Bell Potter - TTN | Financial Accounting | Economies

25 September 2013

Analyst John O'Shea 613 9235 1633

Titan Energy Services (TTN)
Seams like there is more growth to come
Service provider to the CSG segment with a broad offering
TTN is in the process of evolving from a small drill rig company to a diversified service provider to the Coal Seam Gas (CSG) to Liquefied Natural Gas (LNG) segment. The company now offers drill rigs, mobile camps (including transport and logistics), catering and equipment hire. This expanded offering has been orchestrated through a combination of acquisitions and organic growth initiatives over the last two years. In our view, the TTN service offering is compelling relative to CSG competitors.

Authorisation TS Lim 612 8224 2810

Recommendation

Buy (Initiation)
Price

$2.92
Target (12 months)

$3.42 (unchanged)
Expected Return Capital growth Dividend yield Total expected return Company Data & Ratios Enterprise value Market cap Issued capital Free float Avg. daily val. (52wk) 12 month price range GICS sector Energy $153.7m $141.3m 48.4m 62% $253,197 $0.65-$3.06 17.1% 2.6% 19.7%

Strong outlook for the CSG segment
Given TTN derives more than 90% of earnings from the CSG segment, the key driver is the number of CSG wells required to deliver and maintain production levels for key projects. With three major projects already under construction (QCLNG, GLNG and APLNG) and others potentially to follow, industry estimates suggest the number of wells is likely to peak at around 1,900 per annum by 2016 (~1,000 currently) with ongoing wells of 1,300 per annum to 2025. In broad terms, this is expected to create strong demand for services from companies such as TTN.

Growth potential outside of CSG
The company is also pursuing a range of opportunities outside of the CSG segment notwithstanding the fact that the growth outlook appears likely to be strong over the medium to long-term. We consider this a sound strategy and expect the Northern Territory (oil & gas, iron ore, minerals and precious metals) and the Cooper Basin (oil & gas) the key target markets.

Price Performance
Price (A$) Absolute (%) Rel market (%) (1m) 2.71 8.86 5.32 (3m) 1.45 103.45 93.69 (12m) 0.63 367.28 347.67

Investment View – Initiate with a Buy rating PT $3.42
Our long-term DCF valuation of TTN equates to $3.97 (WACC 13.6% and terminal growth rate 2.5%). We have set a 12-month price target of $3.42 based on a target EV/EBITDA multiple derived from a ROIC model that looks at rolling 1-year earnings and initiate with a Buy rating. We consider the company has a strong growth outlook underpinned by expected CSG activity levels and the breadth of its service offering.
Earnings Forecast
Year end June 2013 72.6 18.9 9.1 9.1 22.0 143.6 13.3 8.1 5.5 1.9 100.0 17.6 2014e 108.6 28.4 14.8 14.8 30.5 38.8 9.6 5.4 7.6 2.6 100.0 23.5 2015e 123.3 33.3 17.5 17.5 36.2 18.7 8.1 4.6 9.0 3.1 100.0 23.1 2016e 134.1 36.9 19.6 19.6 40.4 11.8 7.2 4.2 10.1 3.5 100.0 21.6 Sales (A$m) EBITDA (A$m) NPAT (reported) (A$m) NPAT (adjusted) (A$m) EPS (cps) EPS growth (%) PER (x) EV/EBITDA (x) Dividend (¢ps)

Absolute Price
$3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Sep Jan May Sep Jan May Sep 11 12 12 12 13 13 13 TTN S&P 300 Rebased
SOURCE: IRESS

Yield (%) Franking (%) ROE (%)
SOURCE: BELL POTTER SECURITIES ESTIMATES

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT.

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............... 9 Valuation ........................... 15 Page 2 .................................................................................................................................................. 4 Key Earnings Drivers ....................................................................................................................... 11 Management . 12 Key Shareholders ..........................................................................................................................Titan Energy Services (TTN) 25 September 2013 Contents Summary and Investment Thesis ........... 14 Titan Energy Services (TTN) .......... 5 Financials ................... 3 Background ...................................................................................................................

the key driver of earnings is the number of CSG wells required to deliver and maintain production levels for the CSG to LNG sector. We believe the business is well positioned to capitalise on its strong position in a market segment that is expected to accelerate in the coming years.900 per annum by 2016 (~1. Page 3 .5m per annum specifically dedicated to this objective on additional business development managers. At the current share price. marketing. Investment Thesis We believe TTN has a number of investment positives that underpin our view on the company. In broad terms.000 currently) with ongoing wells of 1. Well positioned in CSG relative to competitors given breadth of offering – The Company has extended its service offering over recent years to include camps. 3.Titan Energy Services (TTN) 25 September 2013 Summary and Investment Thesis Summary TTN is predominantly a service provider to the CSG to LNG segment in Australia. We are initiating with a Buy recommendation and a 12-month price target of $3. The company’s business model has evolved significantly over recent years from a drilling centric business to a diversified service provider. GLNG and APLNG) and others potentially to follow. industry estimates suggest the number of wells is likely to peak at around 1. and Options beyond CSG are being addressed now – The Company is also focussing on growth beyond CSG in both new geographies and segments. We consider this a sound medium-term strategy and believe TTN is well positioned to extend its offering to Oil and Gas opportunities outside of CSG and other mining and infrastructure target markets. transport and logistics. With three major projects already under construction (QCLNG.300 per annum to 2025. The highlights of the TTN business model from an investor perspective are as follows: 1.42 based on a target EV/EVITDA multiple derived from a ROIC model that looks at rolling 1-year forward earnings. This has been achieved through a combination of organic growth and acquisitions.5-$2. this is expected to create strong demand for CSG service companies such as TTN. promotion and other initiatives. A detailed review of key competitors indicates that TTN now has significant breadth in its CSG offering which suggests to us that it is well positioned to increase share of wallet in the CSG segment. 2. Strong growth outlook for the CSG to LNG segment – Given the nature of TTN’s service offering. we believe the magnitude of the opportunity available to the company has not yet been fully priced in. We estimate TTN is currently spending around $1. catering and equipment hire.

Ability to expand into non-CSG segments 1. RCH was established in 2010 and acquired by TTN in September 2011. Its core business is the provision of portable accommodation to the CSG to LNG segment and infrastructure companies. Business model is to hire camps with ancillary support services (catering. The company currently operates four rigs (3 owned. 1 rented) and provides rig and support staff as part of each contract. Its core business is a rental provider of drilling equipment to the CSG sector. Ability to cross sell services to CSG clients SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 4 . No of wells required to establish and maintain existing CSG to LNG projects 2. Also provides standalone catering services to non-camp customers. downhole motors. Key hire equipment includes: drill collars and pipes. catering services and equipment hire. Ability to expand into non-CSG segments 1. stabilisers and fishing equipment. The company was first listed on the ASX in December 2011.Compass Group KJM Contractors Key competitors Tasman Oil Tools DTA Various smaller private companies Various larger private companies Revenue model Contract term typically 6-12 months Drill Rig . No of wells required to establish and maintain existing CSG to LNG projects 2. survey instruments. Figure 1 . No of wells required to establish and maintain existing CSG to LNG projects 2. EDA Energy (Ausdrill) Lucas Savanna Energy Saxon KJM Contractors Australian Portable Camps Coal Gas Camps Bonnie Rock Transport EDA Energy (Ausdrill) Caza Catering Oil Industry Catering Services Easternwell (Transfield) Morris Sodexo ESS . hydraulic drilling jars.) either directly or by subcontractors Business Description Nektar was established by TTN as an organic initiative in April 2012 and offers catering and camp management services to remote accommodation service providers. Currently provides services to around 80% of RCH's camp accommodation contracts.TTN Overview Atlas Drilling (23% of FY13 EBIT pre-overheads) RCH (50% of FY13 EBIT) Nektar (11% of FY13 EBIT) Hofco (16% of FY13 EBIT 6 mths ownership) Atlas Drilling was founded in 2007 as a specialist provider of drilling services to the CSG industry. drilling rigs. transport etc. Ability to cross sell services to CSG clients 3. Customers also have the choice of other add on services such as catering and accommodation (sourced internally via Nektar and RCH).rate per day including crew Other services at standard rates (refer RCH for accommodation/camp and Nektar for catering) Contract term typically 3-18 months Room rate per day Contract term typically 3-18 months Rate per man days catered Contract term 1 week to 12 months Rate per day APLNG QGC Arrow Energy Pangaea Resources Santos APLNG Leighton Daracon Bruhl Energy Drilling Australia General Trade Industries APLNG Leighton Daracon Bruhl Energy Drilling Australia General Trade Industries AGL Beach Energy Santos Senex Energy Smith Transfield Key growth drivers Key clients 1. Ability to cross sell services to CSG clients 3. Hofco was established in 1980 and acquired in April 2013 (effective Jan 2013).Titan Energy Services (TTN) 25 September 2013 Background TTN is predominantly a service provider to the CSG to LNG market in Australia and provides mobile accommodation/camps (including transport). No of wells required to establish and maintain existing CSG to LNG projects 1.

0 to 9. Figure 2 – Key CSG to LNG projects and indicative wells required Project Client Capacity (Mtpa) First production Status Total CSG Wells required Estimated Wells Required Per Year CY13 to End of project QCLNG British Gas 8. ACIL TASMAN Number of wells likely to increase rapidly in coming years and then decline to a healthy level Industry analysis conducted by ACIL Tasman suggests the number of wells drilled within the CSG to LNG segment is likely to increase rapidly in the coming years from 1. Figure 3 – Number of wells required Queensland CSG segment SOURCE: COMPANY DATA. Kogas etc 7.000 wells in CY13 to a peak of at least 1.500 in CY16 based only on approved projects (likely 1. gas gathering and processing facilities that occur in the CSG production fields.000 per annum by CY19 based only on committed projects (likely ~1. Of most relevance to TTN is the fact that the initial focus of this work is likely to be on drilling sufficient wells to meet production deadlines such that customer supply agreements can be satisfied.5 2014 Under Construction 6.060 SOURCE: COMPANY DATA. Sinpoec 9.700 250-480 APLNG Origin.060-2.400 per annum).Titan Energy Services (TTN) 25 September 2013 Key Earnings Drivers Key Driver 1 – Number of CSG wells required The key target segment for TTN’s services remains the upstream CSG industry which includes the drilling.200 270-520 GLNG Santos.300 260-490 Total 23.0 2015 Under Construction 6. Petronas.800 1.0 2016-2017 Awaiting FID 5.900 given likely new project approvals). Connoco Philips.600 280-550 SALNG Shell/PetroChina 8. Further the analysis suggests that the number of wells required to maintain production levels is expected to level out at 1. Beyond this the focus is likely to be on having sufficient wells to maintain production levels. ACIL TASMAN Page 5 . At present there are three major CSG to LNG projects in Australia which are currently under construction with each requiring extensive upstream work including drilling and other services.8 2015 Under Construction 5.

TTN History Figure 5 .TTN EBIT by Division FY14e Equipment Hire 19% Drill Rigs 18% Catering 12% Camps (inc transport & logistics) 51% SOURCE: COMPANY DATA SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES RCH acquired just prior to listing and the key source of growth The RCH camps business has been the most significant driver of profit growth for the group over the last two years with the number of rooms increasing from 110 at acquisition to 710 currently. Key Driver 2 – Breadth of TTN’s CSG offering Prior to listing the company’s origins were as a specialist provider of drilling services to the CSG industry including rig and support staff. Figure 6 . The success of this business reflects the strong demand for temporary camp hire including transport and logistics at remote CSG drilling sites.Nektar Man Days Catered 25000 Number of available rooms has increased from 110 as at September 2011 to 710 currently. catering and equipment hire through a combination of organic growth and acquisitions.294 meal days in its first year of trading. The initial focus was on the existing CSG clients of both Atlas Drilling and RCH and the business has started well given it is currently servicing 6 contracts (80% of RCH camps) equating to 62. To this end. Figure 4 .RCH Number of Rooms Available 1200 1000 800 600 400 200 0 0 Sept Qtr 12 SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Figure 7 . TTN’s experience in the segment via Atlas Drilling has been an important factor in extending the offering to other services.096 as at 30 June 2015 20000 15000 10000 5000 Dec Qtr 12 Mar Qtr 13 Jun Qtr 13 SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Nektar was a logical next step and enhances the offering The company started the Nektar catering business in April 2012 targeting remote catering opportunities across Australia. While drilling remains a core part of the TTN business (4 rigs currently operating) the company has extended the breadth of its offering to include camps. We expect this to increase to 896 as at 30 June 2014 and 1. Page 6 .Titan Energy Services (TTN) 25 September 2013 Conclusion Key Driver 1 – Numbers of CSG wells required a powerful macro backdrop The size and scale of the committed CSG to LNG projects under construction together with the potential for further approvals suggests that the number of CSG wells required to support and then maintain production levels is likely to be material over the long-term. This is expected to provide a favourable backdrop for TTN’s services.

the company is now in a position to provide more complete outsourcing services to clients.TTN Competition Matrix CSG Segment Drill Rigs Titan Energy Services EDA Energy Savanna Energy Lucas Saxon WDS TDC Ensign KJM Contractors Australian Portable Camps Coal Gas Camps Bonnie Rock Transport Caza Catering Oil Industry Catering Services Easternwell Morris Sodexo ESS . Further. Further. We believe this places TTN in a strong competitive position with which to gain an increasing share of wallet from key customers. the experienced management team (2 year retainers) and the fact that it is complimentary to TTN’s other CSG related services. we consider these types of contracts can act to de-risk the business as they are longer-term in nature given the permanent sites. The company is now in a stronger position to increase share of customer wallet in the CSG segment given the range of services it can now offer. The client has not been disclosed by the company but we note the contract is to provide catering to a 200 room permanent camp on a 1+1+1 year contract commencing September/October 2013. down-hole tools and other equipment to the CSG segment. TTN’s offering to the CSG segment now has breadth The TTN service offering to the CSG segment now includes drill rigs.Compass Group Tasman Oil Tools DTA Camps Transport and Logistics Catering Equipment Hire r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r r SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Conclusion Key Driver 2 – TTN well positioned in the CSG segment given breadth of its offering The company has taken the opportunity to leverage off its experience and relationships within the CSG sector by significantly expanding the depth of its offering over the last two years. We consider this acquisition a positive given the specialised nature of the equipment. transport and logistics. Hofco appears a neat fit TTN announced the acquisition of Hofco Oilfield Services in February 2013. Figure 8 .Titan Energy Services (TTN) 25 September 2013 Further. Hofco is essentially a rental company that provides directional drilling equipment. We consider this contract an important milestone given it represents not only the company’s first contract in the permanent space but it highlights the opportunities to sell services beyond the existing client base. mobile camps. This offering has been put together over the last two years using the original drilling business as a starting point. Nektar is also targeting permanent camps in addition to mobile camps and was recently successful in securing its first permanent camp contract. Page 7 . Our analysis of the competitive landscape suggests the company has a broader offering than any of its direct competitors. catering and equipment hire.

promotion and other initiatives. Conclusion Key Driver 3 – Expansion beyond CSG a logical next step but early days We believe TTN’s plans outside of CSG represent a significant potential opportunity for the company and consider the decision to invest now for the medium-term a sound strategy. On face value we can see no reason why TTN’s camps. we consider it a logical extension of TTN’s business and indicative of a forward looking company. a range of potential infrastructure and mining opportunities also exist in the Northern Territory and Queensland. While we are yet to see any material tangible benefits from this expenditure and focus. transport & logistics and catering services similar those provided by TTN.TTN growth opportunities ex CSG SOURCE: COMPANY DATA Investing now for the medium to long-term Our analysis suggests TTN’s strategic plans in relation to growth outside of CSG are serious given we estimate the company is currently spending around $1. The common theme associated with all of these potential targets is they are likely to require camps. Page 8 . transport & storage and catering services cannot prove competitive outside of CSG but note it is early days in this regard. Figure 9 .Titan Energy Services (TTN) 25 September 2013 Key Driver 3 – Expansion beyond CSG TTN management have made it clear that they aim to increase the company’s presence in non-CSG segments in the coming years. marketing. The company appears to have taken the opportunity to invest now in an attempt to deliver new revenue streams for the medium to long-term. Further.5m-$2. The company has identified a range of non-CSG Oil and Gas target areas including the Cooper Basin and Canning Basin. This amount comprises the wages and on-costs of four additional business development managers.5m per annum dedicated to this objective.

Figure 10 .0% 27.TTN Revenue Historical and Forecast 160 140 120 100 80 60 40 20 0 FY12 FY13e FY14e FY15e FY16e FY17e Revenue Forecast CAGR FY13-FY15 = 30% pa Acquisition of higher margin Hofco business 30. We consider this a one-off step up change in margins with marginally higher levels likely in the coming years given the pace of revenue growth.TTN EBITDA Historical and Forecast 45 2. Hofco acquisition to impact full year in FY14 – The Hofco acquisition was effective 1 January 2013 hence it contributed six months’ worth of earnings in FY13 (revenue $3.0% 22.7m and EBIT $2. Page 9 .5% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES 3.5% 25.0% 40 35 30 25 20 15 10 5 0 FY12 FY13e FY14e FY15e FY16e FY17e EBITDA $m .3m in FY14 given the likely need to reinvest in the business.RHS 20. Further. This is likely to be further enhanced by the impact of additional acquisitions given the Company’s history in this regard. We have assumed it contributes revenue of $8m and EBIT of $5. this is expected to drive growth in catering services to both existing camps and drilling clients and new customers.9m). In totality. we expect organic growth and the impact of the Hofco acquisition to underpin strong revenue growth over the short to medium-term. Increase in rooms capacity and catering to drive strong revenue growth over short to medium-term – We consider the Company well positioned to continue the recent trend of strong organic growth in room capacity driven by the level of CSG activity in Australia.LHS EBITDA margin % .Titan Energy Services (TTN) 25 September 2013 Financials Income Statement In broad terms. EBITDA margins to level off post Hofco – Group EBITDA margins improved significantly in FY13 driven primarily by the mix impact of the Hofco acquisition given it has historically delivered EBITDA margins of around 70%. This thesis underpins our key profit and loss forecasts for TTN as follows: 1. these factors are expected to underpin strong revenue growth over the medium term. and Figure 11 .

4% respectively. Figure 13 .0% 2. modest gearing and excellent interest cover – TTN reported net debt of $12. We expect net debt to decline to around $5m by 30 June 2014 and then move to a net cash position in FY15/16 driven primarily by increasing earnings. Page 10 .8m of deferred consideration relating to the Hofco acquisition.LHS Gearing % . Interest cover at the EBIT level equated to over 12x in FY13.RHS 120% Operating Cashlow Realisation % .0% 80% 60% 40% 20% 0% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES 3. Operating cash realisation generally around 100% despite FY13 – Operating cash realisation (OCF/NPAT +D&A) has generally been around 100% with the exception of FY13 where the company was adversely impact by the Hofco acquisition. The business is currently in sound financial shape with a solid balance sheet and cashflow generating capabilities.TTN Gearing 15 10 5 0 FY12 -5 -10 -15 -20 Net Debt $m .0% -20. We note this equated to a gearing (net debt/equity) ratio of 23.RHS 0. Capital Expenditure and Cashflow The TTN business could generally be categorised as one that has medium level capital expenditure requirements assisted by the fact that RCH rooms are generally rented not owned.Titan Energy Services (TTN) 25 September 2013 Balance Sheet. late payment of material amounts due from major customers and investment for growth. We have also assumed that the current financing model employed in the camps business remains unchanged resulting in the bulk of new rooms rented not owned. Attractive ROE and ROIC metrics – We expect TTN to generate attractive ROE and ROIC (pre-tax) numbers in FY14 of 23. We expect this to normalise over the medium-term. Further. The key points to consider in this regard include: 1.5% and 33. Sound balance sheet. Our estimates assume that rig levels remain unchanged (3 owned.0% Operating Cashflow $m .4m as at 30 June 2013 (including $5.TTN Operating Cash Realisation 40.9% as at 30 June 2013. 4. Figure 12 . 1 rental) with only maintenance capital expenditure included in our forecasts for the rig business. Capital expenditure requirements currently around $10m per annum – In general terms we would regard TTN as a medium level capital intensity business given the nature of the rig.0% FY13 FY14e FY15e FY16e 10.0% -10.LHS 30 25 20 15 10 5 0 FY12 FY13 FY14e FY15e FY16e 30.0% 100% 20. At the same time we expect capital expenditure requirement for the Hofco business to increase as the company looks to expand its offering across the TTN group. camps and equipment hire offerings.

42 using ROIC methodology Our 12-month price target of $3.5% 15.97 Our long-term DCF valuation of TTN equates to $3.43 3. Figure 14 .99 48.79 29. 12-month price target of $3.79x.6% and a terminal growth rate of 2.24 29. This price target is derived using a rolling 1-year forward ROIC of 34.0% (pre-tax) and a pre-tax WACC of 15.1% 6.52 165. Major assumptions are a post-tax WACC of 13.43 Page 11 .51 -5.Titan Energy Services (TTN) 25 September 2013 Valuation Long-term DCF valuation of $3.63 171. This derives a rolling 1year forward EV/EBITDA multiple of 5.63 Multiple EBITDA rolling 1-year fwd EV Net Cash (Debt) rolling 1-year fwd Value Equity No of shares Valuation per Share SOURCE: BELL POTTER SECURITIES ESTIMATES 5.TTN EV/EBITDA valuation using ROIC model ROIC pre-tax rolling 1-year fwd Growth Rate WACC pre-tax D&A rollng 1-year fwd EBITDA rolling 1 -year fwd 34.0% 2.1%.97 per share.42 has been derived utilising an ROIC based model that looks at rolling 1-year forward earnings.5%.

He is also a Non‑ executive Director of Hot Rock Ltd. Director County Natwest Corporate Finance and Director BZW Corporate Finance. Jim spent 7+ years at Flight Centre as Chief Financial Officer and then Executive General Manager of Global Property. He is Chairman of Renison Consolidated Mines NL. Simon Keyser – Non-Executive Director Simon has over 20 years’ experience in the finance industry and has held senior investment banking positions with Wilson HTM and Chase Securities (now JPMorgan Chase). Jim Diakos – General Manager of Atlas Drilling Jim is a co-founder of Atlas Drilling and has 18 years’ experience in the oil and gas industry in Australia. Simon is a minority shareholder of XLX Pty Ltd and also the co-owner and a director of Ironstone Capital Partners Pty Ltd. Oil Company of Australia. Prior directorships include non-executive director of ASX listed entities Connecteast Group. Procurement & Projects.. Shaun is currently an Executive Director of Dart Energy Ltd and a Non-executive Director of ACER Energy Ltd and Site Group International Ltd and Chairman elect of Anaeco Ltd. He has had further experience in the CSG sector as an Executive Director of Dart Energy Ltd and Non-executive Director of Bow Energy Ltd and Apollo Gas Ltd. Mark Snape – Independent Non-Executive Director Mark is currently the Chief Executive Officer of the Rivercity Motorway Group and previously held various senior management positions including as Group General Manager Infrastructure Finance and Investment at John Holland Pty Ltd. In addition he has served as nonexecutive director of Connector Motorways Group. Shaun has 20+ years of experience in upstream and downstream projects. Diversa Ltd and Renaissance Uranium Ltd.Titan Energy Services (TTN) 25 September 2013 Management Shaun Scott – Independent Non-executive Chairman Shaun joined Arrow Energy in 2004. Brisconnections Group and Pacific Hydro Limited. Asia. Chief Commercial Officer and Chief Financial Officer with Arrow Energy Limited prior to its acquisition by Royal Dutch Shell plc and PetroChina in 2010. Jim was a Regional General Manager at Ernst & Young and the Director of Finance and HR at Starwood Hotels & Resorts. Inland Oil Refiners. Inc. Shaun previously held the roles of Chief Executive Officer. and the United States. Prior to this. Jim has held various positions in a number of large and small operating companies during his career including Santos. Stanmore Coal Ltd. Jim was previously CEO of the City of Brisbane Investment Corporation. Origin Energy and Blue Energy and has been involved in the drilling service sector since the formation of Atlas Drilling in 2007. Page 12 . Asia Pacific Transport Pty Limited. Managing Director in Australia for American Electric Power Co. Stephen was previously an Executive Director of Arrow Energy Ltd from 1999 until its acquisition in 2010 by Royal Dutch Shell plc and PetroChina. Southern Hydro Pty Limited and AEP Resources Australia Pty Limited. mergers and acquisitions and finance in the energy sector in Australia. Jim Sturgess – Managing Director Jim has been Managing Director of Titan Energy Services since May 2011. Director Deloitte Corporate Finance. Simon is a director of XLX Pty Ltd and is also a director of XLX Capital Pty Ltd. Stephen Bizzell – Non-Executive Director Stephen is the Chairman of boutique corporate advisory and funds management group Bizzell Capital Partners Pty Ltd.

much of that on international assignment throughout Asia as well as significant time in Australia. Most of this was with Halliburton’s Baroid product line. Page 13 .Titan Energy Services (TTN) Gus van der Heide – Chief Operating Officer 25 September 2013 Gus has more than 30 years’ experience in the Oil and Gas industry. Prior to this. starting in field service and progressing through technical and operations roles to management responsibility for fluids and waste management operations. with responsibility for organic and geographical growth in solids control and waste management businesses. Gus was Far East Vice President for NOV Well Site Services based in Singapore.

Wayne Ronald Ranamok Pty. Stephen Grant BCP Alpha Management Zagla Pty Ltd.305.548 704.03% 3. XLX Pty Ltd Wilson HTM Investment Management Pty Ltd Haggarty.95% 1.540 684.849 994. Allan J. Gaffw ick Pty Ltd. Anthony James Davies.46% 1.Top 20 shareholders Holder Pie Funds Management Ltd. Paul HFTT Pty Ltd.511.84% Page 14 .139.70% 2. Andrew Henderson Lujeta Pty Ltd.953 1.849 1.98% 1.399 437.25% 0.90% 0. Simon J.41% 1.393 1.761 % 10.813 603.434.305.92% 0.05% 1.251 869.985 650.70% 2.46% 1.221 734.80% 1. Seabrook. Ltd.450 862.87% 5. Elkington.000 946.315 404.361 960.523 2.Titan Energy Services (TTN) 25 September 2013 Key Shareholders Figure 15 .52% 1. Dalara Investments Pty Ltd Sturgess.540 704.080 3. James Bravic Capital Investments Pty Ltd Scott.809. Shaun Edw ard Keyser. Bizzell.61% 7.817 444. SOURCE: CAPITAL IQ No Shares 5.12% 2. Plummer.34% 1.78% 1.

Any material deterioration in the outlook for this sector over the medium-term has the potential to adversely impact TTN’s business. We consider this both a risk and an opportunity for the company given its lack of experience in these markets. has a strong balance sheet and has medium level capital intensity. Valuation Our long-term DCF valuation of TTN equates to $3. Risks We believe there are five key risks to our investment thesis as follows: • • • Loss of key customers – Despite the fact that TTN has diversified client portfolio.97 per share. and Equipment Hire.Titan Energy Services (TTN) 25 September 2013 Titan Energy Services (TTN) Company Description Titan Energy Services Limited engages in the provision of energy and infrastructure services primarily to the coal seam gas and associated industries in Australia. and New markets – A key component of the TTN’s strategy over the medium to long-term is expansion into new geographies.6% and a terminal growth rate of 2. Investment Strategy We rate TTN as a Buy with a 12-month target price of $3. • Page 15 . Material deterioration in the outlook for the Oil and Gas sector – TTN’s business is heavily exposed to development in the Oil and Gas sector (particularly CSG to LNG). It operates through four segments: Drill Rigs. Competition – TTN could be adversely impacted by material market share gains and irrational pricing behaviour of a competitor. the loss of a number of key customers has the potential to negatively impact the company. Major assumptions are a post-tax WACC of 13. This derives a rolling 1-year forward EV/EBITDA multiple of 5. The company also generates a very high ROE.42 has been derived utilising an ROIC based model that looks at rolling 1-year forward earnings.0% (pretax) and a pre-tax WACC of 15.5%.79x. Catering.42. This price target is derived using a rolling 1-year forward ROIC of 34.1%. We consider the company has strong growth potential underpinned by CSG market in Australia and attractive growth options outside of CSG. Camps. Our 12-month price target of $3.

3 1.4 6.5 2H12 18.5 39.8 -3.5% 21.92 Buy 48.8 40.1) 18. Change EBITDA Deprec.6% 29.9 0.4 4.2 4.8 1.8 35.2) 0.6 0.8 14. & amort.5 73.9 0. & amort.4 33.03 2.8 14.9) 3.5 61.0% 14.9% 6.2 9.7 42.5) 9.1% 2012 2013 2014e 2015e $2.0 0.9 19.3 0.0 22.2 51.0 0.4 35.2 62.1 8.1 0.1% 6.0% 100.8% 9.0 3.2 0.2 90.4 (2.87 1.4) (4.7 22.1 22.2% 6.42 2016e 40.5% 28.5 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 16 .0 25.7% 8.2 18.0 0.3 14.0 1.1 4.0% 3.3 (6.8 2.2) 32.8 1. .7 23.1 32.3 49.4 (6.0 134.8 6.8% 12.6 15.3 0.07 2.1 65.5 n/a 5.4 43.1% n/a 2.4 20.0 1. .3 36.7 0.2) 4.0% 0.0) 2. tax rate Minorities Net Profit Reported NRI's post tax Net Profit pre-NRI's Norm adj post tax Net Profit Normalised 22.7 40.5 3.3) 10.9) (9.2 0.7 6.79 3.5 6.6 14.8 1.8 12.0 72.2 51.8 0.5 (4.9 (7.8) 29.2 3.5 74.5 38.9) (4.7 17.6 7.5 (1.0) (5.6 7.4 (3.1 108.1 (0. % pay-out Franking (%) Yield (%) Performance Ratios EBITDA/sales (%) EBITA/sales (%) OCF realisation (%) FCF realisation (%) ROE (%) ROIC (%) Asset Turn (years) Capex/Depn (x) EBIT Interest cover (x) Net debt/EBITDA Net debt/equity (%) Divisional Revenue $m Drilling Camps Catering (external only) Equipment Hire Adjustment Total EBIT $m Drilling Camps (exc internal catering) Catering Equipment Hire Corporate Adjustment Total Half yearly Sales revenue .0% 17.7 1.1 0.4 111.1 10.0 132.3 2.5 85.8 21.4 17.4 6.3 0.9) 13.8 49.7 34.1) 0.2) 10. .1 8.0 -1.0% 1.5 2.5% 112% 257% 9.5 8.1 14.4 0.3 $3.4 (1.8 5.8 35.1% 36.0 26.0 14.3 0.4 (0.2 9.2% 20.3 13.5 76.8 (0. .6) 3.0 0.9 0.4 n/a 7.2 25.4 0.73 5.9 16.5% 2.6 44.0% 0.6 15.8 0.1 1.8 32.9) 26.1 (0.0 6.0 3.5 19.8 34.76 3.30 2.86 9.0 n/a 32.1 2. EBIT Interest Non recurring items Pre-tax profit Tax expense .3 (0.2) 31.5 28.0 0.9 0.1 4.2 9.5 (0.8 33.8 0.6% 90% 121% 23.3 (0.8) (4.5) 3.6 1.6 0.3 45.8 10.5 0.8 20.0 3.4 9.7 (0.6 0.6 16.4 0.5 6.8) (15.7 (1.1) 0.5 25. .6 9.1 9.0 3.2 9.6 26.4 (4.3 21.3 2.4 (8.6 25. tax rate Minorities Net Profit Reported NRI's post tax Net Profit pre-NRI's Normalisation adjustments Net Profit Normalised 33.4 5.4% 2.8 15.4% 90% 119% 23.5 6.9 1.0) 10.9 26.3 (4.0 1.0) 25.6) 31.64 2. .6 19.9% 30.0 22.92 25 September 2013 $3.9 n/a 2.0 0.2 9.6 117.7) 0.6 -7.5 71.4 0.9 0. .6 -0.8 0.0 33.1% 24.3 95.0 2.8 6.0 0.3) 2.3 0.1 4.4 2H13 43.6 3.2 5.9 0.8) (10.7% 2.3) (14.3) 33.0 1.3 5.0 2.5 (6.0 -0.1 0.5 7.6 1.0 5.1% 4.56 10. .0% 19.8 1H12 14.1 1H14e 50.57 1.8% 36.0% 100.3 1.1 7.1 90. .6) 21.5 0.6 5.6 0.0 -0.2) 13.0% 100.4% 4. .2% 4.3 2.7 1.6 0.0% 26.6 0.7% 104% 137% 21.8 3.0 0.2 0.6 13.0% 11.8 0.2 9.8 123.6 125.Titan Energy Services Titan Energy Services (TTN) Table 1 .4 -7.7% 27.7 26.7% 9.3 (1.8 0.8) 28.9 0.2 23.9 (4.0) 22.5 1.6% 36.6 46.3 23.6 20.0 29.9 40.6 5.7 -13.0 (3.8% 7.5% 13.4) 7.5 17.6 49.6 4.6% 33.33 2.4 (24.9 0.8 1.9) 31.1 1.9 3.0 143.0 1.4) (10.5 9.4 1H13 29.3 (3.8) 31.7 11. .3 4.4 0.5 (2.4 (1.8% 4.7 3.2% 27.6% 38.0) 21.2 (0.8 0.3 2.8 (0.6 Price Recommendation Diluted issued capital (m) Market cap ($m) Target Price (A$ps) June Year end Valuation Ratios Core EPS (¢ps) .9 1.5 2012 2013 2014e 2015e as at 25 September 2013 Recommendation Price Target (12 months) Buy $2.0 7.0 0.Financial summary June Year end Profit & Loss (A$m) Sales revenue .0 76.1 25.52 5.3 25.4 (7.0) (10. Change vs pcp EBITDA Deprec.1 28.2 48.3 2.4 (6. Change in working capital Other Net operating cashflow Investing Cashflow Capex Payment for businesses Other Net investing cash flow Financing Cashflow Issue of shares Buy backs Dividends paid Debt Others Net financing cash flow Effects of exchange rate Net change in cash held Balance Sheet (A$m) Cash assets Receivables Inventories Other Total current assets Plant and equipment Intangible assets Other / financial assets Deferred tax assets Total non-current assets Total assets Short term debt Payables Current tax liabilities Provisions Other liabilities Total current liabilities Long term debt Deferred Tax Liability Other Total non-current liabilities Total liabilities Net assets Contributed equity Reserves & outside equity Retained earnings Total equity Net debt/(cash) $m 1.4 17.3 72.0) (10.0% 2.76 3.9) 3.2 12.3 3.0% 20.0 40.3 24.2% 100.5 25.2) 3.6% 13.0 0.0 (1.2) 35.3 0.3 9.5 25.0% 100.8 6.0 123.5% Cashflow (A$m) Reconciliation Net Profit Deprec.4 (1.7) 0. EBIT Interest expense Non recurring items (NRI's) Pre-tax profit Tax expense .0) (10. .6 98.9 20.4 9.0) 30. % change PE (x) EV/EBITDA (x) EV/EBIT (x) NTA ($ps) P/NTA (x) Book Value ($ps) Price/ Book DPS (¢ps) 9.1 6.0 1.3 38.3 0.9 25.5% 33.3 5.0% 3.8 71.7 23.5 43.9 2.0 (2.9 40.2 3.4 17.1 9.4 11.3 -5.1 0.4 5.7 11.0% 69% 94% 17.3 2.4 -15.3 3.8 62.8) 29.42 2016e 134.0 0.4 0.9% 26.0 2.5 5.1 8.7 3.5 0.8 6.3 (1.7 0.4) 14.7) (0.1 26.3 3.5 2.0 108.7) (15.7) 0.3% 18.25 7.6 9.3 0.4 76.6 19.0 9.2 1.9 1.2 (3.3 11.4 . & amort.7) (3.9 7.9 (2.7% 22.5 17.0% 21.0) 30.3 8.8 (3.4 $141.1 (20.1 10.3 0.3 13.8 54.

is.au The following may affect your legal rights. Such investments may carry an exceptionally high level of capital risk and volatility of returns. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission. certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was. or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. directly or indirectly. It is not for release. Sydney 2000 Telephone +61 2 9255 7200 www. publication or distribution in whole or in part to any persons in the two specified countries. In the USA and the UK this research is only for institutional investors. Bell Potter Limited and its directors. particular needs and investment objectives (‘relevant personal circumstances’). views opinions. employees and consultants do not represent.bellpotter. Because this document has been prepared without consideration of any specific client’s financial situation. its employees. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report. expressly or impliedly. that the information contained in this document is complete or accurate. Except insofar as liability under any statute cannot be excluded. or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued.au tslim shaddad jkriska joshea csavage jsnape sbyrnes bcalwell jhester tnjain tslim lsotiriou dbrookman showe ftruong blai jtai tpiper dwilliamson bziegler TS Lim Industrials Sam Haddad Jonathan Kriska John O’Shea Chris Savage Jonathan Snape Sam Byrnes Bryson Calwell John Hester Tanushree Jain Financials TS Lim Lafitani Sotiriou Resources Di Brookman Stuart Howe Fred Truong Bernard Lai Quantitative Janice Tai Tim Piper Fixed Income Damien Williamson Barry Ziegler 612 8224 2810 612 8224 2819 612 8224 2820 613 9235 1633 612 8224 2835 613 9235 1601 612 8224 2886 612 8224 2879 612 8224 2871 612 8224 2849 612 8224 2810 613 9235 1668 612 8224 2859 613 9235 1782 613 9235 1629 613 9235 1731 612 8224 2833 612 8224 2825 613 9235 1958 613 9235 1848 Bell Potter Securities Limited ACN 25 006 390 7721 Level 38. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice. warrant or guarantee. underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. or the representative of such licensee. Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors. who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. @bellpotter. Page 18 . consequential or otherwise) suffered by the recipient of this document or any other person. related to the specific recommendations or views expressed by that research analyst in the research report. This is general investment advice only and does not constitute personal advice to any person. indirect. consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions. Hong Kong.Titan Energy Services (TTN) Research Team Staff Member Title/Sector Head of Research Industrials Industrials Industrials Industrials Industrials Industrials Industrials Associate Healthcare Healthcare/Biotech Banks/Regionals Diversified Oil & Gas Bulks & Copper Bulks & Copper Gold Quantitative & System Research Assistant Fixed Income Fixed Income Phone 25 September 2013 Recommendation structure Buy: Expect >15% total return on a 12 month view. While this document is based on information from sources which are considered reliable.com. in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct. in whole or in part. without the prior approval of Bell Potter Securities Limited.com. Hold: Expect total return between -5% and 15% on a 12 month view Sell: Expect <-5% total return on a 12 month view Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party. or will be. Aurora Place 88 Phillip Street. For stocks regarded as ‘Speculative’ a return of >30% is expected. a Bell Potter Securities Limited investment adviser (or the financial services licensee. employees and consultants do not accept any liability (whether arising in contract. Disclosure of interest: Bell Potter Securities Limited.

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