 3.5 cents a share, equal to the entire FY13 payout.
The impressive interim result comes on the back of an outstanding full-year FY13, in which Titan boosted net profit four-fold to $9 million. Titan has grown earnings before interest and tax (EBIT) from $1.8 million in FY09 to $14.5 million in FY13. The stock has rewarded shareholders with a 47% total return over the past 12 months, and is capitalised at $106 million. The stock could be one of the best-kept secrets on the stock exchange.
And Titan remains extremely confident about the second half of the year: the company has flagged EBIT earnings of between $21 million-$23 million for the full-year, compared to $8 million at the half, implying a big finish to the financial year – with the caveat of normal weather conditions permitting.
What does Titan Energy Services have going for it that most of its struggling peers do not?
Titan, which has been listed on the ASX since December 2011, has built its business by focusing on the Queensland coal-seam gas (CSG) industry. Its four divisions provide essential services to this industry: drilling rigs, workers’ camps, catering camps and equipment hire. The operation is geographically focused, in the Surat Basin, where the CSG wells are being sunk to supply the three projects at Gladstone – worth more than $20 billion apiece – that will refine the gas to liquefied natural gas (LNG) for export.
The company has leveraged off the upstream work generated by Queensland’s CSG boom – it is the old story of selling shovels to gold miners, and investors have backed the CSG exposure the stock provides.
Titan operates four businesses:
Atlas Drilling
• Atlas owns three production rigs and operates a fourth rig under a rental agreement with an external party. All rigs are currently working in the Surat Basin area. The rig packages are self-contained and include drilling rigs, drill pipe, tanks, generators, offices and accommodation. At present, Atlas generates about 45% of Titan’s revenue.
RCH
• Portable camp hire business RCH provides self-contained accommodation units, based on shipping containers, which are designed for frequent transportation and purpose-built for remote applications. Apart from the CSG drilling industry, RCH also supplies the road, civil and construction industries.
Nektar Remote Hospitality
• Nektar delivers catering and camp services, specialising in remote locations. The business is currently servicing six major contracts.
Hofco Oilfield Services
• Acquired in March 2013, Hofco is a market leader in CSG drilling rental equipment, providing specialised equipment that can be hired at daily rates for durations of one week to one year. The business provides services to Queensland CSG and wider oil and gas industry throughout Australia, and currently has customers in Queensland, Northern Territory and South Australia.
The “complete package” solution that Titan can provide is its major competitive advantage over its peers, giving it both pricing power and preferred-supplier status with major customers, which include Santos, Origin, Arrow, Queensland Gas and ConocoPhillips.
The company is always looking for ways to extend the offering: Nektar was an organic start-up (launched in April 2012) based off the accommodation supply business; and in December 2013 Titan unveiled its latest idea, an operation to supply water to mining camps, and then remove the waste-water, by truck.
This business has already won five contracts to supply drinking and shower water to camps, and remove the waste-water to regional councils’ sewerage plants. It all helps Titan Energy to pitch itself as a one-stop supplier for everything a drilling or mining camp needs.
Titan expects the core business of CSG to remain strong, based on the amount of gas the Gladstone export plants need to meet their contracts. The company says that there were about 1000 wells drilled in the Surat Basin in 2013, but that would have to rise to up to 2000 wells a year: while that number would taper off to about 1300 wells a year, Titan expects that number of about 1300 wells a year to be maintained for 20 years.
The company wants to position itself for further growth in CSG – it is diversifying into the Cooper Basin, which is being explored for shale gas, and the Northern Territory. And if New South Wales re-opens for CSG exploration, Titan says it will be ready to move in.
But while the strategy is based on capitalising on the very significant spending expected in the CSG-LNG industry over the next few decades, Titan is also looking to diversify into other industry sectors, such as rail, road and pipeline infrastructure.
Analysts like the story: consensus expects EPS of 27.2 cents in FY14, up from 22.2 cents in FY13, with a full-year fully franked dividend of 8 cents a share, up from 5.5 cents
At $2.21, that places Titan on a prospective FY14 price/earnings (P/E) ratio of 8.1 times earnings, and a fully franked dividend yield of 3.62%. On those numbers, appears to represent very good value indeed.
