AJL optimistic despite tough market

DIVERSIFIED drilling and pipeline services firm AJ Lucas has delivered an improved underlying earnings before tax of $9.4 million, despite what chairman Phil Arnall described as “tough” conditions in the resources sector.

Haydn Black

The increase in the underlying earnings, which built on a breakeven result last year, arose following cost-cutting, a restructure and the simplification of the struggling company into just two business units.

“The new structure gives us a clear line of sight to market opportunities and operating efficiencies in both drilling and pipelines and will benefit us going forward,” Arnall said on Friday.

“At the same time we have effectively closed out the bulk of the legacy issues of the past, the GAWB (Gladstone Area Water Board) dispute being the sole material issue remaining.”

That dispute has been hanging over the company for more than three years, and hinges on the Curtis Island Water and Sewage Infrastructure Project contract that AJL secured in 2011, to support the LNG projects on the island, which almost immediately fell into disarray.

AJL's role in the project was terminated after just several months in 2012 when it was accused to failing to pay its subcontractors. The company accused GAWB of not paying its invoices on time, and within 12 months the matter had moved to the Brisbane Supreme Court.

Arnall said the company’s drilling business had posted lower revenue due to the resources slowdown, particularly in the coal mining sector where AJL has traditionally picked up a lot of work, with miners pressuring service companies to cut costs, but he was hopeful that the company's reputation in directional drilling – both for gas drainage and pipelines – would help it win new contracts.

“The pipelines business has benefitted from our partnership with internationally recognised JV partner Spiecapag especially the successful completion of the EGP (Eastern Goldfields Gas Pipeline) project.

“We expect to develop this partnership further over the coming years, and if successful with our current tenders the JV will have confirmed project work for the next 24 months.”

Arnall said the company continued to have the support of its largest shareholder, Paul Fudge's Kerogen, which continues to hold off on calling loan interest repayments due in April and October, but he flagged that it may need to raise cash later this year to increase working capital to support the pipeline division's projects and to reduce debt, particularly one due to the tax office.

AJL also expects to be cashcalled for its investments in the controversial UK shale gas business in the third quarter of 2016.

The company's interest in Cuadrilla Resources remains stalled, with Cuadrilla appealing a decision by Lancashire County Council not to allow drilling at Preston New Road and Roseacre Wood in the Bowland Basin, but Arnall remains optimistic of approval being granted in the June quarter next year.

AJ has increased its interest in the project, to 23.75%,%, taking 5% from Cuadrilla’s previous 56.25% stake. Farminee Centrica Energy has opted to hold off on further spending until after planning permission has been won.

AJL also expects funding will be needed in late 2016 for its new shale exploration licences in Yorkshire.

Arnall said the company was considering both debt and equity options to shore up its finances.