Getech provides gravity and magnetic data, services and geological studies to the petroleum and mining industries to assist in their exploration activities. They are based in Leeds and are listed on the AIM exchange. They have now released their final results for the year ending 2014.

Overall revenues fell year on year as a £2.4M decline in multi-client products was partially offset by increases in proprietary projects and other segments which relate to the provision of training and other miscellaneous income. Cost of inventories fell considerably though, with R&D costs also lower to give a gross profit some £1M lower than in 2013. The group then experienced £153K of adverse currency movements and other admin expenses were also slightly higher to give a profit before tax down by £1.2M. Due to a net £574K tax receipt from R&D enhanced expenditure (including some £494K from prior years), however, the profit for the year was just £59K lower at £1.6M.

When compared to the end point of last year, total assets increased by just £55K as a £724K increase in prepayments & accrued income; a £674K growth in current tax assets and a £183K increase in deferred tax assets following the part-payment of the deferred consideration for the acquisition of Lisle Gravity, was mostly offset by a £935K fall in cash, a £500K decline in fixed term bank deposits and a £186K fall in the value of data holdings. Liabilities fell during the period, driven by a £961K decline in accruals and deferred income, a £119K fall in borrowings and a £109K decrease in current tax liabilities, partially offset by a £211K increase in deferred tax liabilities and a £161K growth in trade payables. The end result is a £1M growth in net tangible assets to £7.3M which looks fine along with a comfortable current ratio. Looking at the outstanding operating leases makes for less comfortable reading, however. At the end of the year there were some £51M non-cancellable leases with £22.3M falling due within one year. This is compared to £6M last year which looks like a huge difference – how will the group pay these?

Before movements in working capital, cash profits fell by £1.1M to £1.3M. An increase in receivables and a decrease in payables, however, meant that after a much lower tax bill, there was a cash outflow from operations of £480K, a negative £3M swing when compared to last year. After development costs and the purchase of property, plant and equipment was more than offset by funds transferred from fixed term deposits, the free cash flow was still negative at £137K. The group then repaid £119K of borrowings and spent £617K on dividends to give a cash outflow for the year of £853K, although there was still a comfortable cash pile of £3.4M at the year end. As an aside, I know this is not specific to Getech but why is interest received considered an investment item but interest paid a financing item – I don’t really get that…
The profit at the multi-client products division was £2.8M, a decline of £1.6M year on year. The profit at the Proprietary projects division was £614K, an increase of £423K when compared to last year. The profit at the other segments division was £61K, an increase of £51K year on year.
This year was a much more challenging operating environment for the business than the previous two years. There was significantly lower capital expenditure in the upstream sector due to the uncertainly about the global economy and downward pressure in the oil price along with the cyclical reassessment of expenditure following a number of years of cost growth. In addition the year has been disappointing generally for international exploration with a number of key wells in new plays being unsuccessful which has led to companies reconsidering their exploration expenditure. These trends affected the group for the first nine months of the year but Q4 showed a much stronger environment with companies committing to expenditure with the group and consequent impact on the sales pipeline and signed contracts. Although at the current oil price levels, the fluctuations are not regarded as posing a material risk, should the oil price fall to significantly lower levels, there may be an adverse impact on demand.
The bulk of the revenues are still made in the US but these are falling year on year with Asian and African revenue increasing. Rather worryingly there are two customers that account for more than 10% of turnover with one accounting for 12% and one for 11%. I suppose this is not that unusual for this type of company that is this size but it is still a potential problem nonetheless. Although there are no impairments of receivables at the moment, there are some £43K worth that are more than six months overdue compared to none last year which is another potential issue. Additionally the group is rather susceptible to exchange rate changes and a 10% appreciation of Sterling against the US dollar will have a £283K detrimental effect to profit before tax whilst a 10% appreciation against the Euro would reduce profits by £30K. These figures are not insignificant given the size of the company.
The group has four areas where they believe they have a strong foundation for growing the business. The Globe framework, which entered its second phase in August, has seen continued support from the larger exploration and production companies. It provides an environment that encourages increased interaction with clients with a larger number at the annual Globe workshops in Leeds and Houston. The group have also seen increased demand for Proprietary projects, partly as a result of the Globe framework, but also increased interest from national oil companies such as Sonangol. The framework also allows the group to deal with a wider range of companies at geographical scales that are considerably smaller than previously which will be a major area of focus in the coming year. The group have also seen continuing sales of the gravity and magnetic data sets, particularly in the US where exploration spend continues to be strong and finally, they are in the process of developing new business streams and looking for acquisition opportunities.
During the next period the group will extend Globe so that it is capable of meeting the needs of a much broader community of clients. The second three year period of build for the framework started in July and five sponsors have already committed to the core data layers with discussions ongoing regarding other potentials. During this phase the framework will be upgraded to increase resolution within a structure that can be easily delivered to clients in several forms such as a global set of core deliverables, as regional deliverables, or in bespoke parts which can be at any scale and contain data layers extracted from the overall framework. The full Globe framework comprises many data layers, some of which are delivered as part of the core Globe sponsorship and some of which are only available as additional products. It provides a springboard for the efficient development of new, more focused regional reports and provides an added value starting point for new proprietary contracts.
The strategy for the Commissions division started to show success in the year by doubling its income year on year. This strategy included an objective to target key clients capable of having a material impact on the group’s performance which was shown by the Sonangol contract which involves interpretation work on the geological basins of Angola.
The multi-satellite project, which is a global roll-out of the Cryosat R&D pilot project achieved funding in excess of £1M to cover a three year programme to June 2017. This project combines the gravity data from several satellites in a way that generates higher resolution results than is otherwise available, thereby increasing the value of the data for exploration purposes. The performance of the US gravity data business during the year was “exceptional” with two sales out of the upgraded data set with an aggregate value of $1.1M. The group believes that this resulted from a combination of the major upgrade to the data set that they completed the previous year and an increased interest in North America as an exploration target.
There were several important new contract wins during the year. The group won its largest ever contract worth $5M which will be undertaken by the Proprietary services division. The contract is with Sonangol, the Angolan National oil company and involves overseeing and managing the oil and gas exploration and production in the country. The group also won a major contract with a leading US oil and gas independent valued at $2M which includes the renewal of the Globe subscription which will cover the second period to July 2017, a long term license for regional high resolution gravity and magnetic data; and a subscription to the global depth to basement project which is planned to complete in Q4 2015. Other contracts included the delivery from the recently upgraded US gravity data set for $600K with all the income recognised during 2015 and another $500K contract for the delivery of the US gravity data set.
Given the pullback in exploration spending in 2014, the board believes that expenditure will not reach the previous high points seen in 2012 in the near future but they have experienced a strong start to the current financial year with a number of large contracts already secured. The CEO states that the oil price weakness has not had an obvious impact on sales and interest levels and many clients are apparently intending to include the group’s products in their 2015 budgets. This, combined with the committed income already received for the year gives the board confidence that this year will be a “very much better year”.
At the current share price the shares trade on a P/E ratio of 10.5 which falls to a rather good value 9.3 on WH Ireland’s forecast for next year. The shares enjoy a dividend yield of 4% which increases to 4.2% on next year’s forecast which seems like a pretty decent pay out to me.
Overall then, this was a mixed year for the group. The falling oil price has curtailed exploration budgets but the group has won some great contracts in Q4 of the year. The contract with Sonangol looks particularly good, showing the international nature of the work. Overall though, I feel that there is quite a lot of risk with regards the oil price which, along with the reliance on a few large customers and the huge operating leases means I will wait on the side lines for now.