Stocks To Buy: Ausdrill (ASL)

Ausdrill (ASL) is an international mining services group who provides specialist drilling services to the mining sector. The company’s operates mainly in Australian and Africa, but does have offices in the United Kingdom.

ASL has a five main business segments; Contract Mining Services Australia, Contract Mining Services Africa, Manufacturing, Supply and Logistics and Diamond Communication.

Over the past few years, ASL has made a conscious decision to diversify its business and offer more services then its traditional, drill, blast and exploration drilling business.

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The diversification has seen the company being able to become ‘the complete service company’ to the mining industry in both Australia and Africa.

ASL continues to able to win key contracts, with an aim to make these contracts as long-term as possible for income stability.

Projects

The company has completed a raft of acquisitions over the last few years, in line with their strategy to become ‘the complete service company’.

The last acquisition was of Connector Drilling in early 2011, with the deal increasing the company’s presence in Western Australia and in particular the growing Pilbara region.

ASL has also been able to secure key contracts from some of the biggest miners in Australia, including Fortescue and BHP Billiton.

The contracts are not all Australian-based either, with ASL winning several gold contracts in African.

As at the company’s last update, ASL had approximately $1.84 billion work in hand for FY12 onwards in the mining services business alone.

With the mining sectors growing in Australia and across Africa, ASL is in position to take advantage of this growth and build upon its already strong relationships.

Financial Position

ASL has achieved solid growth over the last few years and profits are hitting record levels.

Profit jumped 52% to a record $73.3 million in FY11, on the back of 32.3% growth in revenue to $834.6 million.

The company provided earnings guidance in December, expecting to report a first-half profit of $48-$50 million on revenue of approximately $500 million.

QR National (ASX:QRN) is Australia’s largest rail freight operator and the world’s largest rail transporter of coal from mine to port for export markets.

QRN is a provider of specialist rail engineering, construction and maintenance services in Australia, operating a network of five terminals and more than 40 depots across five states.

The company not only transports minerals but agricultural goods, and is a significant transporter of grain.

Since being privatised by the Queensland government in November 2010, QRN has been a stock to watch with a large percentage of retail shareholders.

QRN has faced some major headwinds since listing, principally the early-2011 flooding and cyclone in that state.

However, the company proved its resilience by managing to record a healthy FY11 underlying profit despite the impact to coal volumes from the floods.

The expansion into the WA and NSW markets also positions the company well for future growth.

Profit shines despite floods

QRN delivered an FY11 net profit of $349.5 million, which compared to a $36.8 million loss a year earlier when it was still owned by the Queensland government.

QR National faced a number of difficulties last year due to the Queensland floods, yet still managed an 11% lift in revenue and a 35% rise in underlying EBIT.

The growth in earnings was achieved due to the company’s focus on cost management and better revenue quality (more customer-focussed contracts).

With a net gearing ratio of less than 10% at the end of FY11, QRN’s balance sheet was in strong enough shape financially to pursue growth initiatives.

Volumes down, but significant growth potential

The Queensland floods had a big impact on QRN’s coal haulage volumes, and the company is yet to fully recover from the damage.

The slow recovery in Queensland coal volumes necessitates an ongoing focus on cost initiatives as well as pursuing new growth opportunities.

The company has recognised the importance of that second point, and is looking to expand its presence in the NSW Hunter Valley coal region and WA’s lucrative iron ore market.

QRN recently signed an iron ore haulage contract with the Karara Iron Ore Project, which is expected to deliver $900 million in additional revenue over the next ten years.

That is not say QRN has forgotten its core Queensland market.  Asciano and QRN recently signed a multi-year deal with Rio Tinto to haul millions of tonnes of coal from its Queensland mines.

Importantly, this deal will leverage QRN’s $1.1 billion project to expand the Goonyella-Abbot Point rail network link.

Outlook

QRN’s management has thus far proven its ability to grow earnings in periods of turbulence.

A focus on improving operational efficiency paid dividends for the company in FY11, and given the slow recovery in Queensland coal haulage, we would look for similar diligence this year.

Along with cost initiatives, QRN is positioning itself for growth via the Goonyella-Abbot Point project and its expansion into the WA and NSW mining industries.

In our view, the positive momentum will translate into more near-term growth for QRN.

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Nexus Energy (NXS) is an emerging oil and gas producer, with operations focused on the Gippsland Basin, offshore Victoria and the Browse Basin, offshore Western Australia.

In 2009, NXS transitioned from explorer to producer with the start-up of the Longtom gas project.

A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project (15% Osaka Gas-owned), which is Shell-operated and has a reserve estimate of around 75 million barrels of oil.

With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS and its peers are in good standing owing to the LNG boom and recovering commodities market.

Nexus saw its share price slump last Friday and this Monday, on heavy volumes. The selling was revealed on Tuesday as coming from a key shareholder that was forced to liquidate its holdings, allaying fears about a breakdown in the company’s fundamental outlook.

The Crux of it all

NXS is renowned for its involvement in the Crux liquids project, just off the coast of North Western Australia.

Over FY10, floating LNG (FLNG) technology in Australia highlighted the potential for FLNG to accelerate a gas and liquids development at Crux.

FEED work has been completed and the site has three production-ready suspended wells.

Crux is Shell-operated and if it is not developed, Shell will not have any legal title to the licence until the handover date.

However, NXS is confident of Crux success and last month confirmed that Shell had granted it an option for a three-year extension of the gas rights handover for Crux to the end of 2023, from 2020. The final investment decision is expected before the end of 2011.

First production

FY10 was a landmark year for Longtom, with first gas production on 21 October. Cumulative production of 6.2PJ of gas and 78,400 barrels of condensate have been sold to Santos.

NXS is aiming to acquire further Longtom production to underwrite a gas/electricity strategy, based on a tightening electricity market post-2014.

NXS also conducted a lot of exploration work over the year, including at the Echuca Shoals gas discovery (NXS 100%).

Revenue revealed

For FY10, NXS clocked a profit after tax of $1.03 million, swinging from a prior-year loss of $50 million.

Whilst there were no revenues in FY09, in FY10 NXS reported revenue from ordinary activities of $28.6 million.

As expected by the market and in line with the previous year, NXS did not declare a dividend for FY10.

Since the FY10 update, NXS has revealed its September quarterly results. Production and sales ceased from the Longtom field on 23 April 2010 following the detection of low levels of mercury in the delivered gas.

Therefore, there was no production or sales for the quarter, though NXS and Santos are working on removing the mercury for condensate to be in place later this month.

Shareholder selldown

Nexus was one of the shares to sell recently, plummeted almost 14% from its 26 November intra-day high before closing the session with a 7% loss, at 46.5 cents.

The stock continued to fall on Monday, dropping to a low of 42.5 cents, before closing the session down 6.5% at 43.5 cents.

Over the two days the stock fell 13%, on heavy volume.

The company announced the source of the selling on Tuesday, revealing that major shareholder Viking Shipping Limited had sold most, if not all of its holdings.

According to Nexus, Viking was forced to sell the shares by its financiers. The forced nature of the selling allayed fears about a breakdown in the company’s fundamental outlook.

Outlook

NXS has finally made the transition from explorer to producer with the start-up of the Longtom gas project, which after a mercury scare is almost back to production.

A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project, which is Shell-operated and has three production-ready suspended wells. If Crux is pursued, NXS stands to benefit from majority participation in a major liquids project.

We are not overly concerned about the recent selldown, with forced selling of shareholder or directors’ holdings often leading to artificial price drops that are not sustained.

With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS will be one of the stocks to watch in coming months.

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