AJ Lucas ASX code AJL
AJ Lucas total revenue fell
41.5% to $295 million as weak commodity prices and client focus on
cost reduction cut drastically into sales. Net loss dragged down
another 15% to hit $127 million, while basic loss per share was
AJ Lucas Group
Limited : Chairman's address at AGM
"While the immediate outlook is weak,
the Company has been rationalised and restructured to deal with it."
AJ Lucas Group Limited 2012 Annual General Meeting
Chairman's Address 30 November 2012
Chairman and CEO Allan
Reflecting on the past few years, one
could say that "Lucas put its foot flat on the accelerator just as
the world was putting its foot on the brake".
While the timing was
inauspicious, the thinking was and remains correct. Having embarked
upon the chosen course of action, it was difficult not to follow it
through and thereby risk losing a great deal of potential wealth,
albeit then having to deal with the consequences and strains on the
demands for capital.
Dealing with the
consequences has taken up a great deal of management time during the
past two financial years but we now believe we are back on track.
Cuadrilla has involved twice as much
time and money than was originally planned, East Texas has not yet
drilled and we are not in a position to judge whether this was a
wise investment or not, a very unfortunate acquisition of Mitchell
Drilling, some ill judged senior appointments and, quite frankly,
some management decisions both here and in the UK which were not up
to the increased challenges presented by the market place, all
combined to create a very challenging 2-3 year period.
We have chewed through
money instead of producing lots of it.
But where we are now I think justifies
not only the strategy but the course of action we had to take to
deal with it; notwithstanding the pain caused along the way.
situation vis a vis fracking, the slowdown in the world economy,
severe weather conditions, the state of the financial markets have
all taken their toll and therefore, refinancing and restructuring in
this market place has had to be gradual.
We would like to think that these are
now behind us.
The market has moved
such that Lucas' operational strategy and the market place are now
back to being realigned, our senior management has been completely
restructured and we have returned to the "proprietor mentality"
which previously operated.
We now have first rate systems and
procedures, including our Oracle ERP system. The final piece in the
jigsaw puzzle is the last stage of the balance sheet
restructuring/refinancing of the Group, which is currently in
process and expected to conclude in the first quarter of 2013.
Over the last 18 months, we have
substantially recapitalised the Company through the injection of
$215 million of capital into Lucas: $87 million of equity, $100
million in net new loans and $25 million from asset sales.
During this period, we
have continued to develop our interests in our E&P assets and
restructured our debt instruments.
The maturity profile
of our liabilities has been extended to better match expected cash
flow and future asset sales.
Kerogen, our new
principal shareholder and financier, has been very supportive in
this process and we thank them for their continued and meaningful
equity raised, including $40 million since balance date, together
with an agreed period for repayment of the monies owing to the ATO,
has resulted in a substantially stronger balance sheet.
continuing with the Company's financiers as well as other
restructuring initiatives which will hopefully restore the Group
balance sheet to a surplus net current asset position in the not too
Turning now to last
year's financial results, clearly these were very disappointing.
The headline result however, paints a worse picture than the
Much of the loss was of a non-cash flow
nature, including nearly $50 million of impairment charges.
accounted for nearly $7 million.
We also decided to
provide $10 million for some legacy contracts which we had been a
long time in settling and we decided to take a cautious approach to
accounting for these in order to expedite collection of the agreed
Costs for discontinued
business activities added another $3.5 million.
The quality of the
underlying operating business is however, reflected in the cash flow
from operations which amounted to over $20 million, a substantial
improvement over the prior year.
There is no doubt that the financial
result was impacted by the drop in commodity prices, the Group's
weakened balance sheet, senior management's time being diverted to
other factors such as Cuadrilla and the balance sheet reconstruction
as well as strains on the Group's liquidity position, with
competition for funding between the Group's E&P investments and the
Group's operating activities.
Both the Drilling and Engineering &
Construction divisions experienced increased turnover.
The Drilling operating
result however, after a solid first half, fell away towards the end
of the financial year as weaker commodity prices and unseasonal wet
weather caused frequent business interruptions and stand downs.
Construction also experienced a weaker second half mainly due to
provisions for contracts in dispute.
These contracts are
currently subject to mediation and judicial proceedings which,
should there be a favourable outcome, may result in recovery of some
of the provisions.
To address the business environment, we
have significantly rationalised and restructured the business to
reduce overheads, particularly in our Engineering and Construction
has been cut by approximately $13 million on an annualised basis and
we continue to look for further savings. We also continue to
consolidate our operating facilities and implement margin
Senior management changes have also
occurred as well as a new organisation and reporting structure
Savings are expected
to be found and made at all levels of the business.
The restructuring of
the business returns us to the organisation structure pre-2009 where
we had a much "leaner and meaner" overhead structure and delivery
on the cost base across the business includes many of the senior
management voluntarily making salary sacrifices and curtailment of
expenditure on plant and equipment.
During the year and continuing, the new
Oracle ERP system was successfully rolled out and, while being a
very significant investment thus far to the Group (approximately
$10.5 million in capitalised expenditure over a 3.5 year period), we
expect this to result in a substantial improvement in not only the
Group's job cost and project management capabilities, but also
We now have
comprehensive and systemic procedures embedded across the businesses
to ensure management discipline and quality financial and management
information systems and procedures.
Cuadrilla / Bowland
The level of capital expenditure
required to maintain our involvement in both the Bowland prospect
and Cuadrilla Resources has been a major cause of our balance sheet
strain and lack of liquidity.
Only time will tell
whether our continued faith in these assets will prove to be a wise
investment but the lack of decision making regarding whether or not
to allow fracking to resume is certainly frustrating, given that we
have had to continue funding a much increased operating overhead
structure to support Cuadrilla's activities throughout this delay
We are now three years
later than where we wished to be and have invested a total of
approximately $100 million - twice the amount we originally planned.
Having said that, we are very encouraged
that the Bowland shale is a super giant continuous gas accumulation
which has the ability to transform the socio-economic landscape in
much like has happened in the USA from the development of its shale
We are however,
hopeful of receiving consent in the near future to resume hydraulic
fracturing activities in Lancashire (and thereby prove Bowland as a
major gas resource) by flowing the wells.
(To date, we can only
say that this is a major gas accumulation as no commercial
The next stage of
Bowland exploration and development has been carefully planned but,
in reality, it is of little consequence in a value creation context
until we can flow the wells, observe decline curves, and estimate
the total recoverable resource etc which will allow us to formulate
a detailed Development Plan.
This cannot happen
until we are given permission to recommence hydraulic fracturing
this end, we note that a number of authoritative reports have been
issued during the year including, importantly, one from The Royal
Society and The Royal Academy of Engineering in June 2012 entitled
"Shale gas extraction in the UK: a review of hydraulic fracturing"
which concludes, inter alia, that "the health, safety and
environmental risks associated with hydraulic fracturing as a means
to extract shale gas can be managed effectively in the UK as long as
operational best practices are implemented and enforced..." We share
the now overwhelming body of scientific data which supports the
extraction of gas from shale and the potential favourable economic
impact that development of this industry in the UK (and Europe for
that matter) would have were it allowed to be developed, the
tardiness of the UK government in allowing fracking to resume is
mystifying, especially when one considers the prevailing economic
circumstances in the UK.
The Bowland resource
alone could meet much of the UK's domestic energy requirements for
many years. In this regard, the UK Energy Bill, released last night,
notes the expected continued importance of gas to the UK energy mix
for the foreseeable future.
We believe that the
Bowland prospect has the reserves potential to support this thereby
significantly reducing the UK's reliance on gas imports.
I also note recent
comments made by George Osborne, the UK Chancellor of the Exchequer,
regarding consideration being given to the introduction of a
"generous new tax regime" to encourage shale gas exploration.
There is speculation
that this will be included in his autumn economic statement to be
made next week and, at the same time, permission is granted for the
resumption of fracking. We can only hope.
There is no doubt that
softening in commodity prices, the slowdown in China and reduced
productivity and the increased cost of doing business in Australia
relative to overseas are biting in the market place.
New projects are being
shelved, mine expansion is being curtailed and, generally speaking,
there is an element of political risk now creeping into the decision
making process regarding further capital expenditure in Australia
which was certainly not there 2-3 years ago.
In the coal sector, Lucas is seeing a
number of its exploration rigs being stood down, planned capex from
clients for resource projects is being deferred or delayed, the cost
of doing business is increasing and many clients are demanding cost
reductions, which in turn is impacting on service company margins.
We have restructured
the business to operate in this environment.
That being said, we are not all "doom and gloom".
The financial markets
are over-reacting and, if the Government creates its foreshadowed
nexus with business, business conditions should improve and a saner
cost regime should prevail with a greater focus on productivity.
While the outlook for our drilling
business in the immediate future is more clouded than this time last
year, mines still have to be degassed, coal still has to come out of
the ground and CSG is gaining more traction.
We are therefore quite
sanguine about this business and are planning to change our emphasis
to focus more on directional drilling, forming closer
delivery/turnkey relationships with clients as well as increasing
our engineering and non-capital intensive related service offerings
such as steering, engineering and the like.
We remain confident in
the underlying strength of and our prospects for the Drilling
division, even if fewer new coal mines are being developed.
We believe that the
operating environment will get better; particularly around the end
Engineering and Construction division is actively engaged in the
construction of the Perth desalination project.
We are very pleased
with our performance on the contract; on time and on budget.
project delivery, at odds with the delivery of many other Australian
desalination projects, has been recognised and applauded by the
market - winning desalination plant of the year at the Global Water
Awards in Rome earlier this year.
Our engineering expertise has also been
recognised by the 2012 Environmental Engineering Excellence Award
for the Gorgon Project shore crossing at Barrow Island. On account
of this engineering expertise, we are being invited and are
tendering on a significant amount of work.
The works required to
complete the roll out of the many energy and resource projects
commenced in recent years is not expected to be completed for
several years yet.
In summary, this year has been one of
consolidation and establishing a solid platform to really motor the
Group from the middle of CY13.
Lucas expects to
realise an asset or assets during the next 12 months; to eliminate
debt and provide its final balance sheet solution.
While the immediate
outlook is weak, the Company has been rationalised and restructured
to deal with it.
We believe market
conditions and, in particular, Lucas' ability to perform in that
market are quite positive from around the middle of next year.
Upside will come from positive developments in the UK.
I now ask our CFO, Mark Summergreene, to
address the meeting to explain more fully our achievements in
restructuring our balance sheet and providing a solid platform from
which to move forward.