AJ Lucas : Appendix 4D and Half Yearly Report

For personal use only

LUCAS GROUP

INTERIM REPORT

&

APPENDIX 4D

HALF YEAR ENDED 31 DECEMBER 2021

(Previous Corresponding Reporting Period:

half year ended 31 December 2020)

Lucas Group

Appendix 4D Page 1

For personal use only

______________________________________________________

Appendix 4D

for the half year ended 31 December 2021

Name of entity: AJ LUCAS GROUP LIMITED

ACN: 060 309 104

Dec-21

Dec-20

Change

$A'000

$A'000

Revenue

Revenues from continuing operations

Decrease of

1.1%

to

60,642

61,309

Results from continuing operations

Reported EBITDA (1)

Decrease of

28.0%

to

10,800

15,002

Profit before interest and tax

Decrease of

40.6%

to

7,078

11,918

Profit / (Loss) for the period attributable to

Decrease of

133.8%

to

(3,357)

9,941

members

NTA Backing

Dec-21

Jun-21

Net tangible asset backing per ordinary security

7.0

7.1

(cents per share)

Amount

Franked

amount

per

per

security

Dividends

security

Total dividend - current year

0.0¢

N/A

- previous year

0.0¢

N/A

1. Reported EBITDA from continuing operations refers to earnings before net financing costs, depreciation and amortisation, impairments and tax expense but excludes results from discontinued operations.

An interim financial report for the half year ended 31 December 2021 is provided with the Appendix 4D information.

1. The interim report has been prepared in accordance with AASB 134 Interim Financial Reporting.
2. The Appendix 4D information is based on the interim financial report, which has been subject to a review.
3. The Auditor's unqualified review report is attached as part of the interim financial report.
4. The non-IFRS financial information presented in this document has not been audited or reviewed in accordance with Australian Auditing Standards.

Lucas Group

Appendix 4D Page 2

For personal use only

______________________________________________________

Commentary on the Results

for the half year ended 31 December 2021

AJ Lucas Group Limited ("the Company") and its controlled entities (together referred to as "Lucas" the "Group" or "Lucas Group") presents its results for the period 31 December 2021.

	Dec	Dec
	2021	2020	Change
	$'000	$'000	%
Total revenue from continuing operations	60,642	61,309	(1.1%)
Reported EBITDA - Australian operations	11,749	15,358	(23.5%)
Reported EBITDA - UK investments operations	(949)	(356)	(166.6%)
Total Reported EBITDA	10,800	15,002	(28.0%)
Depreciation and amortisation	(3,722)	(3,084)	(20.7%)
EBIT	7,078	11,918	(40.6%)
Net finance costs	(10,435)	(4,954)	(110.6%)
Income tax benefit (UK R&D Incentive)	-	2,977	(100.0%)
Net profit / (loss) for the year	(3,357)	9,941	(133.8%)
Basic profit / (loss) per share (cents)	(0.3)	0.8	(133.8%)

Lucas Group has continued to build on the structural and operational improvements implemented in the last financial year, including a Board and management restructure and the closure of the Sydney office as reported in the June 2021 Annual Report. As a result of these changes the Lucas Group remains well positioned to benefit from a more stable external environment in the future. Lucas Group's consolidated results were underpinned by the continued strength of its domestic drilling operations, which continue to demonstrate our hard-earned reputation for delivering complex projects that enhance our clients' businesses.

Lucas Group's domestic drilling business continued to perform in general in line with expectations with first-half revenue falling 1.1% to $60.64 million. EBITDA, which fell 28.0% to $10.8 million, was largely impacted by a continuation of various delays and interruptions that were reported on 30 June 2021. These project delays and interruptions are not reflective of the usual project performance life cycle of Lucas Group's drilling business.

Lucas Group's consolidated results include the impact of our UK gas exploration business which has seen limited progress due to the UK Government's moratorium on shale gas exploration. During the first half, the UK operations incurred administration and other expenses of $0.9 million, largely to support the maintenance of Lucas Group's licences and to pursue strategies to overturn the moratorium.

Lucas Group's first-half net loss was $3.4 million, compared to a profit of $9.9 million for the corresponding prior period. The net operating loss for the half year reflects a $5.5 million increase in net finance costs over the previous corresponding period, due in large part to a $1.5 million unrealised foreign exchange loss on its US Dollar related party debt as compared to a foreign exchange profit of $4.2 million for the previous corresponding period. It is also important to note that the consolidated result for the previous corresponding half included a one-off tax benefit of $2.97 million related to UK research and development credits.

Lucas Group has maintained its focus on growing its pipeline of contracted works and remains optimistic that the outlook for the metallurgical coal sector remains buoyant with extensive investment in new and existing capacity.

Lucas Group

Appendix 4D Page 3

For personal use only

______________________________________________________

Commentary on the Results

for the half year ended 31 December 2021

Lucas Drilling
	Dec	Dec
	2021	2020	Change
	$'000	$'000	%
Revenue	60,642	61,309	(1.1%)
Reported EBITDA - Australian Operations	11,749	15,358	(23.5%)
EBITDA margin	19.4%	25.1%

Lucas Drilling is the Group's main operating business and provides a range of essential drilling services to the Australian coal industry. The Lucas Group's work is subject to the variable nature of coal mining and the shifting priorities and challenges of clients.

This was evident in the first half, with the Group's revenue falling slightly from $61.3 million to $60.6 million in the half and EBITDA on Australian operations falling 23.5% to $11.7 million. The mining plans of our customers, on which Lucas Drilling's business depends, were impacted by previously reported operational and regulatory challenges at key customer mine sites. These delays and interruptions have been addressed and all of the Group's higher value rigs were operating by January 2022 and delivering an increase in monthly EBITDA run rate which is expected to result in a strong second half performance.

The Lucas drilling operations have developed strong internal procedures to manage the potential impact of a COVID in line with industry expectations and have maintained an excellent record of operational continuity throughout the pandemic. Covid-related issues faced by Lucas Group have primarily affected clients, rather than the Lucas operations.

As well as managing COVID, Lucas has continued its proud history of maintaining safe and healthy workplaces. The total recordable injury frequency rate ("TRIFR") is to 4.59 at December 2021 which continues to be an industry leading level.

UK Oil & Gas

The Oil and Gas reporting segment comprises the Group's interest in onshore oil and gas exploration licences in the UK, held through the Company's UK subsidiaries. The Group has accumulated significant information through its own seismic surveys and through drilling of a number of vertical and horizontal exploration wells. Third party studies also support the Group's information on the potential gas resources held in the UK, particularly the UK Government commissioned British Geological Society Carboniferous Bowland Shale gas study in 2013, which estimated significant amount of gas was stored in the Bowland Shale.

Most recently the Group undertook drilling of the only two horizontal wells to have ever been drilled into UK shale rock, at Preston New Road ("PNR"), which were partially hydraulically fractured and flow tested. This confirmed the presence of significant amounts of very high-quality natural gas. Each of our two Lancashire gas exploration wells flowed very high-quality natural gas to surface from just a handful of fractures completed in the underlying shale rock. However, seismicity induced during the fracturing process meant that both wells could only be partially fractured and flow-tested. Under the UK Oil and Gas Authority's ("OGA") prevailing regulatory requirement, we were required to halt operations any time micro-seismicity induced by fracturing exceeded just 0.5 on the Richter scale. As a result, this did not allow for a full assessment of the amount of gas that could be commercially produced.

In November 2019, the UK Government announced a moratorium on hydraulic fracturing in the UK. The reason for introducing the moratorium according to the OGA was that it was not currently possible to accurately predict the possibility or magnitude of sub-surface tremors linked to hydraulic fracturing. However, induced seismicity is not a new phenomenon in shale or in other operations where fluid is injected at high pressure underground. In fact, the level of ground vibrations allowed for in other UK industries, such as quarrying or geothermal wells, is as high as that which was recorded at any stage during hydraulic fracturing at PNR.

Lucas Group

Appendix 4D Page 4

For personal use only

______________________________________________________

Commentary on the Results

for the half year ended 31 December 2021

It has widely been reported that the UK is currently in the midst of an energy crises caused by supply shortages. Multiple UK energy suppliers have collapsed, and gas prices have increased significantly. Wholesale gas prices in the UK increased from typical levels of £0.50 per therm to a record peak of £4.50 per therm in December 2021. Whilst they subsequently fell back somewhat to around £2.0 per therm they are now rapidly rising again, following Russia's invasion of Ukraine, trading currently at close to £3.0 per therm. As a consequence of rising wholesale prices, the price cap that suppliers are permitted to charge UK domestic consumers for energy (including both electricity and gas) has been increased by a record-breaking 54% with further price rises forecast to come.

Very recent events in Ukraine have reinforced the criticality of security of gas supply and the benefits of having significant domestic gas production in a world where gas demand continues to increase and supply becomes increasingly constrained and potentially uncertain.

It is widely acknowledged that natural gas will continue to play a key role in UK energy supply for many decades to come, even as the country transitions to a Net Zero CO2 economy. Indeed, recent events in the UK energy market show that in the absence of greater baseload generating capacity, the UK will likely be increasingly at risk of sustained higher electricity prices.

This crisis could have been foreseen with the decline of indigenous North Sea gas production having been known for many years. Meanwhile, the billions of pounds being spent annually on importing expensive gas from the Middle East, Russia and the US would be better directed on developing the UK's substantial onshore shale gas resource. Exploiting this resource would help provide energy security for the UK, create a significant number of new jobs in the North of England and provide substantial tax revenues for the UK.

Since then, the Group and other UK shale gas operators have been working together and collaborating with the UK regulator to address its concerns around induced seismicity, so that the moratorium can be lifted. We remain convinced that the gas held onshore in the UK has potential to be a very significant and clean contributor to UK energy supply, and in particular a source of fuel for heating our homes and businesses.

Separately, Spirit Energy, a Joint Venture Partner on the Bowland exploration licence located in the UK, will provide funding towards the cost of plugging and abandoning the two PNR wells and the nearby suspended Elswick conventional gas production well (shut-in since 2013) as part of an agreement related to Spirit Energy's planned exit from the Lancashire Shale Licences. The plug and abandonment of these wells is expected to be completed during calendar year 2022.

Balance Sheet and cash flows
	Dec
	2021	Jun 2021	Change
	$'000	$'000	%
Total assets	237,203	232,001	2.2%
Net assets	92,562	94,443	(2.0%)

Net assets fell slightly during the half from $94.4 million to $92.6 million, while total assets grew 2.2% to $237.2 million since the end of June 2021.

Net cash from operating activities fell from $20.56 million in the corresponding prior period to $1.7 million in the current half year's results. This was in part due to lower cash receipts from customers and reflects an increase in "Trade and other receivables" in the period. It should also be noted that the corresponding prior period benefits from a $4.3 million R&D grant.

The lower cash flows and greater demand for working capital as new contracts came online during the first half increased the utilisation of Lucas Group's borrowing facilities.

Lucas Group

Appendix 4D Page 5