AJ Lucas (AJL) has benefited from a material recovery in profitability from its Australian onshore drilling division, with underlying EBITDA in H119 (31 December 2018) of A$13.1m (17.2% margin), up from A$5.5m (9.7% margin) in the previous year. High rig utilisation and strong coal mine degassing demand support our forecast of revenue sustained at close to H119 levels (A$76.2m). AJL’s track record and tier 1 client relationships support management guidance of FY19 drilling underlying EBITDA in excess of FY18’s A$19.7m (Edison FY19 forecast: A$22.5m). Valuing Lucas Drilling Services (LDS) at 6x Edison adjusted EBITDA (after associated overheads) equates to A$0.15/share or A$0.03/share after consideration of group net debt. This excludes our net P50 UK shale valuation of A$0.91/share. We intend to update our probabilistic value of UK shale based on an improved understanding of key inputs including initial production rate (IP rate), estimated ultimate recovery (EUR) and well costs.
