Hunting PLC

LSE:HTG

Earnings Call Transcript 2017-Q4

[Arthur James Johnson, Chief Executive and Director]

Okay, everybody is looking at their phones. So good morning, everybody. I'm really amazed considering the weather and the storm out there that everybody made it. I was wondering how big of a crowd we were going to get today. So I appreciate all of you taking the time to be here today and listen to our story and go over our results. Peter, you have the -- I'll let you do that. You all have a copy of this, so here are some of the highlights we talk about as far as our end of the year results. I'm very, very pleased with these results and say that the key word is we're very pleased, but we're not content. There's a lot of things still to happen to benefit us in the market, a lot of things we are working on internally, but obviously, it was a very good year. And having saying that, I wouldn't want to start this presentation out -- without first thanking all those at the Hunting team. This was a very -- team effort to deliver these results. There are thousands of people around the company that have just worked very, very hard through very, very challenging times, and I personally want to give my thanks out to all of them because they're what makes it happen. Just a couple of points to start out with, again, I hate reading PowerPoint presentations as Peter knows, so I'm not going to do that. But it's very interesting to me that the numbers that we generated for the -- 2017 were really based on the back of only about 7 or 8 months of strength in the marketplace. When you look back a year ago this month, a year ago late February and March, we had oil prices in March still falling down into the $47, $48 a barrel range. We had still a lot of uncertainty. So considering what we delivered on the back of only 7 or 8 months of strong performance or recovery in the industry, I'm even further thankful for what we were able to do as a company.The other point that I'd like to make today going through is, the Hunting Titan business obviously, has been the strongest part of the business. It's the one that has the most excitement, it's the one I think the marketplace looks at and sees us as, this is a good play on the shale basins out there. And I think it's important to have an understanding today on where we are at in this marketplace. So a lot of the profits and the increase in volumes that we have seen have really been driven by a transformation that's going on in these shale plays in North America. If you go back prior to 2014, you had a giant land grab going on in North America, primarily in the U.S. And you had numerous shale plays identified all throughout the region. Today, though some of those shale plays have been found out to be very wanting. Some of them like -- areas like the Tuscaloosa Marine shale play had a lot of press. You still need $80 a barrel oil to make that work. Places like, I'm trying to think of some other ones. There are some other lesser ones where excitement came into play and this just faded away. So today, much like how the internet had its early days and went to internet 2.0, the comments around the U.S. today with my clients and people in the business, we're really in Shale 2.0 right now. And so what does that mean for a company like Hunting? It means continued great upside because of the massive intensity going on in all of these drilling and completion applications.Going back to 2014, when the land rush was going on, a lot of wells were being drilled just to hold acreage, these guys didn't want to lose this acreage. Those days are more or less gone. Today, that has morphed into pad drilling, which has reduced costs. If you follow people like Encana, EQT, Devon is an example, all different plays whether it's the Marcellus, the Permian Basin, the SCOOP and STACK play up in Oklahoma, the business has evolved into very, very high-volume, super fracs on these super pads that they are drilling on.Encana is talking in their presentations or plans for the West Texas of drilling 20 wells on each pad. What's this doing? It's all making Shale 2.0 more economical and more profitable for these guys because infrastructure costs per barrel becomes lower, production per well becomes a lot greater because of the intensity and completion of these wells. And just the whole infrastructure, the lack of having to move rigs, all those type of things are where we're at today. It's interesting to me that some of these pads, for example EQT's big super pad they are doing in Western Pennsylvania, these are pads that are going to cost $125 million to $150 million. I mean, these are almost the cost of what used to be the shallow Gulf of Mexico, stand-alone small production platforms. So the whole mindset has changed with that as far as the development and the economics of this. And with that, you've seen a focus down on the number of plays that are being developed. The Marcellus continues to be active. The SCOOP and STACK in Oklahoma, the Eagle Ford in Texas, the Bakken in North Dakota, and the mother of all plays, the Permian, just keep being the gift that keeps on giving, and if you listen to what Exxon and Chevron are talking investment-wise, they're going to continue to pour a lot of money into that. So all of that is the backdrop that what we're going to show you today. The last point I'd like to make is that we are very satisfied with our portfolio. Our portfolio of products and services touches the wellbore, not just for wells that are onshore. As you all know, one of our specialties is focusing on kit in the offshore market, especially deepwater. We are disappointed that those businesses have not performed back to 2013, 2014 levels. But I strongly believe that they will one day. I don't know what that day will be. But I can tell you that Shell, Exxon in Guyana, I can go down the list, the finds with BP in the North Sea, with Chevron with Anadarko, these guys have not given up on deepwater, they have not given up on offshore. It's still a huge part of the daily production that the world is using for oil and gas. Couple that with the early demands for things like LNG, and we're still bullish on the offshore market. So we want to be well-balanced. We're thankful that we have the Titan business, it gives us huge exposure on land, but the rest of that we are quite happy with and maintaining and nurturing as well. So with that, I'm going to turn it over to Peter and talk about numbers.

[Peter Rose, Finance Director and Executive Director]

Thanks, Jim, good morning, everyone. Let's start with the income statement, it's a much improved position to that, that we were looking at in '16. Revenues up 60%, you will see in the pages that follow a lot of that is attributable to Titan, which has more than doubled its revenues in the year. Equally, so, our gross profit margins are showing a big healthy increase. We're getting the benefit of the cost reductions that we implemented over '15 and '16, plus we are getting some operating leverage kicking in. Our fixed costs are now 28% versus 40% of our overall cost base. So that means there is more profit dropping to the bottom line as our revenues continue to climb.EBITDA equally is positive, there's a big swing there from the loss the prior year. Within these numbers, we are also taking some hits into the underlying results. We've got nearly $4 million worth of reorganization costs that's letting people go unfortunately in the U.K. and the U.S. and Asia. We have also impaired some of our smaller properties. Plus we've got some ongoing trading losses in Saudi, Kenya and Cape Town and those add up to about $5 million. So those are all hitting the underlying results here -- there. We haven't taken them and put them into the exceptional middle column.Tax line, we're showing 10% there. On a go-forward basis with what Mr. Trump did in America, reduced the tax rates from 35% to 21%, we're going to benefit from that. Our underlying effective tax rate for '18 is going to be between 20% and 22%. We do have a large deferred tax asset held off-balance sheet, being mainly trading losses in -- arising mainly in North America, that's worth about $40 million on the tax line. We'll bring that on when we feel comfortable that we can utilize these losses in the years ahead. So that will shelter us from paying any cash tax for at least the next couple of years.Looking at the segmentals, as I said before, Hunting Titan doubling -- more than doubling its revenues and benefiting from the perforating business in well completions in the U.S. The U.S. market now accounts for 75% of our revenues by origin. So it's a hugely important market for us. The other regions where we trade, Canada, Europe and Asia, they are all benefiting from a slight improvement in activities. The main things that we do in Canada, Europe and Asia Pacific, most of them are OCTG-related, where we are supplying pipe with a thread or an accessory, we're also selling a lot of well intervention type kit into those regions.Within Middle East, Africa and Other, there are these losses that we have had in Saudi, Kenya and Cape Town, they are all hitting or included in that $7 million results from operational loss. If we looked at these results at an EBITDA level, strip back our central costs and share-based payment costs, all of these segments would become contributing to our bottom line. So they are showing a loss there, but that's after depreciation which is about 40 -- running at about $40 million per annum, virtually half of which hits the U.S. line. So that's -- it's an improving trend, and as I say, it's good to see the revenues coming up -- coming back up to a healthier level.Revenue by products. OCTG and Premium Connections, that's our high volume, low margin business. We're making about 12% gross margin on OCTG and Premium Connections in '17 versus about 4% gross margins in '16. Perforating Systems, again, that's mainly the Hunting Titan business doubling its revenues period-on-period. Subsea, as it says, its focus is the offshore market. It's not doing very well. But what we're trying to do there, and Jim may talk about it later on is, we're trying to refocus some of their products to focus on the onshore markets, adapting their products for onshore markets rather than just offshore. Intervention, we are optimistic seeing an improvement there. Again, the U.S. market is a good strong market for intervention tools. We are using the Titan distribution network to channel our intervention tools into the U.S. market, as well as our drilling tools fleet which is also benefiting from the shale, improved -- shale industry improvements in North America.Advanced Manufacturing, that's our Dearborn, MWD, LWD as well as our electronics business, they are doing very well. In fact, Dearborn is sitting on an order book position as we speak of about $50 million, which is more than their revenues they did in '17. And our order book as a whole excluding Titan, which is very much sales on the date, is running at about $150 million at the end of December '17. So that will help us continue the momentum into '18. Amortization, exceptional items, we've got the regular ongoing amortization of our intangible assets running about $30 million. We've taken the decision to shut down our Cape Town facility. It's been running at a loss ever since we opened it, of about $3 million per annum. So the $2.4 million and the $7.6 million, that's all related to the closure of Cape Town, $10 million hit to the exceptional item line. We will sell the building which we own and redeploy the cash into our other more profitable operations. We'll still maintain a presence there, a small sales office and hopefully get some opportunities going forward. Balance sheet is in pretty good shape. We have kept capital expenditure tightly under control. We only spent about 8 -- $11 million in '17. I would expect us to spend about $30 million in '18, and the focus of that will be in Titan and relieving bottlenecks and increasing capacity there. So the movement on property, plant equipment is very much depreciation of $40-odd million plus CapEx of $11 million plus an impairment of the Cape Town facility of about $7 million. Goodwill intangible assets. If you look at those together, over 80% of that relates to the Hunting Titan business. So in terms of the carrying value and the support for that, it's good, it's solid, there's no questions as to the impair -- any further impairments required there at the moment. Working capital is showing a $40 million increase. We are seeing an underlying increase of inventory from December to -- December '16 to December '17 of about $26 million. But the main culprit there is trade debtors, we've seen that climb up by about nearly $70 million. No concerns about recoverability, but that's just reflecting the momentum that we saw in Q4 '17, delivering a high level of trade receivables.Tax, we've touched on. Provisions are showing a bit of an increase there, that's $2.5 million of provisions coming in relating to the closure of Cape Town, and they will unwind in '18. Within other, $22.7 million, most of that relates to our -- the surplus on our defined-benefit pension scheme here in the U.K, which we've closed. We're going to liquidate that, and we'll get another $10 million coming into our bank account in the second half of '18.Pleasingly, we're -- we've ended the year with $30 million -- over $30 million of net cash sitting in our banks. That has allowed us to come out of our suspension period covenants. We came out on the 18th of January, and that means we are going to pay a smaller commitment fee on our $200 million bank facility, which is pleasing. It also removes any restrictions we have on capital expenditures and dividend payments.Inventory. This is a very interesting graph, just to demonstrate to everyone that our inventory days is reducing. The inventory position at the end of December '17, we were sitting at about $286 million of inventory. At the end of December '14, we were sitting at nearly $380 million -- nearly $400 million, amounts to $100 million. But we are not back up at the same levels of revenue as in '14 but we're watching our inventory very closely and managing the buying and selling of it. And I would expect our inventory days to come down to the levels that we were looking at in '13 and '14. Cash flow, we've probably covered most of the items here, but we're looking at a strong income from EBITDA, after share-based payments, of $67 million. We do have working capital outflowing, that's controlled. We had additional tax receipts in from -- tax refunds from the U.S. IRS that came in the first 6 months of the year, plus we had a first-stage payment refund of the pension scheme, $9.7 million. As I say, another $10 million should come in, in the second half of this year as we liquidate that in the balance sheet. We've only spend $11 million on CapEx, leading us to a net cash inflow of $32 million. So that brings me to the end of mine. And I will hand it over to Jim.

[Arthur James Johnson, Chief Executive and Director]

Thanks, Peter. I will take that one. So here again, just talking a little bit -- it's on there -- a little bit about the market overview. I think the Hunting Titan business, I talked a little bit about in my opening remarks, the business is doing great. We're seeing strong demand for our products across all the basins that are active today in the U.S, and in Canada, which has been a very good marketplace for us. The key with this business today is the intensity that is going on in these wells. We are running way more guns than we ever thought imaginable, way more charges, much, much longer laterals. They are drilling these land wells today on -- with extended reach or lateral lengths that typically would have only been done offshore in the past because of platform and infrastructure costs. But all of this benefits this product line, this business. We've also, as I'll show in later slides, we've seen a pickup in our instrumentation sales. So even -- this isn't just a story about guns. Charge demand, we are basically running around the clock to meet demand at our plant in Milford making explosive charges, all good things. The rest of the U.S., again, the whole market in the U.S. right now is really being driven by the unconventional. So areas in the U.S. where we benefit from that, our Specialty Supply business was profitable last year. Our Drilling Tools business has made a lot of good positive inroads. The team there has done a great job with some redesigns of our power sections which are dramatically lowering our costs, and we are expanding more and more into the Permian Basin in a business that historically had the Bakken area and the DJ Basin and the Rockies as the home markets. So some upside there. Premium Connection business, we've managed to keep that business stable through a very poor Gulf of Mexico market. Our new facility at Ameriport, which we built a couple of years ago in our CapEx expansion. That facility is now running 2 shifts a day, 5, 6 days a week, where this time last year, it was running one shift. So we've seen more business come in there, actually some of that is going to the export market, to places like Trinidad. Canada, the oil sand prices, there is renewed thought process that this isn't going to be all killed by low oil prices. So again, like everybody else they've worked hard to get their cost down, USD 60 is a good price. There is a differential on the Canadian price, there are some pipeline issues. But the -- there is a little bit more bullish thought I would think in the oil sands and the shale activity, when you listen to Chevron, when you listen to some of the other operators up there, Cenovus, they are very, very bullish about the potential for the shale development in Canada, primarily for natural gas. And so I think that market, again, I think, it has seen better days, but I think it's coming back. Europe, probably one of our most disappointing areas. Not disappointing from the efforts that the team has put out, but disappointing from the market that we work in today. As you all know, rig count in the U.K. has been horrendous by historic counts, the Netherlands has fallen off the chart, Norway is not -- it's a market for us but not what I would consider a whole market. But we've done well. We're doing better in our facilities with Aberdeen and with Holland. Just this week we were awarded the Centrica contract for 3 years over some direct mill competition, so we're very, very happy about that. And I think that highlights the relationship we keep with clients and the value they put on the service and having that facility there to take service, repairs and support for the North Sea. Asia Pacific. Improvement in OCTG activity. Some of that is driven by increased demand in China. The Chinese have ramped up drilling more, that's taking away more OCTG out of the non-Chinese market. With China being more active, it's raised steel prices, we like steel prices to be higher. I'd like them to continue to go high when you're selling OCTG. So we're happy about that. And again, we've seen some increased orders and activity there. Middle East and North Africa. It's one of those areas where it's almost, in some cases you take 2 steps forward and 1 step back. Our Saudi operation is now cash-positive. We should have gone through and completed all of the licenses and audits and everything, getting Aramco approval. And really going forward, we look at Halliburton as being one of the main partners for us driving the profitability of that operation there. This is a map that you -- many of you have seen before and it basically shows you real quickly, and I'm not going to spend a lot of time on it, but it talks about, it shows you the shale plays. The blue dot shows you the distribution. One of the things to highlight in Shale 2.0 today, is the fact that this has become a business where you almost need to be part Federal Express, part oil and gas company. Logistics, I can't overplay the importance of logistics to making these plays work. And if you listen to the calls that were recently done by Halliburton, Schlumberger, some of our peers, they talked about bottlenecks in sand, rail issues. I mean, this is such a logistics business because there's just a massive volume of kit that is going into these wells right now. What's the pluses? All those blue dots on that map show where we're at. Clients love to call us up because they know we keep the product there, it's in stock, it's ready to go and how fast can we get it to your rig.Onshore metrics that I briefly talked about, pretty self-explanatory. We're still not back to the rig count that we were in '14. And I will be one of the first to say, rig count today means less than what it meant 4 years ago. It's not the indicator of activity that it historically has been. We always watch it. First thing I do Friday after lunch is always see what's [Audio Gap] [ the big news in ] rig count, you've got to see what that number is because it is a trend. But the productivity that they're getting out of these rigs is amazing today. And again, with the intensity per well, that's where the money is at, is where all of this is going. And whether you're drilling, whether you are providing the mud motors and doing the Titan completion work, that's the number. And as you can see from the bottom, lateral lengths continue to go longer. There's a lot of discussion over -- in our clients' offices, what is the right length for some of these things. Because there is no doubt, they can drill them 30,000 feet out, right. They have been doing that in Sakhalin Island or Wytch Farm for a long time. But what's the economics with that as far as getting done and being able to complete those wells. So today, the average 10,000 foot lateral, way different than 5,000 or 6,000 feet a couple of years ago, and it's continuing to expand. And with that, the stage count or the clusters, the amount of guns going in continues to increase. This next slide briefly talks to you on the components. It's pretty self-explanatory. But again, it shows you how the units per well has increased, so there is kind of the black-and-white information it shows you, why is Hunting Titan doing so well with a rig count that hasn't recovered? There is the answer right there -- 15 again -- H1 gun continuing to do well. Some of the things that we've struggled with has been our own bottlenecks on some of this because demand surprised us. And so we've ramped up, for example, in Canada, we had to buy swaging equipment and some other different equipment in order to make the H1 for the Canadian market because it had been supplied out of the U.S. Demand got so great, it didn't make sense, so we are now making H1 guns in Calgary, using our oil country facility there to make guns, H1 and conventional. But those bottlenecks are getting worked out. We're expanding on our facility in Pampa with some CapEx that's going to help that. So the client base hasn't -- has liked what they've seen. But the one thing that is amazing even though the H1 gun sales continue to increase month after month, the percentage hasn't increased all that much because it's been unbelievable volumes of conventional guns. So clients are still using -- many of them still like the conventional way of doing things that they did 4 or 5 years ago and sometimes you're just never going to change that no matter what. But it's positive in all aspects of this business for us. Our charges we've developed. The EQUAfrac charge is doing extremely well, it's getting more and more buy-in as the clients decide or look to get smarter in their completion. Again, this thing lowers costs and gives them better productivity. It went from 0, which basically I think -- what, 2 years, Peter, we've been on the market with this product and right now it's between 15% and 20% of all of our charge sales are this. Again, it's very much focused on the laterals and the unconventionals. And as we explain it more, we give papers at SPE conferences and things like that, we will get more -- hopefully more orders. We also charge more for this, so that's the other plus that I like from my side. We talked about earlier, about the electronics. The switch business continues to be very, very strong. The --that's again, it's driven by the demand and everything that we're doing there. Switch demand is strong. We're fortunate that our electronics facility is being able to provide a lot of manufacturing support for this. But one of the things on the electronics that we don't talk about, I think, enough has been the increase that we've seen ramp up in the last quarter in our instrumentation business too, which is also electronics-related. And I will give you an example, we do gamma detectors that go in MWD tools that we sell. Last year, we probably averaged 40 a month that we sold of these things. We are starting the new year off averaging 70 a month, and these are $10,000 apiece, $9,000, $12,000 depending on the configuration. We like selling those. Our clients like them, they perform well. And part of this is all an indication of the buy -- the recovery you are seeing in capital equipment spending too because a lot of this is going into conjunction with MWD equipment. So it's one of the areas we don't talk a lot about, but our instrumentation guys have done a great job and that business as responding as well.The classic that you see other -- from other people, not just me but the drilled uncompleted numbers. You read about people like Halliburton coming out and saying that their fracking horsepower has sold out for all of 2018. This is some of the reason why you have 7,500 drilled uncompleted wells out there. Most of these wells will be completed. People usually don't put holes in the ground just to walk away from them. A lot of it's based on infrastructure, pipelines, all that kind of stuff. So the good news is, that's a nice backlog that you have to have perforating guns, completion equipment to make these things make money. And so whatever percentage is completed, we'll be there benefiting from that, on top of the wells that are being drilled on a daily basis.I just throw this in because natural gas kind of gets a sideline discussion these days. Everybody is talking oil, everybody is talking about the U.S. passing Russia in production and going to 11 million barrels a day. Natural gas is a big deal in the U.S. It still is a big percentage of what the drilling activity is out there. We're producing boatloads of it, we have boatloads of it. The outlook is good for exports, for LNG. And if you've seen some of the international prices, I think there was a record set in the U.K. this week, $24/1,000 -- Mcf or whatever. In China, I think they had record prices for LNG earlier, or just in -- a couple of months ago. So there's already people talking about possible LNG shortages in the next year or 2. A lot of this will be onshore U.S. supplied from the conventional wells but it also plays into the offshore market too as people have to go find these reserves.Manufacturing mix. No secret, you guys see the numbers. There has been a switch from our historic higher percentage on offshore to now a higher percentage onshore. And again, that's the market we have today. Not a lot else to really talk about there. As I mentioned earlier, we are still bullish with 30% of world's oil coming from places surrounded by water or in water, that's -- we don't see that as changing a whole lot.Offshore recovered that I mentioned about. We have depletion, there's a lot of exciting finds going out there. Hess announced with Exxon yesterday, their seventh find off of Guyana. There is more drilling going to happen in Suriname. Gulf of Mexico still remains an area with lots of potential. And the Chevrons and Shells of the world are not closing up shop and going home. So they're going to be there a long time. And they are finding a way to make -- hopefully make investment decisions in a $60 a barrel oil world. Additional opportunities. Our AMG business has done really well in the last quarter. As Peter alluded to our order book at Dearborn is higher than all last year's sales. We have seen a big influx in orders from our biggest client worldwide, for some orders up there for MWD equipment, looking very, very positive. Our electronics business the same, having excellent results for the last 4 months, very, very strong. We see those as being driven again, by the capital equipment cycle. Nobody was spending money for a couple of years. Now this equipment is either being cannibalized, wore out, new versions coming online, it plays right into our sweet spot. Additionally, during this downturn, we did have few competitors bite the dust. We had some of them in the machining side that were competitors went out of business, one of them that I won't mention, there is an auction going on, I think, this week for all the shop equipment in Houston. I won't be buying any of it but I'm glad to see that it's going away, hopefully in pieces. In the electronics business, we had some people go out of the business, they thought that consumer electronics were like making high-temperature boards for MWD equipment. It's not. When volumes fell, they thought, this is a bad business. And so again, that -- those are all positives for us.Our pressure control business. I think, that is going to be one of the other upsides of this year. We've got something like 25 pressure control units on order right now in the books for 2018. I think all of last year -- that's -- and that's just for the U.S. I think all of last year in the U.S. we might have sold 5. And these are basically $100,000 to $250,000 apiece. We make them in Houston and Aberdeen as far as the parts go. We're taking advantage of our good name. We are taking advantage of the Hunting Titan distribution center and the technology that we've right-sized for the Permian rather than a North Sea application and so I think we're going to do well there.TEC-LOCK, new premium connection. Last month, 68 -- more than 68% of all OCTG used in the U.S. came from offshore. The -- this is an area onshore where we traditionally haven't been a strong player mainly because of the mill dominance. But with that, with the offshore material, heat-treated at processors throughout -- in the U.S.A., it gives us an opportunity to use our threading facilities, put these connections on and these are shale-focused products. They are shale-focused because it is high torque, it's enhanced sealing. It is basically a semi-premium product and it is used for long reach, extended reach, long-lateral wells. We're excited about this, we've done all the testing for it in our lab that we invested in, which by the way was probably -- maybe the best investment we made in the last 3 years. That connection lab is booked all of this year on some exciting projects domestically and in the Middle East, and it has paid for itself already. And then as I mentioned, Drilling Tools, we are seeing increased activity. Last month -- last 2 months one of the strongest areas was actually in the Northeast. So that has been -- it's good business for us. And then the Permian is an area that is -- we're in, it was not a home market but thanks to the new distribution center we built 1.5 years ago, which is a Drilling Tools Titan facility, along with the redevelopment of our bearing sections, we're making inroads in that marketplace. And I think that business has turned a corner.We talk about our strategic capital discipline, again, it's there. We like to consider ourselves a very agile company, a very fast-moving company, and we don't take a long time debating decisions on that. We looked at the world as it is, not how we wish it is, and we make our decisions and go forward.The big thing is the massive amounts of investment that we've made in the past couple of years. We are capitalizing on all that now. Our facility in Mexico is running around the clock making perforating guns for Latin America and for South Texas. Our investment in Houma, Louisiana, yes, there is not as much deepwater activity going on there but we're making thousands and thousands of guns a month there to go and take care of demand in Louisiana, in places like the Haynesville Shale or in that marketplace over there. Our Sam Houston's -- facility in Houston is making a lot of additional jewelry supporting the Hunting Titan product line that a year ago, we weren't doing that here. So it is taking advantage of those dollars and making them contribute to all of Hunting, focus in on where we need it. So we don't have to make more roofline expansion, and again, take advantage of that. Rest of that is pretty self-explanatory. Again, this is again, driven by their -- I've pretty much talked about this. Capital -- the capital expenditure focus this year unless it's going to be either replacement, things that we have to do for health, safety and environmental issues if needed, and focus in on Titan. So I'm summarizing that whole sheet what we're looking at today. We are disciplined in looking at our capital. We wanted to be good stewards of the money that we have. And I think enough said on that. Capital investment, one of them that has been approved. I thank my board for their approval of this project. We are going to dramatically increase our capital expenditures at the Milford facility and expand there. Milford is where all of our Energetics are made. We literally are running at full capacity right now. We're selling 800,000 to 900,000 charges a month at that facility, of all the different kinds that we do. This CapEx will take that capacity up to $1.2 million roughly, depending again -- product mix is always, tell me which charge you are making and I'll tell you the volume. But we need to expand that. We have the site, we have the people, there the cost is lined up. I'm very excited about this. Because really, since the acquisition in 2011, other than maintenance, there hasn't been significant capital spend put into the Hunting Titan business. We have done some facilities like Odessa, upgraded it a little. But I think this is the largest single CapEx investment we've made since the acquisition. So in closing, in my speech. Investment highlights. A year ago, we were sitting in here, as I maybe said earlier, last March, we were in a world of $50 oil, we had 40 -- it dropped down to $47 a barrel. We need consistency in the price. We are back at $60 today, I mean, at the end of the day, that's the driver, what's that price of oil?Our clients are feeling more confident today. They are starting to have better returns because they've reined in and been more disciplined on their spending. All of that should focus -- should feed down to us, trickle down to us with more opportunities and orders, as they invest properly in the business. We're still keen on our platforms that we have. We're still going to look at how to grow those. We are working very, very hard. We believe that the offshore business is not dead, it will be back. And we are going to be extremely well-positioned for that. And Shale 2.0 is really going to continue to drive our business going forward at least for the foreseeable future. We see these guys. It's kind of like your performance in our factories. We have a continuous improvement team, that we -- last year generated $10 million in savings we identified. They wake up every day in a -- the manufacturing people throughout our company. How do we do it quicker, faster, better? You know what, our customers do the same thing. There is not an oil man sitting out there right now that says, you know what, I've gotten enough oil out of that shale. Oh well, I think we can stop today. They're not doing that. And so that movement, the Shale 2.0 it's all about intensity. It's all about more kit, and we are very, very well-placed to benefit from them. So with that, I think I've talked enough right now, right? Throw it open for questions?

[Mick Pickup, Managing Director]

I think you said in your press release -- -- sorry it's Mick from Barclays. I think you said in your press release that you were shipping as many guns and charges as you were in 2014. If I look at the Titan revenues, that would suggest that pricing is still down 20% to 30% for that equipment. Can you talk about moves and expectations you have for pricing as you go through the year, is the first question.

[Arthur James Johnson, Chief Executive and Director]

Everything we do we sell it too cheap as far as I'm concerned. Some -- none of my customers -- won't want to hear that. No, pricing is not back to the levels it was in 2014 in some areas. When you look at charges, instrumentation, switches those prices are at the 2014 level. The big deal has been more on the guns -- the conventional gun side and we are not back to '14 levels. For our business, we announce price increases in January on the Hunting Titan product line ranging from 7% to 10% depending on what item it is. And those will start hitting the bottom line in February. So again, demand has been good, the gun side -- the conventional gun side, there's more players in. And so we have taken -- we've tried to be proactive in raising those prices. The key -- the -- one of the good things is our margins have improved tremendously. And a lot of that has been by the hard work and the efficiencies we've driven in the company as well as more volumes that are absorbing costs along the way.

[Mick Pickup, Managing Director]

And that was my second question, if I look at your results, you have done $300 million in revenues and $60-odd million of operating profit, and given that it's only 7 months of move-through, it implies that margins in that Titan business are already back at 2014 levels and you'd expect them to move further north to record levels. Can you talk about any headwinds that might offset future moves from here?

[Arthur James Johnson, Chief Executive and Director]

The headwinds are going to be a function of what does the industry do. There's nothing operationally-wise that's going to hinder us from continuing the progress, it is going to be a matter of the volume, it's going to be matter of oil price, like it always is. If this oil price drops to $40 a barrel next month, I can tell you what, everything I'm telling you is going to have to be revised. Because it will change. The bankers are not going to be as generous in 2018 as they were in 2013 or 2014. So again, oil price has always, will always drive activity because it's the sentiment it creates in the industry.

[Hin Kin Wong, Executive Director and Analyst]

Amy from UBS. Two questions for me, also related to some of your cost base there. Any thoughts on some of the increase in steel prices recently that you have seen in the market and what potential? How that would further increase in your steel -- in your input cost, how that would affect your pricing in terms of how you negotiate with your clients? And my second question relates to just kind of get your thoughts on what's the kind of unit cost reduction on your manufacturing right now? If we can get a steer on that now versus 2014?

[Arthur James Johnson, Chief Executive and Director]

You want to take the second one, Peter?

[Peter Rose, Finance Director and Executive Director]

I would say 20%, 30% in terms of unit cost reduction with the -- having taken out the overheads introduced automation. We are going to be doing more of that as Jim said with regard to energetic production at Titan. So we'll get the benefit of that going through, so.

[Arthur James Johnson, Chief Executive and Director]

It is going to be of that order. As far as steel goes, for OCTG, I welcome higher steel prices because we will pass that along with the client. So whatever that is, it's all in the formula that passes along. For the gun business, again, all of us are buying from the same steel people, so it's an equal -- we're all on a level platform for that. And as those price increases hit we will respond accordingly. We're really haven't seen a price increase issue on gun material to date.

[David Mirzai, Research Analyst]

David Mirzai, Deutsche Bank. Again 2 questions. The first I suppose, I appreciate it is very difficult to set growth targets for next year. But I'm [ observing ] Q1 '17 was a very different place from Q4 '17. So if we simply look at how you went into the end of the year and what does that say about your run rate for 2018 in terms of how you can improve on margins? How you feel about a consensus EBITDA margin, revenue, profit, cash? Secondly, a question about dividends. So you do point to -- towards the back of your results, is that the only thing stopping you from paying out a dividend is your liquidity. What do you need to see in 2018? What level would you be happy with? Have you set any internal targets for how you might set a dividend policy?

[Peter Rose, Finance Director and Executive Director]

Run rate. I've spoken to a number of you -- a number of you this morning and I've -- in the calls that I have had with you, I've told you that the results we saw for January almost replicated what we did in October, which is -- for us is very, very pleasing. Because obviously, that number was impacted by Thanksgiving, December was Christmas, even January had a bit of holiday season Christmas impact on it. So to see January coming in with a good, strong start to the year is encouraging. So is that run rate going to continue? I hope. Are we going to [Audio Gap] continue to see an improvement on a go-forward basis? By what I surmise, I would expect to see that continue. But we need to see a few more months under our belt. We will issue a trading statement around our AGM, middle of April. By then we will have seen January, February, March results. And that can give us a feel as to where we are going to end up. The consensus EBITDA at the moment is about $100 million EBITDA on the revenues of $820 million. I'm comfortable with that, at the moment. But to repeat, we need to see what happens in the year. There is no -- there is nothing to suggest that $70 million, $80 million of revenue per month is going to slow down or going to stop or plateau, whatever. We just need to wait and see.

[Arthur James Johnson, Chief Executive and Director]

Yes, I'm very cautious right now because there is -- what we need is stability in the price and we need stability in the mindset of our clients right now. And the -- as far as the shale operations go, now one of the things we're seeing today that we didn't see in the past years is, for the first time, Peter has mentioned this before, the Hunting Titan business is pretty much a -- we don't have an order book if you -- for instrumentation and instruments we do. But for the daily guns in terms of -- you don't know tomorrow what's going to happen, because it's that quick of a delivery, which is why we have the distribution centers for just-in-time deliveries to our clients and they count on us. But in the last couple of months, we've actually seen clients wanting -- locking up for a month ahead rather than a job ahead. So that is a positive trend. And I think a lot of it's, the guy in the field doesn't want to worry about being fired because he didn't have guns and charges there. But it's almost part of that, we need to be thinking more than just this next well or whatever, so that's a positive trend for us. But again, the guidance going forward, you just have to be, I think it's still time for caution, to a degree.

[Peter Rose, Finance Director and Executive Director]

Dividends.

[Arthur James Johnson, Chief Executive and Director]

Dividends, I'd like to pay them tomorrow. I mean I'd love to pay them as fast as we can. We will prudently look at our cash position and what we're doing, what we are generating and as soon as we can, we will announce it, and like I said, I would love to get back into paying them. I'm pro paying dividends.

[Hin Kin Wong, Executive Director and Analyst]

So another question around operational leverage. So what is the average plant utilization that you currently have in the U.S.?

[Arthur James Johnson, Chief Executive and Director]

I knew that question was going to come up. So the answer to that is it depends on what product line. We have facilities like our Stafford facility, in Subsea, working one shift, 5 days a week. We have Milford working basically around the clock. Our threading plant in Marrero, Louisiana round the clock, 6 days a week. Our gun facility at Pampa, full utilization, basically there it's 2 shifts. Because of people issues, just finding them is one of those areas where we are this year spending a nice amount of CapEx on robotics -- robotics sales in order to manufacture guns. So it varies by -- it really varies by location, product line and facility. It is up considerably from where it was a year ago at this time and it continues to expand. And in total, we are up about 500 employees from where we were this time a year ago. We have had increased utilization in our Wuxi plant in China. And yet our Dutch facility has reached a real quiet part. So it fluctuates, it really depends on product line.

[Hin Kin Wong, Executive Director and Analyst]

And so everything that is linked to U.S. onshore activity, would you say that in terms of fixed cost absorption, it's back to the 2011, '14 levels?

[Arthur James Johnson, Chief Executive and Director]

Would you say...

[Peter Rose, Finance Director and Executive Director]

It's getting there, it's still got a little bit to go. Look, again, looking in isolation, Titan, yes, but not necessarily [ sort out ] there....

[Arthur James Johnson, Chief Executive and Director]

And there is still some upside there, for example, when was it -- it was only in the fourth quarter that we brought Oklahoma City back online.

[Peter Rose, Finance Director and Executive Director]

Correct.

[Arthur James Johnson, Chief Executive and Director]

So we are not -- we're only still -- we're still running on just one shift at the Oklahoma City facility that had been shut down in 2016. We'll have the ability to again get people, get them trained, get those facilities fired back up for demand.

[Hin Kin Wong, Executive Director and Analyst]

And then moving to raw materials, clearly, you mentioned that you can then pass it on. But I was just wondering, how fast can you actually pass it on, i.e. is it first a headwind from a P&L standpoint? Or are you able to pass it on straightaway in terms of -- any type of material...

[Arthur James Johnson, Chief Executive and Director]

On the steel, you mean?

[Hin Kin Wong, Executive Director and Analyst]

Yes.

[Arthur James Johnson, Chief Executive and Director]

It's not really much of a headwind. That -- the pricing -- when we do our OCTG business for example, our Centrica contract in the U.K. Those prices are negotiated with the mill, so we say here's their drilling program for 3 years or whatever -- however we structure the tender is going to be based on the support we have from our mill supplies. So we don't just throw numbers up in the air. So the Japanese for example, will promise this, we're going to hold this price on 13 chrome tubing all through 2018. And they are good at -- they honor their word. So it's a case-by-case basis. And so we -- any increases, there is no -- anything that we already have going, there is never a shock to that, like hey, Mr. Hunting you are in a bad place right now, we are raising the [ stimul ] of your contract, we are not going to see that. So we are to have those plan or those prices [ locked ] on a client-by-client basis beforehand.

[Hin Kin Wong, Executive Director and Analyst]

And one final question is, working capital dynamics, how should we think about it in 2018?

[Peter Rose, Finance Director and Executive Director]

Inventory will continue to be tightly controlled. It's round about the $290 million mark at the moment based on this improved run rate. So we will endeavor to keep that under the $300 million mark, which is way below what it was in the -- at the end of '14. We've learned a lot of lessons in the downturn, just-in-time deliveries. Debtors and creditors, we'll continue to manage that as best we can. A lot of our customers, I could name a few here, they're just taking extended credit. And the blue chip customers, if you want that order, you are going to take their credit terms. Similarly on the creditor side, we've only got so much muscle power in terms of telling our suppliers when we will pay them. If you're dealing with a mill, they typically want payment with the order. So we'll manage it as best as we can. But I would -- I will strive not to see much more increase in the working capital going forward.

[Kevin Roger, Research Analyst]

Kevin Roger from Kepler Cheuvreux. I was wondering if you could share your view on the completion activity in the U.S. for 2018. Because in 2017, the [ permanent ] [indiscernible] [ what time commission ] activity was close to 60%. So do you expect in '18, a focus from your clients on the completion activity, meaning that bottom [ price we could be seeing ] could be close to 100% or even above? And in terms of -- you were speaking in terms of intensity on the well, the spacing has been strongly reduced between the frac between 2014 and '17. Is it a trend that is continuing further in '18? Or now that we are kind of bottom, if staying at [ 1,200 ] feet?

[Arthur James Johnson, Chief Executive and Director]

I think it's the same trends. If you look at -- I mentioned about Encana. They're actually visualizing a 3D cube in which they are trying to drain these reservoirs from. That's why they're putting 20 wells on a pad, why they are not hitting one play in the Permian, only like a Wolfcamp A or whatever they're called. They're hitting multiple plays within that cube that the pad can serve. So a lot of intensity, a lot of ways to drain the hydrocarbons out of there. As far as the basins go, the completion, if I'm answering your question right, some of these -- some of these basins are right now, the horsepower, the fracking power to do these jobs, they're totally booked up. So you're seeing newbuild fracking equipment coming online, orders for newbuild fracking equipment. It is going continue to be strong. Like I said, it's going to be driven by oil price, a big fall in the oil price is going to ruin cash flow and cause people to slow down. But today, I think you're going to continue to see more and more completion activity. Two of the super majors, Exxon and Chevron, have both announced huge ramp-ups in capital spending in the Permian Basin for the next 3 years. EOG came out this week, said they're going to be one -- they are one of the companies significantly raising CapEx, raising it almost $1 billion over what they did in 2017. It's all onshore, Texas primarily. So I just think the numbers I'm seeing coming out of the Permian are almost scary for the volumes that they're talking about. And production is going continue to grow there. It is going to continue to be a focus place.

[James Thompson, Analyst]

It's James from JPMorgan, a couple of questions if I may. It sounds from your presentation that you've obviously, shifted a number of facilities to feed the Titan vehicle. I just wondered if that potentially hinders your ability to go back to your other more traditional markets, if they were to recover -- I'm sorry, that may be my opinion -- but is there that flexibility in all of your locations to move back, if those markets do recover?

[Arthur James Johnson, Chief Executive and Director]

Extreme flexibility. I mean, machine tools don't know what they make. It could be making automobile parts, it could be making oil field parts, they don't care. The people that we have in our organization are highly trained. We've got a great staff of technical people from the manufacturing side that are very knowledgeable in all aspects of machining and processing. So we have tons of flexibility. There's very few of our facilities that can only do one thing. Milford can only make explosives. But if you look at Houma, you look Pampa, you look at Rankin Road, Sam Houston, Parkway, our Canada operation. Mexico 4 years ago, was primarily completion equipment for Schlumberger. Today, it's 90% perforating guns supporting the Hunting Titan business. So there is a lot -- we have a lot of flexibility and I hope I have to get to where I worry about supplying that demand for them. That would be a great problem to have.

[James Thompson, Analyst]

And just going back to the point on utilization, are you seeing any sort of pressure on salaries, at this point in time?

[Arthur James Johnson, Chief Executive and Director]

Every day. There is pressure on salaries. There is pressure on salaries regardless of the oil patch, for the fact that we have very low unemployment in the U.S. And especially when it comes to blue-collar work, people don't want to be in those businesses anymore. And those that are, they are paid appropriately and their skills are in demand. We have lots of machinists, lots of people with technical backgrounds and so, yes, it's not -- look, we're not seeing the pressures that we had in '13 and '14, but they are going to be there. It hasn't been something that has reared its head for example, in Houston or Louisiana. Again, offshore -- more offshore focus. But right now, if you are in Odessa, Texas, and you can have any type of oilfield experience or work, you get a job tomorrow. We're fortunate that, that's more of a distribution area for us. And I thank our team that's out there. But labor could be more of an issue going forward, it isn't today.

[James Thompson, Analyst]

And just -- so on your kind of R&D efforts. I mean, last time out we heard about ceramic perforating guns. I'd be very interested to hear if there is any update there. Are you able to progress it? Has it become something you can industrialize or not?

[Arthur James Johnson, Chief Executive and Director]

I thought -- I probably missed that one. Our project with Exxon is going exceedingly well. We started this project out and the first thing our engineers did was far exceed what Exxon had developed with their algorithms as far as the timing and all on this Autonomous Gun Project, is what it's called. The Autonomous Gun Project is still the finish line where we want to go. But honestly, we believe that this year in 2018, we will commercialize some of this technology primarily in plug-setting and in pipe-cutting. So more of a P&A application, just because that's where it's evolved to. And again, if they can get P&A costs down, where they don't have to send as much kit into it, I think that will be a plus. But we've made lots of progress, we're way ahead of where we were at a year ago. We are continuing to develop it. And I'm hoping this year we have purchase orders sometime from it.

[James Thompson, Analyst]

Great, that's very helpful. Just one final one from me, if that's -- you told us that you are spending $12 million in Milford, just could you give us the rest of the breakdown on CapEx, where it is being spent?

[Arthur James Johnson, Chief Executive and Director]

I mean, the capital expenditures for Titan this year will probably be $20 million. Would that be a fair number, Peter? Based on everything we know there?

[Peter Rose, Finance Director and Executive Director]

Yes, we say that in the unreported accounts that around $20 million is tied. And then there is another $10 million we reckon that will be for general underlying repair and maintenance. I mean, of the $11 million we spent in '17, most of that was repair and maintenance. Now we're moving into the debottlenecking additional capacity, particularly for Titan.

[Mick Pickup, Managing Director]

Sorry, it's Mick, again. Just so I'm clear. Obviously, you have a lot to talk about Titan here, and then the rest of the world, I would just summarize everything in that category. There's nothing in the other businesses that is coming to an end in 2018 versus 2017, that could stop that progressing towards breakeven?

[Arthur James Johnson, Chief Executive and Director]

No, nothing is stopping it.

[Mick Pickup, Managing Director]

And then looking at those businesses, obviously they are losing money now. I think the phrase you used was nurturing. Is there any consideration or any point in time where you would look at being more drastic on those businesses and stop the hemorrhage?

[Arthur James Johnson, Chief Executive and Director]

I think the days of our cuts as far as facilities go is -- it's over. I think that when we talk about losing money, actually our electronics businesses is profitable today. The Dearborn business is generating cash. The Specialty business is profitable, I'm missing one. The results are much improved and improving. And backlogs are picking up. Our Premium Connection business is profitable. So there is areas like Aberdeen that are struggling in the North Sea. We've cut to the bone there. We won't be able to support a Centrica contract or get more business if we cut further. So I'm happy where we're at right now. I'm happy with the cost-cutting that we've had. We're staying lean and mean in all of these operations because they -- and they will come back. I just can't give you the date. I just don't know when.

[Unknown Analyst]

Could you give us a feel for the range for year-end cash assuming there is no dividend?

[Peter Rose, Finance Director and Executive Director]

I'll stick my neck out. Round about $50 million. It's -- clearly it depends on the rate of capital expenditure, on this debottlenecking and how much is absorbed into working capital, but $50 million.

[Arthur James Johnson, Chief Executive and Director]

Finished? Anything else? No? Well, I appreciate you all taking the time and trudging out through the cold and the snow and the sleet today. So safe travels out of here. Be careful and we look forward to talking to you all in the future.