Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us this morning. My name is Allen Chan from Bridge Street Capital, and we are pleased to be hosting Mitchell Services for their quarterly update. I do have Nat Mitchell, Chairman; Andrew Elf, MD; and Greg Switala, CFO, to discuss the recent quarterly. This webinar is recorded, and I'll handle Q&A at the end. So if you would answer -- put your questions in, I'll address them at the end of the presentation. Thank you. And Nathan, Andrew and Greg, over to you.

Thanks very much, Allen, and happy new year, everybody, and thanks for attending the call. The presentation this morning, fairly short. Obviously, we're heading into reporting season, and the half year will be out shortly where we'll have the investor preso and probably a bit more of a detailed update, but we'll certainly open it up for questions this morning. So firstly, look, we'll just take the document as being read, and I'll touch on a few key points. I think firstly, we are saying in here that we expect H2 to be stronger than H1. And again, that hangs together with the commentary regarding reutilization and some of that investment that we have made into the business in the first half. And importantly, I think at the bottom of the second page, top of the third page, I do genuinely believe that the business is in a wonderful position, and that balance sheet is certainly giving us the option to invest into these opportunities that we've been successful in. So it's been -- not the sort of numbers you want from an NPAT perspective in the first half. But certainly, I think the team is doing the right things. We're focusing on the right opportunity. We're certainly in a strong position, and we're delivering on that strategy that we've outlaid there with the dot points on Page 3. So just looking at some of those things there, obviously, from a strategy perspective, the PNG market, we've mentioned to people before, it's a multi-rig, multiyear contract with a global gold mining client. We're not looking at running off and starting up a big PNG business. It's really just extending the relationship with a very good client, and certainly, the commercials there are good. It's specialist drilling, and we're on site. We're mobilizing now and hopefully drilling in February. So obviously, that's taken a lot of time, effort and cost to get that organized and mobilized over there. Secondly, with the SIS drilling, that's a form of drilling that Nathan was -- invented back in the day here in Queensland. And MSV being back in Australia now for 10 years, we've reentered that market and had our first contract and again, the cost of getting that up and running. But again, highly specialized drilling that's going to hold the company in good stead to offer that service into the future. Nathan can probably touch on that in the questions and his views on that type of drilling and the gas market. And then lastly, Loop, our decarbonization joint venture with Talisman Partners, has moved faster than anticipated. And rather than expenses in the first contract being in H2, we've effectively incurred expenses in H1 and are now mobilizing that rig 2 site as we speak, and again, should be drilling in February as well. So that has had some good momentum, too. So I think all in all, again, strong balance sheet. We've got some growth opportunities that we're investing in, some jobs we've won that are going to be mobilizing in H2. H2 better than H1. The buyback, obviously, is still on foot. We're nibbling away in that. Yesterday, we bought a few more opportunistically. And again, Nathan can probably talk to his views on capital management. But I think all in all, again, very good position and second half, we're looking forward to. So Allen, I'll hand back to you and let people raise any questions they have, and they can just -- we'll go from there.

Thank you, Andrew. So yes, there's a few questions on the board now, so we'll go through them. The first one comes from [ Nick ]. Can you talk to the margin impact of imminent commissions, obviously, in regards to PNG, specialist drilling and Loop? Are they likely to be favorable to existing contracts?

Yes. I mean we've always said to people, when we look at the drilling business, in an ideal world, you sort of look at it on a 30%, 10%, 20% basis, a 30% gross margin, 10% overheads, 20% EBITDA. That's in an ideal world. Obviously, the business doesn't do those sort of numbers on an ongoing basis, but that's what we'd like to do. Obviously, depending on the nature of the work within the business, the margins vary. There's work that's more of a commodity style nature, but it's more short, it's ongoing, it's long term. It might have a lower margin. There's work that stops and starts that's highly specialist in nature with very high margins. And again, we make the point in this strategy, maintaining and where possible, improving the possibility -- profitability, sorry, of the existing business. And that's what we're trying to do with these opportunities. PNG, again, offshore, specialist drilling, the margin is good. It certainly meet that 30-10 hurdle that we're talking about. SIS drilling, again, specialist in nature, stops, starts, very experienced crews, dealing with gas, good margins, again. Loop, again, first mover. It's a new market. It's a new opportunity. What we're doing is, again, very specialist in nature. So absolutely, it's a good question. We are trying to invest where the margins are better and there is a better return on capital, better return for our shareholders. We'll still, obviously, keep investing in the business and undertaking those other jobs and opportunities as they come, but certainly, from a growth perspective, trying to put the money where we can get a better return.

Next question from [ Daniel ]. Gold price in Australian dollars continue to hit records. Is the industry seeing any uptick in exploration demand from this as yet?

Yes. You would think so, but not really. I don't see it in the gold sector. There's a bit of a drop off in [ WA ]. It seems to be picking back up again. I think on the East Coast, the smaller companies, the juniors are still struggling to raise capital. I think there's a fear that the cost to actually get a mine up and running now is fairly expensive here. So I think there's a lot of opportunities around brownfield as people are still looking for old mines and trying to milk as much as they can out of the current mines. So I think -- I do think potentially now with what's happened in the U.S., there should really be good sentiment coming forward. Hopefully, a lot of that will rub off on to Australia and elsewhere. Certainly, there's -- in the copper market and the gold market, if the U.S. administration says that they're going back to a gold standard soon, you would hope that that would be opportunistic for us as well. So yes, I think in the last sort of 6 months leading up to the election in the U.S., there's certainly been a pullback last year, and you probably see that in the numbers. And I think that's something we envisaged. But hopefully now, with the right direction the U.S. is going, things should pick up. But as Andrew said before, our focus was sort of to wheel into the higher-margin businesses. We did that purposely 12 months ago. It obviously costs a lot of money to gear up into a whole new industry like Loop and the SIS. And that also reflects in the risk and the cost for us to do that. But we can't sit around and just wait for these things to happen. So we've made those decisions, and we're happy with those decisions. So it's -- obviously, you see things kick down, and hopefully, we'll see things kick back up again.

[indiscernible]. Another question from [ Nick ]. Revenue per rig seems to have dipped to a 2-year low after a period of trending up. What are the causes of this? Is there anything beyond the seasonality?

Thanks, Allen. Look, seasonality would be the large reason there, just given typically in December, that break over Christmas, you generally see less shifts per rig. And if there's less shifts per rig, revenue per rig, as a consequence, tends to drop. But in addition to that, it probably ties back to what Andrew said earlier around the specialist work. FY '25, Q2 probably saw one of the lowest levels of that specialist work in the organization with -- for various reasons, but you sort of think of Grosvenor as one and the large-diameter rigs probably not as productive as has been the case in the past. So that's probably the second reason. But to Andrew's point, obviously, the expectation is that that would begin to increase again as the specialist work comes back online, sort of noting PNG, decarb, potentially SIS and large-diameter as well.

A question from [ Glenn ]. What is the forecast improvement for second half of '25 given the setup spend in PNG and specialist work and Loop, of course?

Yes. Look, I suppose we're not going to give any forecasts away in here or any guidance away in here. I think we're happy to say that it's going to be improved. And again, we're hoping that it's obviously -- to that degree, going to be NPAT positive in H2. What I would say is it's probably fair to assume that analysts, QValue and Morgans, will see this quarterly come out, the half year come out and update their notes and papers, and I'd probably point people to those once they've been updated.

Next question from [ Jason ] is a long one, so I will read it slowly. Additionally, there are other players in the fugitive gas market and safeguard mechanism space such as Carbon Logica and QPM, who appear to be active and established players in the area. As a drilling organization, is there an opportunity to collaborate with these entities to strengthen our position under the Loop brand?

Yes. Sure. We obviously know those 2 players well, and there's other players in the market at the same time. And definitely, as -- I think Carbon Logica is really targeting the waste gas market from a power generation point of view, essentially replacing EDL in some ways. They're all ex-EDL players. QPM, I think that's -- they're certainly on the path of being a gas producer. They're currently doing drilling up there at the moment. But I think they're really focused on trying to maximize their field. So yes, we're in conversations with those guys. They're right in the same area we are. Obviously, we're a service provider, and those other 2 are more -- different business to us in some ways. But certainly, that market is going to get hotter, we think, in the next 2 to 3 years. That's for sure.

Yes. And I think just to add to that, I think just looking at what the Loop business is currently doing. I mean obviously, there's -- as Nathan says, there's opportunities for that business to grow in breadth, but we're really focused at the moment on the gas drainage from opencut coal mines. So we're an opencut coal mine now with blast and dig, and the gas in the coal would emit into the atmosphere. Would effectively work with those clients to do -- provide a turnkey decarbonization solution where we would -- from the engineering at the very front of potentially what gas is there to drilling planning, to the drilling, to gathering the gas, et cetera, flaring the gas. We're looking at draining that gas out of the coal in advance of their mining. So when they mine, there's no emission up into the atmosphere. So it's a pretty specialist niche opportunity that we're targeting at the moment. Obviously, we've got our first project starting in February, as I said. But absolutely, to Nathan's point, the opportunities for that business to partner and look at other areas is exactly what we set it up for.

Question from [ Michelle ]. Can you provide an update on the previous Anglo coal assets where Mitchell operates and what operating conditions have been like under Peabody?

No change. No change. I don't think the transaction is closed yet. So it's -- I think, obviously, Peabody there in the background somewhere and they're working together. But for us, it's just Anglo as normal at the moment, day-to-day. So I think down the track, we'll probably be able to answer that a little bit differently maybe.

Another question from [ Daniel ]. With the decarb strategy gaining traction faster than expected, when do you think you'll be in a position to order additional rigs?

We have signed up a second client. The second client has obviously signed up on the basis of conducting some initial engineering studies and works in advance of potential drilling. So I think before we make any decisions on a second rig, get the first one out, make sure everything goes to plan and as we expect, and then secondly, get a little bit more visibility on that second client that we've signed up and see where that's going. And then after that, you would -- you'd probably look to make a decision.

Question from [ Tom ]. Can you also confirm on some of the drivers of the lower rig count called out last quarter, for example, some roll-off contracts in gold notionally to the sector of M&A or change in geology strategy in some operations? Have those rigs been slower or harder to redeploy?