James Faulkner on KBC Advanced Technologies – Benefitting from the falling oil price?

Oil services software specialist KBC Advanced Technologies (KBC) has been dragged lower along with the rest of the energy sector, but I’m not all that certain that a lower oil price spells disaster for this £73 million AIM-quoted company. On the contrary, it is quite possible that KBC could in fact be a net beneficiary of the falling oil price over the longer term.

Walton-on-Thames based KBC is a specialist provider of proprietary simulation software (55% of EBITA in H1 2014) and associated consultancy services (45%) to the oil & gas sector. It is also the market leader for profit improvements in refineries and processing plants. In the upstream market the firm’s proprietary software helps oil & gas firms to minimise capital spending, through accurate modelling of reservoirs and flow assurance. Downstream, KBC can help clients manage their facilities more efficiently through optimising processes, eliminating bottlenecks and maximising yields. With the energy industry set to cut capex by $250 billion per annum by 2018 (according to Wood Mackenzie), KBC’s technology is likely to be in high demand.

The fact that KBC offers customers end-to-end services incorporating the entire production process from extraction to refining means that it is able to position itself as a ‘one-stop shop’ and punch above its weight. KBC currently has operations in 60+ countries with clients including state-owned oil companies, blue-chip integrated majors and 2nd-tier independent E&Ps. To operators such as these, even a minor reduction in costs in percentage terms can quickly stack up to millions of dollars in savings.

Don’t take my word for it. Just look at some of the contracts that KBC has been delivering on of late.

At the beginning of December, KBC won a two-year contract from a South American oil and gas company, to expand its support to the refinery with a focus on providing operational readiness and management support for the upcoming revamping of its facilities. The contract is said to be worth more than $48.6 million to KBC over a 24 month period and extends the current contractual relationship to 2018. What’s more, the contract came as a direct consequence of improving plant performance, with savings of c.$100 million said to have already been delivered. As Executive Chairman Ian Godden observes, “This is the third largest award in the Company’s history and gives us excellent revenue visibility into 2015 and beyond.”

More recently, at the end of December the firm secured a 7 year, £3.3 million landmark contract to license KBC’s simulation software. The agreement includes the Maximus, Multiflash and Petro-SIM modules covering all E&P stages from reservoir chemistry and well bore/pipeline modelling, through to process facilities simulation. This deal in particular is evidence that recent acquisitions intended to augment the firm’s upstream offering are having the desired impact, with the upstream market estimated to be worth c.10x the downstream market.

KBC still has around £14 million net cash on its balance sheet, which means that further such acquisitions could be on the way for 2015. With the focus moving towards higher margin and more reliable software revenues, and the consultancy division becoming more selective in the type of work it takes on, the outlook for revenue quality is improving.

What’s it worth?

While it may be too early to call the bottom for the oil price, the markets seem to have taken an overly harsh view of KBC’s prospects in a lower oil price environment. Lower oil prices will force operators in the sector to become more efficient – and KBC can help them do that. Research house Equity Development has a price target of 162p for the shares, which at the current 91p still trade on a significant discount to the wider oilfield services sector.