(Extracted from Annual Report 2016)
A Tumultuous Year
Mencast had a difficult year, recording our first full year loss in over a decade due to lower revenue and asset write-downs.
Cashflow declined, but remained positive, with $9.2 million generated from operations during the year.
Oil prices have firmed significantly from their lows of USD28 in 2015, and OPEC's announcement of production cuts last November added strength to the price recovery. Higher prices are strongly positive for our business, but will need to be sustained to drive meaningful increases in customer confidence and spending. There will almost certainly be significant oil price volatility in the year ahead.
Three Focus Areas
Mencast is executing three major initiatives in the year ahead to prepare for the future. These initiatives focus on controlling what is within our control, and are designed to maintain our leadership in existing markets while building new capabilities for the future.
Our first key initiative is streamlining operations to sustain us through the industry malaise. During the past year, we have aggressively wrung out costs, written-off assets and cut surplus overheads. As an example, costs for wages, welfare and medical insurance fell almost 30% in FY2016 as compared to the prior year. The costs of this restructuring were largely borne in FY2016, though the benefit will be received in the years ahead.
Our second major initiative is to strengthen our balance sheet and allocate capital within the bounds of prudence and cashflow. Last year, we refinanced our SGD50 million Fixed Rate Notes, with long term bank borrowings at a lower interest rate. In addition, we will recycle capital through selectively disposing non-core assets.
In the year ahead, we will aggressively seek to leverage Mencast's capabilities, platforms and relationships into business opportunities.
Our last initiative is designed to allow Mencast to take control of our own destiny. In the year ahead, we will aggressively seek to leverage Mencast's capabilities, platforms and relationships into business opportunities. This may be through using existing skills in new industries. For example, in FY2016, we booked over $5 million in engineering works for the construction industry, and will continue to seek other value enhancing opportunities.
Looking further ahead, Mencast will also evaluate promising technologies that can provide new platforms for growth and will differentiate us as the market recovers. The Energy Services segment, which has enjoyed profitable growth for the past several years, is an example of a new business that was created through leveraging in-house and acquired technology into new business segments. As well as adding strong potential growth, such businesses also enhance earnings quality by providing resiliency through the industry cycles.
The second anniversary of the deepest downturn in the oil industry in decades has passed, and there are some signs that the worst may be over. Capex spending in the oil industry has already declined by more than half over the last two years, with the capex to revenue ratio dipping to 8% in FY2016, compared to 10-12% in earlier years. This reduced spending has sharply lowered the rate of new oil discoveries and the crude oil replacement ratio1 is currently below one for the first time in over a decade last year.
As long as the projected future growth of oil demand eventuates, tightening of supply must inevitably restore oil price equilibrium which should also bring a recovery in oilfield activity. It is too early to predict the timing and pace of recovery with certainty, but Mencast will be relentless in preparing for the upturn and our next phase of growth.
Sim Soon Ngee Glenndle
Executive Chairman and Chief Executive Officer
1 Ratio of new finds to oil extracted. A reserve ratio below one indicates that production cannot be sustained indefinitely at current levels