HDX 0.00% $2.80 hughes drilling limited

It does happen to be the accounting definition of a sound...

  1. 57 Posts.
    It does happen to be the accounting definition of a sound balance sheet that current assets should exceed current liabilities. Over the years, Hughes had very different levels of Inventory, sometimes very low, and more recently very high. I suspect they should be able to wind down some of this inventory to release working capital to pay down debt. Management makes a similar announcement in the presentation they released on 12 September (increased spare part sales).

    About Cash-flow: Currently they employ 34 Reich-Drill rigs, 32 East-Coast, and 2 West Coast. According to individual rig economics (disclosed in their November 2012 presentation) this should generate them 23,8 Million in EBITDA. That is considering their usual 38% margin, which should be a bit lower right now, but is not considering the fact that their West-Coast Reich-drill right now are running double shifts.
    Going through their 2014 AR, it appears these margins held up quite well. The Profit number is quite accurate (employed about 30-32 rigs, at 0,4 million per rig equals profits of 12,8 million).
    That is also not including any of their other West-Coast rigs, which should be cash generating.

    Besides this, they have ample opportunities to exploit right now, like changing the rigs employed on the West-Coast Blast-Hole contracts to BHP by Reich-drills (should add 6 to 7 rigs) or just sell idle rigs (yes, probably at a huge discount, but they have a bit more than 20 idle rigs).
    They can also sell rigs and they wound down the HD2 (delineation) division to be cash-flow neutral.

    But I would like to conclude. This is a pretty simple business. Drill holes, and do it above the cost, while also receiving cash due to depreciation. Express Hydraulics makes it a bit more difficult (have more inventory, and some risk to sell inventory that has been bought), but prudent management should make this a nice little complementary business.

    About the John Silverthorne sale, that is indeed disappointing, and I didn't immediately know that. He had some good credentials. I do however think that other issues besides financial ones should be considered here. He also didn't opt for a re-election to the board. In all likelihood because he has a new company to run (check out the FMG announcement regarding the North Star Pipeline contract to Viento, of which he is the Executive Director).

    Besides this, I think Forager is one of the best fund managers in Australia, and as such this sale is somewhat reassuring. It will be interesting if they disclose any info about this transaction in their next quarterly report.
 
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