Greka Drilling: Weak FY13 On The Cards

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Greka Drilling's, (GDL) drilling activity has been considerably weaker in 2013 than seemed likely at the beginning of the year. However, we believe this reflects a hiatus in 2013 related to GDL’s largest customer GDG. Drilling is set to rebound in 2014 through a resumption of activity levels at GDG, with LiFaBriC technology offering a point of differentiation versus peers. GDL remains an interesting play on its exposure to potentially booming unconventional hydrocarbons development activity in China.

Drilling: Activity down sharply in 2013
We estimate GDL’s drilling activity has fallen in FY13 due to a lack of site availability, extended pilot testing at new customers and a slowdown in drilling activity at GDG pending the resolution of title issues. With the latter now having been resolved a recovery in drilling activity and revenues is anticipated in 2014, led by drilling activity at GDG. New third-party contracts are expected to commence in 2014 from a relatively small base, building up to potentially larger contracts in 2015/16. FY13 meterage drilled is forecast to be less than half 2012 levels, although is set to rebound in 2014 as activity levels increase notably at GDG.

Contracts: Two-year backlog
GDL has built up a substantial backlog of business since late-2012, reflecting new contracts obtained from Petro-king/Sinopec and China Natural Petroleum Corporation (CNPC). GDL remains positive about the prospects for business development in India, where it recently won a contract with Essar Oil.

Financials: Weak FY13 on the cards
The decline in drilling activity in 2013 is pointing to depressed profitability in the period. Performance is expected to strengthen in 2014, driven by recovering drilling activity. However, our 2013 full-year EBITDA forecast of -$0.6m is down from $11.5m previously, due to considerably lower drilling activity.

Valuation: Between 8p and 19p/share
Our base case valuation is derived using an average peer group 2014 EV/EBITDA of 6x which, applying our forecast EBITDA of $13.1m, implies a market capitalisation of $53m, or 8.4p/share (based on 398m shares in issue and an FX rate of US$1.6/£). However, GDL is at a very much earlier stage of development and, with its China unconventionals focus should, in principle, be capable of substantially higher EBITDA growth over the two or three years post 2013. If we apply 6x EV/EBITDA to our EBITDA forecast of $26.1m in 2015e, this implies a value of 19p/share. The key catalyst for the stock will be drilling activity.

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