AIM-quoted Plexus has developed a new type of wellhead used in oil and gas exploration drilling, and the major oil companies are now taking an interest. BP, Shell Brunei, Repsol and BG International have all signed deals in the past year. Talisman Energy recently announced it would use Plexus’ POS-GRIP wellheads in the Norwegian North Sea. This won’t start until later this year but the deal should generate £350,000 in the next financial year and up to £1.5 million over the life of the project.

The wellhead is at the surface of the well bore and supports and seals the casings, as well as providing the connection to the blow-out preventer, which seals the well in an emergency. Chief executive Ben van Bilderbeek says the POS-GRIP is better at gripping and sealing than established rivals because it has no moving parts. He claims this leads to improved safety and reliability and reduces the installation time and cost.

Tried and tested

Plexus has proved the viability of the technology and initial rental revenues started in 2004. POS-GRIP wellheads are rented to oil companies for exploration wells and tend to cost up to £400,000 over a three-month period (more for higher-pressure versions). Additional service revenues plus some sales for use in production wells are also part of the equation.

Though the main R&D has been completed, development is ongoing and a five-year framework agreement with BG International, worth at least £2.3 million, is helping to develop and qualify the equipment at a pressure level of 20,000 psi.

Plexus reported losses of £54,000 for the year to June 2006 despite a sales jump from £2.64 million to £6.78 million. Losses only slightly reduced because Plexus was building up its infrastructure to cope with increasing demand. Administrative costs rose by £1.5 million to £2.3 million and are currently running at an annualised rate of £3.2 million. Plexus can handle a much higher turnover with this overhead base.

On the up

Stocks rose to £4 million and are heading up to £6 million, according to finance director Graham Stevens, since Plexus needs the wellheads to rent when demand rises. The build-up is being financed from a £9.8 million fundraising at float in December 2005 at 59p a share.

What Plexus needs is a link-up with an oil service business with a distribution network. The company is trying to build up its sales coverage away from its North Sea base – recent contracts in Brunei and Trinidad and Tobago demonstrate that – but the process is costly and takes time.

The shares, which gushed higher to 104p within two months of the float, have drifted back to 55.5p. This seems harsh given that Plexus is making progress. Ben van Bilderbeek insists he is ‘prepared to be patient’ and argues there is ‘far more value in the company now than when we floated’.

Profits of £700,000 are forecast from £10.1 million of turnover for the current year, and the rental model has high gross margins, which means that if Plexus could grow turnover to £15.1 million, profits could hit £2.9 million next year. That still gives a prospective multiple of 22 for 2007-08. That is pretty high.

Nevertheless, it is early days for Plexus and the group doesn’t have to grab much of a market worth more than $2 billion a year to perform much better over the long haul. And if Plexus continues to claim market share, a bigger rival will probably snap it up sooner rather than later, which is what happened to van Bilderbeek’s previous oil services business.

Plexus	AIM	£31.27m	39.00p	0.00p
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