KCA - new contract wins in context

All,

KCA announced today the win of $460m of new contracts/extensions in their Land Drilling business. First take is positive, as some of the contract wins (Nigeria) are definitely incremental and not just replacement.

Oman: Biggest gains are in the Middle East, and mainly in Oman. Company have 20 out of 24 rigs operational at Q2, and we had modelled increasing to 22 out of 24. The confirmation of the March options justify this assumption. The 5 rigs that have to be taken off line and upgraded prior to start of contract in 2021 will hit utilisation in 2020 in Oman but the increase in activity for Bentec, the Company’s engineering arm, should more than compensate for the revenue shortfall.

In Nigeria: the Company have 2 out of 5 rigs operational, increasing to 3 for Q3 (to be confirmed at release of results on Thursday). This contract win should imply 5 out 5 utilised.
In Iraq: currently 4 out of 5 operational, so these two contract extensions aren’t incremental contracts, but assure revenue into the future.
Europe: utilisation is currently low at 3 out of 7, and reducing to 2 in new year. The contract gained in Netherlands is short term so doesn’t change the overall prospects for the Company.


Call is 2pm on Thursday. We don’t expect any comment from the Company management re: capital Structure. We remain cautiously constructive on the name but have not yet taken a position.

Tomas