Expro drills a niche in the oil boom

SHARES
The oil industry is in the grip of a growing boom in deep water drilling and exploration. New areas such as west of the Shetland Isles, the west African coast and the Gulf of Mexico have the potential for major new finds rivalling or even exceeding the North Sea. However, oil companies are under pressure to raise profitability, so they are trimming costs partly by contracting out non-core activities to third-party specialists.

This is good news for oil service outfits and for one UK company, Expro International, in particular. Expro - whose shares stand at 408p - is a global oil services group with links to the big international players. It starts with a great advantage over many rivals because it learned its trade in the North Sea. This has given it skills and a product range suited to the new markets.

One easy way to grasp the opportunity facing the company is to look at sales by regions. Although overseas turnover is already more than half the total, it has only scratched the surface in most markets outside the UK. Against UK sales last year of pounds 39m the figure for the Americas was just pounds 4m with pounds 14m in continental Europe, pounds 11m in Asia Pacific and pounds 14m in Africa.

Nor will the UK stand still. Finance director Colin Ainger points out that the emphasis is switching to the development of smaller fields with production platform technology giving way to subsea production systems. These reduce the risks of developing offshore fields because subsea systems have much lower upfront capital costs but higher operating costs. For example, Shell's Brent field, developed in the 1980s with a platform system, had start-up costs of $4.5bn and running costs of $1.90 per barrel.

By contrast BP's 1990s development of the Foinaven field west of Shetland had upfront costs of $800m but operating costs of $7.80 a barrel.

This is terrific news for Expro because its measurement, safety and surface and subterranean maintenance systems are targeted at that higher operational spending market. BP used Expro's Dual Bore Subsea Completion System to develop Foinaven. Observers estimate that over the next five years spending on subsea systems worldwide could treble. Those figures were prepared when the oil price was below $20. At $25 a barrel for North Sea Brent benchmark crude, activity could rise even more.

Unlike the US, where oil service groups are stars, UK investors are largely unaware of the merits of oil service companies. Expro is smaller than its US rivals and has a lower profile. In the early 1990s it was a flourishing part of what has become Flextech, a mini BSkyB media group. Expro was sold by Flextech to its management in July 1992, leaving the company with debts of pounds 56m. The group was floated in March last year, reducing the debt to pounds 13m just when activity in the sector was picking up. Since flotation the shares have more than doubled, though they are still modestly rated by US standards. Expro's management has demonstrated real ability in piloting the group: sales have climbed from pounds 49.3m in 1992 to pounds 82.2m for the year to 31 March 1996. And profits have climbed from pounds 7.6m to pounds 14.8m.

The group is also at the leading edge of product development. Expro won the Scottish Offshore Technology Award two years running and is a leader in advanced burners for cleaning up oil operations and in safety systems for deep-water drilling. Expro has developed a system which allows a well to be shut down in 15 seconds and it is working on novel ultrasonic techniques to assist in the removal of oil and drilling waste.

Interim figures are due on 5 December and should show the group on course for another good year after last year's 28 per cent increase in earnings per share and 17 per cent rise in dividend. Earnings per share should rise 17 per cent this year to 20.6p followed by a 20 per cent advance to 24.8p for the year to 31 March 1998. On those numbers the price to earnings ratio would fall to 19.8 and then 16.5, which is not demanding for a high-quality business in the early stages of an oil exploration and development boom.

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