• EBITDA: Period-on-period reduction due to temporary reduction in utilization levels.
• Return on Invested Capital: Lower EBIT numbers driving lower return on invested capital.
• Capital Base: PPE reduced from $73 million to $67 million.
• Net Asset Position: Reduction of approximately $7 million due to final FY'24 dividend and share buyback payments.
• Inventory Increase: Approximately $4 million increase in inventories for new work.
• EBITDA to Cash Conversion Ratio: Relatively strong at 85%.
• Cash Interest: Reduced from $700,000 to $300,000.
• Net Debt: Increased from approximately $2 million in June to $6 million in December.
• Gross Debt: Decreased from $18 million to $12 million, lowest level since June 2019.
• Capital Expenditure: Approximately $10 million for the first half, in line with first half '24.

• Warning! GuruFocus has detected 6 Warning Signs with MDDVF.

Release Date: February 19, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Mitchell Services Ltd (ASX:MSV) has successfully entered the PNG market with rigs and crews on site, marking a significant growth opportunity.
• The company has completed its organic entry into the Surface to Inseam (SIS) market, a specialized drilling segment with good margins.
• The decarbonisation initiative is progressing faster than anticipated, with drilling set to commence soon, indicating potential for future revenue growth.
• The joint venture with Talisman, known as the loop business, is ahead of expectations with signed contracts and potential for transformational growth.
• Mitchell Services Ltd (ASX:MSV) maintains a strong balance sheet with reduced gross debt and significant financial headroom for future opportunities.

Negative Points

• Temporary reduction in utilization levels due to factors like wet weather and corporate activity at a client level, impacting EBITDA and earnings.
• The company experienced a period-on-period reduction in return on invested capital due to lower EBIT numbers.
• Net asset position decreased by approximately $7 million, influenced by dividend payments and share buybacks.
• Inventory levels have increased due to new contracts, which may not revert to historical norms, impacting working capital.
• The company faces potential exposure to changes in government policies on decarbonisation, which could affect the size of the opportunity.

Q & A Highlights

Q: Are there any new contracts that Mitchell Services is targeting for the rest of the year that could significantly impact the bottom line, and is there a possibility of returning dividends in the second half? A: Andrew Elf, CEO, mentioned that business development is crucial, with several jobs in the pipeline ranging from small to large contracts. The company has already secured significant contracts, including work in PNG and with the SIS. Regarding dividends, Nathan Mitchell, Executive Chairman, stated it depends on the second half's performance, and while the first half wasn't great, they are hopeful for improvement. The board is open to shareholder returns up to 75% of NPAT, contingent on second-half performance.

Q: Can you explain the SIS workstream in more detail? What does it involve, and what type of clients and crew sizes are typical? A: Nathan Mitchell, Executive Chairman, explained that the SIS workstream involves a gas drainage or coal seam gas rig, similar to oil and gas drilling. It requires large rigs and extensive crews, as it drills lateral horizontal wells in coal seams. This specialized work is expensive and technical, but it offers good returns due to its complexity and limited competition.

Q: Given the large setup costs for PNG, how quickly can these pre-costs be recovered? A: Gregory Switala, CFO, stated that a significant portion of the setup costs has been covered by a mobilization charge negotiated in the contract. They expect the remaining costs to be covered by the end of the second half of 2025, based on bid margins.

Q: With inventory up due to new contracts, will it revert to historical levels in the second half? A: Gregory Switala, CFO, noted that while inventory levels might reduce, they are unlikely to return to historical norms due to the nature of new contracts in PNG and Decarb, which require higher inventory holdings for operational efficiency and quick response capabilities.

Q: If there is a major shift in government policies regarding decarbonization, how would that affect Mitchell Services? A: Andrew Elf, CEO, acknowledged that changes in government policy could impact the size of the opportunity, but he believes that many companies, especially larger ones, are committed to reducing emissions regardless of government mandates, ensuring the opportunity remains.

Q: Employee cost per shift decreased in the first half. How was this achieved, and what should be expected in the future? A: Gregory Switala, CFO, explained that the decrease is due to a change in the mix of work, with less technical and specialized jobs in the first half. This is not indicative of a cost reduction strategy but rather a shift in work types.

Q: With gold prices rising, is there increased demand for drilling services in the gold sector? A: Nathan Mitchell, Executive Chairman, noted that while there is interest in gold drilling, juniors are struggling to raise capital. The focus seems to be shifting towards copper and rare earths, which are more aligned with energy and AI advancements.

Q: Is there potential for further rationalization in the drilling space, and what role might Mitchell Services play? A: Nathan Mitchell, Executive Chairman, believes there is always room for rationalization, though the market is currently tight with less M&A activity recently. Mitchell Services remains open to opportunities that align with their strategic goals.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.