Getech – brighter prospect for early stage oil and gas exploration

Raymond Wolfson, CEO, Getech Group plc

Two years of market uncertainty have proved a frustration for AIM listed petroleum and minerals consultancy, Getech Group (LON:GTC) . As a specialist in producing detailed and expansive geological maps that help oil and mining companies pin down areas of potential, the company suffered last year as early stage exploration generally took a back seat in the wake of the economic downturn. Nevertheless, a swing into profit in the second half of the year to July combined with buoyant oil prices of over $80 a barrel have triggered more optimism from the company’s CEO, Raymond Wolfson. He believes that extra investment in Getech’s products and some high impact contract wins have set the scene for a stronger year in 2011.

Getech was set up by executive chairman Derek Fairhead back in 1986 and later spun out of Leeds University in 1992. Under his leadership, the company secured the backing of a number of oil groups to create a detailed geological map of Africa using gravity and magnetic information. Indeed, the company’s database covering Africa remains a big draw for Getech’s clients. With free reign to go and market the data to the rest of the industry, Fairhead and his team set about creating similar databases covering much of the world. The company was bought-out in 2000 by the University of Leeds Commercialisation Company, with Wolfson joining as chief executive ahead of its IPO in September 2005.

The company posted a profit of £0.8m in 2007 and £0.9m in 2008 but slipped to a loss of £0.6m in 2009 as the effects of recession took hold. This year, the loss was down to £0.2m on flat revenues of £3.25m and a profit in the second half of the year is being seen – by house broker WH Ireland, at least – as a sign that markets finally appear to be returning to some sort of normality and that this momentum can be sustained into the current year. For investors eyeing the wider sector, Getech’s presence in the Oil Equipment & Services segment of the AIM market means that its peers range from the likes of Offshore Hydocarbon Mapping Plc (LON:OHM) , Kbc Advanced Technologies (LON:KBC) , Velosi Ltd (LON:VELO) and Rheochem (LON:RHEP) . Speaking to Stockopedia, Raymond Wolfson gave his view on the market conditions, the progress the company is making and his expectations for the year ahead.

Raymond, how would you describe the market conditions during the 12 months and how did they change?

It was fairly similar to the previous year. Our commercial year ends 31st July whereas most oil companies have financial years which are calendar years. Because the calendar year is also the year that they set their budgets in, what happened is that for calendar 2009 the budgets were set at the end of 2008 when the world was in economic meltdown. So although they continued with exploration budgets they were very restricted at our end of the exploration market.

We had a very good December 2008 and then in January 2009 business just dropped off the edge, and it was the same all the way through the year, including December 2009. We are almost like retailers, we have a good Christmas because in terms of oil company budgets, it’s the last month of the year and they tend to spend any unused monies. But last year there was no December peak. So the problem is that, of course, August to December of 2009 is effectively our first half year, so we had a year of two halves. The first half was dominated by the budgets that were set at the worst of the crisis in 2008 and then, of course, by the end of 2009, although the budgets hadn’t necessarily freed up, the general market perception had improved substantially. So we are seeing that the budgets are freer now and I’m not really anticipating any significant restrictions on people’s budgets in calendar 2010. I think what we are seeing is a little bit of fallout from reorganisations, a little bit of fallout because the three partners in the Macondo incident - BP (LON:BP.) , Anadarko (NYSE: APC) and Mitsui - were having quite big costs but there was no general feeling of recession in the market.

How did the BP accident in the Gulf of Mexico affect sentiment in the wider industry?

I think it has caused uncertainty about the extent to which there will be increased safety legislation and safety obligations and, therefore, increased costs. But from memory even BP was busily doing further deepwater exploration soon after the Macondo incident. I don’t think globally it’s had a big effect but it could have. In the US there has been discussion about imposing a market capitalisation limit for deepwater exploration to make sure that people have enough capacity to meet liabilities if there is an accident. But I haven’t actually seen any signs of that sort of restriction being put in place but there are discussions about it.

Could that sort of regulatory change have an impact on you?

We have data over deepwater areas. For example, in the Gulf of Mexico we’ve got quite a lot of gravity data but it’s not a big seller for us so it has not really had any impact on us. Globally, yes we have data and studies but because of the scale of our work it tends to not just be deepwater, it is areas which include deepwater but it doesn’t necessarily directly impact.

Your data sets are focused on that pre-seismic, early exploration phase. How much of that was going on last year – was it an area that saw a decline in activity?

That is the impression we have got. One of our concerns was: ‘is it just Getech that’s being hit?’, because we knew there was exploration expenditure going on because, obviously, companies have to maintain their reserves. But we have spoken to people ranging from new aeromagnetic data acquisition contractors, consultants in similar fields to us, and it does look like, generally, this more frontier end of the business has been hit badly.

Clearly things improved in the second half of the year – what factors have driven that and which areas have seen the most interest?

Yes, I think, essentially, the confidence at the time of the budgets for this year were set means that there is money available and, yes, the oil price continuing to stay fairly strong. We have sold quite a lot in Africa, quite a lot of areas of Africa, so that is probably the biggest area, but bear in mind we have got data all over the world. We sold quite a big data set covering South America in October. We felt it wasn’t big enough to do a separate announcement for but it is nevertheless big enough to be worth mentioning because it feels like it gives more weight to the view that data sales have recovered.

What has been involved in some of you larger data sales during the last year?

One was a pure data sale, which we signed up and delivered in October and that was for £230,000. The other one was the one that we did announce formally in September, which was a proprietary interpretation project with a national oil company. That really covered a range of activities from using gravity and magnetic data, seismic data provided by the company and other forms of data to understand the whole basin, the structure of the basin and the petroleum systems in that basin. So although a basin is still quite a big area a lot of work, historically, has been more regional and covered several basins. So this was relatively focused.

Is that kind of integrated project something that you would like to do more of in future?

It is not requiring new capabilities except peripherally, fundamentally it is stuff that we can do anyway. I think what is a step for us is that it is the first time that we’ve done a major proprietary contract which allows us to integrate all the skills. We talk about ourselves providing integrated solutions but this is the first time that we have had a big proprietary contract where we’ve had the opportunity to actually do the same thing but for a single client instead of big studies that we could sell to many clients.

The company has carried out a lot of investment during the year. What did that involve and how do you think it will shape your outlook into 2011?

There were a number of areas, one of which was to do with the databases. Fundamentally we have a lot of data, a lot of the work is driven by data, and it is actually quite complex because there are all sorts of different fields required for various different forms of data. We have developed two databases, one geophysics database and one geological database, because it’s not only important in terms of us managing the data, it is also important in terms of our ability to explain to clients what data is been used – that is very important to them. It has taken quite a long time to develop and although we didn’t develop these with the intention of selling them, one of our clients has actually been interested enough to trial the database for its own purposes. So that is one area and that has actually taken maybe two years.

Another area is that we learnt a lot of lessons in the generation of the studies that we have produced and we have been developing workflows and structures within which we can do the next studies, the idea being to improve the effectiveness and efficiency of the production. We have actually invested in particular studies as well because we don’t get full underwriting for our studies before we do them, so in cash terms we have invested a lot of cash in the last year in new studies.

Lastly, we are now promoting our global thematic layer model. It is a strategic framework that all our work fits in and the idea is to promote it to clients as a strategic framework. They don’t have to buy everything. It is a series of programmes rather than a series of individual studies, but by presenting it in that way it will allow the clients to basically select what elements they’re particularly interested in. Those elements could be different geographies, it could be the results from different disciplines, it could be, for example, getting interpretation of gravity and magnetic data, it could be elements of our tectonic plate models, or it could be petroleum systems. So it allows them to choose a more bespoke product in the context of a strategic programme, which shows how everything we do fits together and it also helps reinforce the reason why having this whole package of capabilities is more valuable.

Finally, what are your expectations for the year ahead now in terms of market stability and demand for services? Have you got more confidence in what might happen in December?

Currently I would say yes. Obviously the way it works is, particularly year end money, just tends to come along. We do the marketing and we have the sales people out there. We have now got a new sales person, which is actually very significant for us because we’ve known for a couple of years that we were short on sales resource but we hadn’t been able to recruit the sort of person that we felt was necessary to sell our studies. Now we have found somebody who has a very strong technical background as well as a very strong sales background and knows the sort of clients that we’re talking to. He is a quite high level person as well, so we’re really pleased.

Thank you for your time.

Thank you.