3 Small-Caps to Profit from a Stable Oil Price

This trio of AIM-listed industrial equipment manufacturers have been overlooked as the oil price has declined. Now things are looking up, can they return to past highs?

David Brenchley 4 May, 2018 | 3:24PM
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Offshore oil rig, oil and gas, defence, AIM

Looking to add a resources play to your portfolio? There are plenty of mining and resource-related companies on AIM, but a word of warning – many can be speculative and overreliant on binary events.

But there are others that facilitate this activity through providing industrial equipment for drilling rigs. They also tend to be more diversified, with some taking interest in military equipment and other areas.

This diversification hasn’t insulated them from the long bear market we’ve seen in the oil price, but it’s allowed them to continue operations while the price has stabilised. Now, the outlook is better and the three below will be hoping to take advantage.

Northbridge Industrial Services (NBI)

Northbridge hires and sells loadbanks for electrical power sources and drilling tools for oil and gas rigs to markets across the world.

Revenue more than doubled between 2010 and 2014, reaching £45 million in that final year. However, since the downturn in the oil and gas market, that number has fallen, to as little as £24 million in 2016.

While the oil price decline is a clear negative, the knock-on impact on the industry has really hit Northbridge. The rig count in Australia and New Zealand, its prime drilling markets, are more telling.

While Australian land rigs have recovered to 2014 highs after bottoming out in mid-2016, offshore rigs have not. Meanwhile, in New Zealand, the picture is even more grim – there have been no rigs in operation since January 2016.

From a 2014 high of over £6, Northbridge’s share price fell to a low of 60p in 2016. Chief executive Eric Hook tells Morningstar.co.uk that the firm re-structured the businesses through 2015-16, selling non-core businesses and surplus equipment.

Graham Bird, manager of Gresham House Strategic (GHS), one of Northbridge’s largest shareholders, says he was impressed with the speed of which management acted after the downturn. “The recognition of ‘there’s an issue, we need to act on it’ and the pace of which that was done was a positive sign for us.”

Now, things seem to be looking up. Hook expects drilling in New Zealand to re-commence late in 2018 and into 2019. And 2017 was the first year it’s had no exceptional charges in results, suggesting the re-structure is now over and boosting revenues by 8%.

It still has the equipment, so once demand returns and it can utilise its fleet, cash generation and, in turn, equity value should come very quickly, Bird says. This is a firm that has generated operating profit of £20 million in its peak years.

Meanwhile, it’s a global leader and recognised brand in what is a niche industry. It’s also a player in the renewables space, battery storage and data storage, which are fast-growing industries.

“This is a small business with a very substantial global footprint and yet it’s trading at a discount to net asset value,” Bird adds.

It’s also recently restructured its banking arrangements, strengthening the balance sheet and meaning there’s no need for extra funding going forward. Shares currently trade at a 16-month high 129p, having risen 42% year-to-date.

Pressure Technologies (PRES)

Pressure Technologies designs and manufactures high-pressure components and systems for industries including energy, defence and industrial gases.

Its largest market is alternative energy, which it serves through its Greenlane BioGas subsidiary in the UK, Canada and New Zealand. The firm makes equipment to upgrade, or purify, biogas for use in the gas grid or as vehicle fuel. On its website it claims a recent report suggested the biogas upgrade market could be worth almost $2 billion by 2022.

Oil and gas is its second largest market, so it hasn’t been immune from the slump in the price of oil. It makes products used on offshore rigs and drilling systems.

It floated on AIM at 150p back in 2007, rising to test £8 by mid-2014. But, as the oil price sunk from $115 then to under $30 in early 2016 and demand for its products waned, so did the share price. By mid-2016, it had reached a closing low of 128p, 15% below its IPO price.

But things didn’t get better. The stock eventually bottomed at 115p in November 2017 – a decline of 85% in three and a half years. But house broker Cantor Fitzgerald Europe thinks things are now looking up.

The share price is back above its initial price, at 168p, after strong full-year earnings announced in December. Revenue for the full year was up 7.3% year-on-year to £38.4 million and the firm returned to profit. Cantor reckons it can quadruple that number to £5 million next year.

Chairman Alan Wilson says that, while optimism in the oil & gas market is increasing by the month, with the price now in the $70s, market conditions in general are still “challenging”.

It also raised £4.8 million at the tail-end of last year, which it says will reduce debt and provide funds for growth. Net debt is expected to reduce from £11 million to £5 million.

A forward earnings multiple of 11.2 times puts Pressure Technologies on a 32% discount to peers, according to analyst Robin Byde. A target price of 220p suggests upside of around a third.

TP Group (TPG)

TP has less exposure to the oil price, as only a small part of its business is focused on the maintenance and replacement of downstream refineries. Its main area of interest is defence, where it services submarines and military helicopters.

The share price began its decline well before the oil price collapsed. It fell from 85p in early 2018 to trade around 10p near the end of the year. Having recovered to 57p by mid-2009, shares currently hover narrowly above 6p.

The wasn’t particularly well managed previously, according to Gervais Williams, whose Miton UK Smaller Companies and Miton MicroCap (MINI) funds both have stakes. But chief executive Phil Cartmell has done a good job in turning the firm around.

“He’s taken some slightly average businesses and improved the customer service by investing quite hard in the quality of the plants and the organisation of the business,” Williams says.

As a result, the order book is now much stronger and margins on those order look attractive. Meanwhile, sales are improving and it has cash on the balance sheet equivalent to half of its £47 million market cap.

That’s likely to be used for acquisitions, of which it made two last year. While its excess capital will be deployed in time, Williams says Cartmell is selective, noting he’s already walked away from one deal this year.

“He’s not turned it round enormously in share price terms, but he’s doing all the right things as far as we’re concerned,” Williams adds. “We think there’s plenty more upside… but we’re not in a hurry.” Williams says he initially bought shares in February 2017, added to that in July and also bought more last month.

Taken at face-level, the price/earnings multiple “doesn’t look that attractive”, but it’s artificially high due to the cash on the balance sheet. Net that cash off and it’s on around 30 times, falling to 15 times next year. That “doesn’t look disgustingly cheap, but we think the momentum will continue to build in the business”, says Williams.

He expects the firm to become a “very nice, profitable business that generates cash and surprises people in due course on the upside”.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk