Enteq Technologies Share Discussion Threads

[somerset lad] 23/10/2023 14:59

Novision, we don't know the targets, which is not unusual, but not ideal. Thinking about incentives, Martin Perry has a 6.7% stake but is not a beneficiary of the awards. Whilst Martin is not chair of the remuneration committee, his presence on the board means (I think) that existing shareholders are protected when incentive schemes are put in place. Martin would presumably want to minimise dilution whilst strongly incentivising the core management team to get NTQ to major growth (see previous discussion about how much NTQ could be worth). Andrew has a fairly large shareholding (2.7%) so has an incentive also to think about the downside of taking too much risk. I'd like to see Mark buying in the market as well as receiving options that incentivise focus on the upside, but of course we don't know how much free cash he has.

Returning to 1gw's posts from earlier, I agree that we need to see what Cavendish say. The previous finnCap forecasts (from the July 21 initiation) were not ideal because (i) they did not match up with NTQ's calculation for the impairment analysis - if we cut through the theory and recognise that the house broker is a vector for the company's own forecasts then what the broker says and what the company says should match (subject to any changes over time); and (ii) they made no sense because they used scenarios but applied a "risk factor" to the revenue line in each scenario(if they want to do scenario analysis they should run the scenarios on their face and then weight the probabilities of each to get a blended view). I don't think Cavendish will publish a GM forecast though, because Andrew has always been very coy about that (although eventually the numbers will be clear to all in the accounts).

In terms of competitive response, I asked on the call whether SABER's offering a 30% saving meant that it would be priced at $3.5k per day vs market rates of $5k per day and was told that it would be priced in line with market at $5k. This surprised me a bit as I'd expect a novel technology being launched into a conservative industry to have to offer a headline discount to drive uptake / utilisation. But their answer was given with the benefit of one signed contract and lots of discussions with potential customers. Thinking about the incentives of the incumbents, there's no reason for them to reduce their standard prices in response to a competitor who is heavily capacity constrained (I modelled 5 units from 1.4.24 and looking again at the AR23 I think NTQ are modelling 10) because the profit sacrifice would be huge. Since prices are set individually, the competitors could in theory bid lower when they know they are up against SABER but the danger is that offering individual discounts pulls down rates across the market as a whole (Andrew has said previously that news travels fast in the US O&G market). Overall, the incentive for the incumbents is to continue to pull in the profits from their existing business (a bit like the Innovator's Dilemma discussion). If SABER gets traction, the competitors could try to kill NTQ by acquisition but antitrust is now very attentive to killer acquisitions (mainly in tech, but generally). Like 1gw, I do, though, see potential (in a success scenario) for NTQ to supply SABER to larger industry players, enabling the rivals to keep control of their customers and NTQ to improve distribution without much investment and NTQ seemed open to something along these lines when they were answering the IMC question about discussions with competitors.

[novision] 23/10/2023 14:08

Anybody know what the targets are for the new director bonus scheme?

[valuehurts] 22/10/2023 08:52

I asked the management previously where they see themselves in the long term, they said with a fleet of Saber tools and further tech. Sondex rolled up other businesses after the management buyout. Andrew Law spent time in M&A. I think eventually they could become acquisitive but first we need an expansive Saber business with a large fleet and strong cash flow.

[novision] 21/10/2023 19:23

apparently they have capacity to build 10-20 units a year and are only constrained by build capacity not the market initially.... The maths looks very good for next year.

(edit) see that point has already been made.

[somerset lad] 21/10/2023 19:21

Final comment: the last question yesterday was about possible exit.

Whilst there are obviously lots of possible scenarios, at its heart NTQ is IMO binary: either it trips up for some reason and can't recover (in which case it's basically a zero, although someone might pick up the technology on the cheap) or it becomes a significant independent player by offering a better product at a lower cost to utilise, protected by IP (in which case the right longer term aspiration - despite the current lowly market cap - is a main market listing and FTSE 250).

I don't see NTQ as, say, a potential double next year on a private equity bid if the commercial trials are positive. NTQ would be a lovely opportunity for venture/private equity because (as already noted) there's a large TAM, a strongly differentiated product and robust barriers to entry, so the upside from success is huge and the downside is limited to a zero. That opportunity should be defended by the current shareholders.

Management is acting like they think there's a pretty good chance of the upside of the binary scenario playing out. Andrew Law took 61% of his pay in shares in FY23; whilst allowing that the capital markets weren't very receptive, if his main priority was his salary he would have pushed for a raise at any price to enable NTQ to pay him in cash. Similarly, IMO the new FD and new non-exec have not joined in the expectation of presiding over a managed wind-down. The board has sold XXT and the Houston site to generate cash to go all in on SABER: if the pay off from SABER were low or the chances of failure were high, they would presumably have hung on to XXT so they would have a business and jobs / board roles if SABER fails.

I therefore agree with management's answer to the exit question - they're focused on pressing on with the opportunity.

[somerset lad] 21/10/2023 18:58

To finish off the stream of thought: if the unit economics are good (GM of c. 73%) and NTQ can self-fund the roll-out to 40 units as at 1.4.27 (recognising that there are many reasons why this might never occur), what position would NTQ be in?

NTQ incurred Admin costs of $1.7m in FY23.
On yesterday's IMC they said that the current staff in the UK was sufficient to assemble 10-20 units p/a, which would allow NTQ to get to 40 units on 1.4.27.
The reality is that Admin costs will grow significantly as NTQ transitions from development to commercialisation, with sales teams, account managers etc.
Purely illustratively and without discounting, for FY28 (from 1.4.27) let’s assume 40 units generating gross profit (in today’s money) of $655k = $26.2m (plus some for redress, refurbishment and lost down hole fees). And central costs at $10m (up from $1.7m). PBT at $16.2m. Assume tax at 25%. PAT at $12.1m. 70.6m shares in issue. 17.2c EPS / 14.2p.

If NTQ overcame all of its challenges and got to this rough position, what multiple might a business attract that's able to invest capital in new units generating a GM of 73% and a payback of less than 7 months and is growing quickly?

[1gw] 21/10/2023 18:52

Sounds good, if those are in the right ballpark. Look forward to Cavendish reinstating guidance later this year or early next, which will allow some cross-referencing.

There's still the competitive response to worry about, now that the technology risk seems to be reducing. How aggressive will the incumbents be prepared to be on their own pricing in order to attempt to slow the roll-out of the disruptive technology? And on the more positive side, how interested might the incumbents be in adopting the new technology themselves through some sort of commercial arrangement (perhaps in limited geographies or drilling environments)?

[somerset lad] 21/10/2023 18:50

So, if the unit economics are potentially great for SABER (see above), how many units will NTQ be able to build and utilise over what period?

The impairments note in AR23 says 5-20 units during initial roll out in each “key region”.
On yesterday’s IMC, the “key regions” currently were said to be US and Middle East.
This implies an initial roll out of 2 x (5 to 20) i.e. 10 to 40.
But the recent non-exec announcement suggests that the Middle East is running a bit behind. And anyway it probably makes sense to put all the units and support into one region initially if there is enough demand.
So let’s assume NTQ starts its commercial roll out with 5 units on 1.4.24 in the US.
If the unit costs are $500k, this would cost $2.5m, which is well within NTQ’s available cash (though the incremental cash cost from today is likely to be lower than $2.5m because the fleet has already been partly constructed with NTQ needing to add/switch parts and assemble by 1.4.24).
At 50% utilisation at $5k per day / $900k p/a and a $500k unit cost, each unit crudely generates enough cash to buy another unit after 5/9 of a year, i.e. less than 7 months. This is consistent with Nov 21 IMC where it was said that the rental model becomes cash positive in a relatively few number of months. In practice the cash won’t come in straight away and there will be some cash drain as central costs rise during transition from development company to commercialisation.
Assume that each unit generates enough cash to buy another one after 12 months, so NTQ can double the fleet every 12 months from its own cashflow without needing to raise fresh capital.
This gives us 1.4.24: 5 units; 1.4.25: 10 units; 1.4.26: 20 units; 1.4.27: 40 units.
If NTQ reaches 40 units on 1.4.27 it would have completed its initial roll out across two regions.
Conversely (of course) there are many reasons why NTQ might not get to 40 units on 1.4.27, e.g. if NTQ fails the commercial tests, fails to win any new customers, fails to generate good utilisation.

[somerset lad] 21/10/2023 18:34

If the GM is in the region of 73%, this compares very favourably with, say, Rotork (which also has an assembly rather than a manufacturer model) at 45.5%, Weir at 35.4% and Hunting at 23.6%. There aren't many industrials companies at that level (Spirax is at 76.1%).

The calculation is plausible though because the price is set by suppliers using a different technology and the competing RSS suppliers can't benefit from NTQ's (potential) superior economics because of the IP protection.

NTQ were coy on yesterday's IMC (and in previous discussions) about expected GM. On the 22.11.22 IMC Andrew talked across David to stop him explaining just how high the margins will be on SABER, saying that it was commercially confidential.

[somerset lad] 20/10/2023 20:52

Has anyone thought about the unit economics of SABER and happy to comment on the following?

Costs:
(a) Capital cost per unit. finnCap implied $400k per unit in its 7.7.21 initiation note as it said NTQ could fund 20 units when it had gross cash of $8.1m. Assume the costs are now higher because of inflation, say $500k. If the unit depreciates over 5 years, implies $100k non-cash depreciation cost p/a.
(b) Annual servicing cost (i.e. work to the units for NTQ’s account that can’t be recouped through redress and refurbishment fees to the customers and isn’t done by the existing Cheltenham staff [who are covered by the $1.7m annual group admin costs]): international staff costs + replacement parts. Assume $100k cash cost per year.
(c) Royalty to Shell once the development costs have been recouped. Unknown. Say 5% of revenue.
I think we can ignore the costs of redress and refurbishment services: there will be costs here of non-Cheltenham international staff + replacement parts, but this should be a profit centre with the components and service charged separately at healthy margins.

Revenues: Day rate - $5k per unit. At 50% utilisation = $900k p/a. (Note that the finnCap 7.7.21 initiation note assumed a ramp up to 50% utilisation over 4 years in the central case and 3 years in the upscale case so 50% may be too high for FY25 and FY26.)
Redress and refurbishment fees: see above, this should be a profit centre with services provided at a healthy margin. Similarly with lost down hole fees.

Profit per unit per year: $900k day rate revenue less $100k depreciation charge on the $500k cash cost and less $100k for annual cost of servicing and (once development costs recouped) less $45k assumed Shell royalty = $655k gross profit at 73% GM (plus profits from redress and refurbishment fees and any lost down hole fees).

[1gw] 20/10/2023 11:44

Exciting times ahead then. Smallish amounts of revenue from a couple of test contracts this financial year, and then all systems go from April, by the sound of it.

[pugugly] 20/10/2023 11:02

Reminder, meeting today at 11:00am : ENTEQ TECHNOLOGIES PLC - Investor Presentation IMC

[somerset lad] 18/10/2023 11:36

Yes, thanks 1gw. I wonder if they're planning an update RNS as well for tomorrow or Friday. Anyway, my questions:

1. You talked about making further performance enhancements to the SABER tool when you reported on US testing. Can you please give us an update? Are the enhancements all completed, if not when is this expected?

2. In your AGM statement you referred to a commercial contract for SABER being in place. Could you please give us some colour on this (customer or a description of their type; does the contract roll automatically on to payment terms if the test results meet the specified standards; when is testing; when are results expected)?

3. How was ADIPEC? And, more generally, where do you stand in terms of signing further contracts / expressions of interest?

4. In your Annual Report you referred to a phased roll out of rental units of between 5 and 20 in each “key region”. What are the key regions (North America, Middle East, anywhere else?)? Can you give some more colour on the roll out plans?

5. In your AGM statement you gave a cash figure of $5.1m on 28 September. How much of the $1.27m that was potentially payable following the XXT sale had you received by 28 September; how much more do you expect to receive?

6. What is your current thinking on funding the roll out? Do you still have the HSBC overdraft facility?

7. When do you expect Cavendish to put forecasts out?

8. Should we expect a second instalment of the SABER Webinar? If so, when?

[1gw] 18/10/2023 11:12

IMC session now announced for this week - Friday at 11am.

[somerset lad] 17/10/2023 16:15

It sounded from the AGM statement as though they have one customer signed up for trials (hopefully on terms that roll over into commercial supply if the trials meet specified standards) and IIRC their plan was to get three.

It might make sense to put out a detailed RNS and broker note and do an investor call once they have all three committed and then they can talk about potential earnings from those three if the trials are successful and the level of demand for additional kits (beyond those first six).

Ultimately, they're not trying to raise and management is heavily invested in the shares (Andrew Law took $200k of a total salary of $327k in shares in the last FY) so they may think there's no real benefit in talking now in speculative terms when they should be able to put more flesh on the bones later.

The only curiosities are: (i) the new FD and new non-exec have not been buying post results (although NTQ may take the view that the progress and terms of contracts is price sensitive so they can't deal); and (ii) they're close to failing the hygiene test of basic listed company competence in making an intra-day announcement on the final day for their accounts, making intra-day announcements on the final day of delays to previously stated timetables for results, making an intra-day announcement of the SABER field trial results, and providing no context at all (whether in an RNS or a broker note) for the SABER contract that was announced in the AGM RNS and on any view is highly material to the business.

[1gw] 17/10/2023 10:25

I thought we would have seen the announcement of an Investor Meet Company presentation date by now. Perhaps they've been deluged with expresssions of interest in SABER following ADIPEC and are prioritising the business development over investor relations...

[valuehurts] 04/10/2023 21:41

Not a sale but you know what I mean.

[valuehurts] 04/10/2023 21:40

Shell sold this off with a lot of other assets a few years ago. It's obviously a non core asset and they didn't want to put a lot of money and time into it. It's not part of their core business. They sold off a lot of valuable stuff like the refinery in the states for about 2x ebitda. Their focus was on transition, wind farms etc until very recently...

[1gw] 04/10/2023 19:40

I would guess one of the reasons for Shell licensing the technology to Enteq was that Shell didn't want its engineers to get distracted from their day job by spending time trying to perfect a promising but unproven technology. So I suspect they may want to take advantage of the technology (and may even have some contractual rights to do so) should it become established through repeated field success as a superior way of steering wells, but until that point they may wish to stay at arms length.

[rivaldo] 04/10/2023 15:05

I have absolutely no specialist knowledge of the O&G sector, so would like to ask.....

NTQ originally licensed SABER from Shell and have now brought it to the cusp of commercialisation - shouldn't NTQ be able to fast-track this process via the links with Shell which must already be in place since Shell must already have an intimate knowledge of the product and its prospects?

[valuehurts] 04/10/2023 08:04

Marlborough funds coming up on the RNS yesterday trimming their sizeable holding. Cannacord is their parent.

[1gw] 03/10/2023 15:09

Nice piece quoting Andrew Law in Offshore - What's being said at ADIPEC 2023?

Key pitch to Middle East customers seems to be around temperature rating and maintenance:

"The directional drilling technology, which has been deployed in the region for decades, is generally not suited to higher temperature wells seen in the Middle East and fails to enable in-country maintenance..."

[1gw] 02/10/2023 19:22

They got to ADIPEC.

[somerset lad] 02/10/2023 09:39

AR came out on Friday - interesting to see how much of the directors' pay was settled in shares.
Cavendish "holding" note today - largely backward looking, with no forecasts.

[1gw] 29/9/2023 15:05

And
"applying a discount rate to cashflow of 25% (2022: 13.4%)"

That's a new record for me. i.e. 25% is the highest discount rate / cost of capital I have seen applied for impairment testing. That's one high time-value-of-money and implies relatively little value contribution (in the DCF calculation) from the out-years.

Also of interest:
"Growth rates - The directors have assumed growth rates in revenues of 33% once the SABER business has been established, resulting from the fleet expansion."