25 September 2013

Analyst John O'Shea 613 9235 1633

Titan Energy Services (TTN)

Seams like there is more growth to come
Service provider to the CSG segment with a broad offering
TTN is in the process of evolving from a small drill rig company to a diversified service provider to the Coal Seam Gas (CSG) to Liquefied Natural Gas (LNG) segment. The company now offers drill rigs, mobile camps (including transport and logistics), catering and equipment hire. This expanded offering has been orchestrated through a combination of acquisitions and organic growth initiatives over the last two years. In our view, the TTN service offering is compelling relative to CSG competitors.

Authorisation TS Lim 612 8224 2810

Recommendation

Buy (Initiation)
Price

$2.92
Target (12 months)

$3.42 (unchanged)
Expected Return Capital growth Dividend yield Total expected return Company Data & Ratios Enterprise value Market cap Issued capital Free float Avg. daily val. (52wk) 12 month price range GICS sector Energy $153.7m $141.3m 48.4m 62% $253,197 $0.65-$3.06 17.1% 2.6% 19.7%

Strong outlook for the CSG segment

Given TTN derives more than 90% of earnings from the CSG segment, the key driver is the number of CSG wells required to deliver and maintain production levels for key projects. With three major projects already under construction (QCLNG, GLNG and APLNG) and others potentially to follow, industry estimates suggest the number of wells is likely to peak at around 1,900 per annum by 2016 (~1,000 currently) with ongoing wells of 1,300 per annum to 2025. In broad terms, this is expected to create strong demand for services from companies such as TTN.

Growth potential outside of CSG

The company is also pursuing a range of opportunities outside of the CSG segment notwithstanding the fact that the growth outlook appears likely to be strong over the medium to long-term. We consider this a sound strategy and expect the Northern Territory (oil & gas, iron ore, minerals and precious metals) and the Cooper Basin (oil & gas) the key target markets.

Price Performance
Price (A$) Absolute (%) Rel market (%) (1m) 2.71 8.86 5.32 (3m) 1.45 103.45 93.69 (12m) 0.63 367.28 347.67

Investment View Initiate with a Buy rating PT $3.42

Our long-term DCF valuation of TTN equates to $3.97 (WACC 13.6% and terminal growth rate 2.5%). We have set a 12-month price target of $3.42 based on a target EV/EBITDA multiple derived from a ROIC model that looks at rolling 1-year earnings and initiate with a Buy rating. We consider the company has a strong growth outlook underpinned by expected CSG activity levels and the breadth of its service offering.
Earnings Forecast
Year end June 2013 72.6 18.9 9.1 9.1 22.0 143.6 13.3 8.1 5.5 1.9 100.0 17.6 2014e 108.6 28.4 14.8 14.8 30.5 38.8 9.6 5.4 7.6 2.6 100.0 23.5 2015e 123.3 33.3 17.5 17.5 36.2 18.7 8.1 4.6 9.0 3.1 100.0 23.1 2016e 134.1 36.9 19.6 19.6 40.4 11.8 7.2 4.2 10.1 3.5 100.0 21.6 Sales (A$m) EBITDA (A$m) NPAT (reported) (A$m) NPAT (adjusted) (A$m) EPS (cps) EPS growth (%) PER (x) EV/EBITDA (x) Dividend (ps)

Absolute Price
$3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Sep Jan May Sep Jan May Sep 11 12 12 12 13 13 13 TTN S&P 300 Rebased
SOURCE: IRESS

Yield (%) Franking (%) ROE (%)

SOURCE: BELL POTTER SECURITIES ESTIMATES

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT.

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Titan Energy Services (TTN)

25 September 2013

Contents
Summary and Investment Thesis ................................................. 3 Background .................................................................................... 4 Key Earnings Drivers ..................................................................... 5 Financials ....................................................................................... 9 Valuation ....................................................................................... 11 Management ................................................................................. 12 Key Shareholders ........................................................................ 14 Titan Energy Services (TTN) ....................................................... 15

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Titan Energy Services (TTN)

25 September 2013

Summary and Investment Thesis

Summary
TTN is predominantly a service provider to the CSG to LNG segment in Australia. The companys business model has evolved significantly over recent years from a drilling centric business to a diversified service provider. We believe the business is well positioned to capitalise on its strong position in a market segment that is expected to accelerate in the coming years. At the current share price, we believe the magnitude of the opportunity available to the company has not yet been fully priced in. We are initiating with a Buy recommendation and a 12-month price target of $3.42 based on a target EV/EVITDA multiple derived from a ROIC model that looks at rolling 1-year forward earnings.

Investment Thesis
We believe TTN has a number of investment positives that underpin our view on the company. The highlights of the TTN business model from an investor perspective are as follows: 1. Strong growth outlook for the CSG to LNG segment Given the nature of TTNs service offering, the key driver of earnings is the number of CSG wells required to deliver and maintain production levels for the CSG to LNG sector. With three major projects already under construction (QCLNG, GLNG and APLNG) and others potentially to follow, industry estimates suggest the number of wells is likely to peak at around 1,900 per annum by 2016 (~1,000 currently) with ongoing wells of 1,300 per annum to 2025. In broad terms, this is expected to create strong demand for CSG service companies such as TTN; Well positioned in CSG relative to competitors given breadth of offering The Company has extended its service offering over recent years to include camps, transport and logistics, catering and equipment hire. This has been achieved through a combination of organic growth and acquisitions. A detailed review of key competitors indicates that TTN now has significant breadth in its CSG offering which suggests to us that it is well positioned to increase share of wallet in the CSG segment; and Options beyond CSG are being addressed now The Company is also focussing on growth beyond CSG in both new geographies and segments. We estimate TTN is currently spending around $1.5-$2.5m per annum specifically dedicated to this objective on additional business development managers, marketing, promotion and other initiatives. We consider this a sound medium-term strategy and believe TTN is well positioned to extend its offering to Oil and Gas opportunities outside of CSG and other mining and infrastructure target markets.

2.

3.

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Titan Energy Services (TTN)

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Background
TTN is predominantly a service provider to the CSG to LNG market in Australia and provides mobile accommodation/camps (including transport), drilling rigs, catering services and equipment hire. The company was first listed on the ASX in December 2011.
Figure 1 - TTN Overview
Atlas Drilling (23% of FY13 EBIT pre-overheads) RCH (50% of FY13 EBIT) Nektar (11% of FY13 EBIT) Hofco (16% of FY13 EBIT 6 mths ownership)

Atlas Drilling was founded in 2007 as a specialist provider of drilling services to the CSG industry. The company currently operates four rigs (3 owned, 1 rented) and provides rig and support staff as part of each contract. Customers also have the choice of other add on services such as catering and accommodation (sourced internally via Nektar and RCH).

RCH was established in 2010 and acquired by TTN in September 2011. Its core business is the provision of portable accommodation to the CSG to LNG segment and infrastructure companies. Business model is to hire camps with ancillary support services (catering, transport etc.) either directly or by subcontractors

Business Description

Nektar was established by TTN as an organic initiative in April 2012 and offers catering and camp management services to remote accommodation service providers. Currently provides services to around 80% of RCH's camp accommodation contracts. Also provides standalone catering services to non-camp customers.

Hofco was established in 1980 and acquired in April 2013 (effective Jan 2013). Its core business is a rental provider of drilling equipment to the CSG sector. Key hire equipment includes: drill collars and pipes, downhole motors, hydraulic drilling jars, survey instruments, stabilisers and fishing equipment.

EDA Energy (Ausdrill) Lucas Savanna Energy Saxon

KJM Contractors Australian Portable Camps Coal Gas Camps Bonnie Rock Transport EDA Energy (Ausdrill)

Caza Catering Oil Industry Catering Services Easternwell (Transfield) Morris Sodexo ESS - Compass Group KJM Contractors

Key competitors

Tasman Oil Tools DTA Various smaller private companies Various larger private companies

Revenue model

Contract term typically 6-12 months Drill Rig - rate per day including crew Other services at standard rates (refer RCH for accommodation/camp and Nektar for catering)

Contract term typically 3-18 months Room rate per day

Contract term typically 3-18 months Rate per man days catered

Contract term 1 week to 12 months Rate per day

APLNG QGC Arrow Energy Pangaea Resources Santos

APLNG Leighton Daracon Bruhl Energy Drilling Australia General Trade Industries

APLNG Leighton Daracon Bruhl Energy Drilling Australia General Trade Industries

AGL Beach Energy Santos Senex Energy Smith Transfield

Key growth drivers

Key clients

1. No of wells required to establish and maintain existing CSG to LNG projects

1. No of wells required to establish and maintain existing CSG to LNG projects 2. Ability to cross sell services to CSG clients 3. Ability to expand into non-CSG segments

1. No of wells required to establish and maintain existing CSG to LNG projects 2. Ability to cross sell services to CSG clients 3. Ability to expand into non-CSG segments

1. No of wells required to establish and maintain existing CSG to LNG projects 2. Ability to cross sell services to CSG clients

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

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Titan Energy Services (TTN)

25 September 2013

Key Earnings Drivers

Key Driver 1 Number of CSG wells required
The key target segment for TTNs services remains the upstream CSG industry which includes the drilling, gas gathering and processing facilities that occur in the CSG production fields. At present there are three major CSG to LNG projects in Australia which are currently under construction with each requiring extensive upstream work including drilling and other services. Of most relevance to TTN is the fact that the initial focus of this work is likely to be on drilling sufficient wells to meet production deadlines such that customer supply agreements can be satisfied. Beyond this the focus is likely to be on having sufficient wells to maintain production levels.
Figure 2 Key CSG to LNG projects and indicative wells required
Project Client Capacity (Mtpa) First production Status Total CSG Wells required Estimated Wells Required Per Year CY13 to End of project

QCLNG

British Gas

8.5

2014

Under Construction

6,200

270-520

GLNG

Santos, Petronas, Kogas etc

7.8

2015

Under Construction

5,700

250-480

APLNG

Origin, Connoco Philips, Sinpoec

9.0

2015

Under Construction

6,600

280-550

SALNG

Shell/PetroChina

8.0 to 9.0

2016-2017

Awaiting FID

5,300

260-490

Total

23,800

1,060-2,060

SOURCE: COMPANY DATA, ACIL TASMAN

Number of wells likely to increase rapidly in coming years and then decline to a healthy level
Industry analysis conducted by ACIL Tasman suggests the number of wells drilled within the CSG to LNG segment is likely to increase rapidly in the coming years from 1,000 wells in CY13 to a peak of at least 1,500 in CY16 based only on approved projects (likely 1,900 given likely new project approvals). Further the analysis suggests that the number of wells required to maintain production levels is expected to level out at 1,000 per annum by CY19 based only on committed projects (likely ~1,400 per annum).
Figure 3 Number of wells required Queensland CSG segment

SOURCE: COMPANY DATA, ACIL TASMAN

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Titan Energy Services (TTN)

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Conclusion Key Driver 1 Numbers of CSG wells required a powerful macro backdrop
The size and scale of the committed CSG to LNG projects under construction together with the potential for further approvals suggests that the number of CSG wells required to support and then maintain production levels is likely to be material over the long-term. This is expected to provide a favourable backdrop for TTNs services.

Key Driver 2 Breadth of TTNs CSG offering

Prior to listing the companys origins were as a specialist provider of drilling services to the CSG industry including rig and support staff. While drilling remains a core part of the TTN business (4 rigs currently operating) the company has extended the breadth of its offering to include camps, catering and equipment hire through a combination of organic growth and acquisitions.
Figure 4 - TTN History Figure 5 - TTN EBIT by Division FY14e
Equipment Hire 19%

Drill Rigs 18%

Catering 12% Camps (inc transport & logistics) 51%

SOURCE: COMPANY DATA

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

RCH acquired just prior to listing and the key source of growth
The RCH camps business has been the most significant driver of profit growth for the group over the last two years with the number of rooms increasing from 110 at acquisition to 710 currently. The success of this business reflects the strong demand for temporary camp hire including transport and logistics at remote CSG drilling sites. To this end, TTNs experience in the segment via Atlas Drilling has been an important factor in extending the offering to other services.
Figure 6 - RCH Number of Rooms Available
1200 1000 800 600 400 200 0
0 Sept Qtr 12
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Figure 7 - Nektar Man Days Catered

25000

Number of available rooms has increased from 110 as at September 2011 to 710 currently. We expect this to increase to 896 as at 30 June 2014 and 1,096 as at 30 June 2015

20000

15000

10000

5000

Dec Qtr 12

Mar Qtr 13

Jun Qtr 13

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Nektar was a logical next step and enhances the offering

The company started the Nektar catering business in April 2012 targeting remote catering opportunities across Australia. The initial focus was on the existing CSG clients of both Atlas Drilling and RCH and the business has started well given it is currently servicing 6 contracts (80% of RCH camps) equating to 62,294 meal days in its first year of trading.

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Titan Energy Services (TTN)

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Further, Nektar is also targeting permanent camps in addition to mobile camps and was recently successful in securing its first permanent camp contract. The client has not been disclosed by the company but we note the contract is to provide catering to a 200 room permanent camp on a 1+1+1 year contract commencing September/October 2013. We consider this contract an important milestone given it represents not only the companys first contract in the permanent space but it highlights the opportunities to sell services beyond the existing client base. Further, we consider these types of contracts can act to de-risk the business as they are longer-term in nature given the permanent sites.

Hofco appears a neat fit

TTN announced the acquisition of Hofco Oilfield Services in February 2013. Hofco is essentially a rental company that provides directional drilling equipment, down-hole tools and other equipment to the CSG segment. We consider this acquisition a positive given the specialised nature of the equipment, the experienced management team (2 year retainers) and the fact that it is complimentary to TTNs other CSG related services.

TTNs offering to the CSG segment now has breadth

The TTN service offering to the CSG segment now includes drill rigs, mobile camps, transport and logistics, catering and equipment hire. This offering has been put together over the last two years using the original drilling business as a starting point. Our analysis of the competitive landscape suggests the company has a broader offering than any of its direct competitors. The company is now in a stronger position to increase share of customer wallet in the CSG segment given the range of services it can now offer. Further, the company is now in a position to provide more complete outsourcing services to clients.
Figure 8 - TTN Competition Matrix CSG Segment
Drill Rigs Titan Energy Services EDA Energy Savanna Energy Lucas Saxon WDS TDC Ensign KJM Contractors Australian Portable Camps Coal Gas Camps Bonnie Rock Transport Caza Catering Oil Industry Catering Services Easternwell Morris Sodexo ESS - Compass Group Tasman Oil Tools DTA Camps Transport and Logistics Catering Equipment Hire

r r r r r r r r r r r r r r r r r r r r r r r

r r r r r r r r r

r r r r r r r

r r r r r r r r

r r r r r r r r r r r r r r r r r

r r

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Conclusion Key Driver 2 TTN well positioned in the CSG segment given breadth of its offering
The company has taken the opportunity to leverage off its experience and relationships within the CSG sector by significantly expanding the depth of its offering over the last two years. We believe this places TTN in a strong competitive position with which to gain an increasing share of wallet from key customers.

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Key Driver 3 Expansion beyond CSG

TTN management have made it clear that they aim to increase the companys presence in non-CSG segments in the coming years. The company has identified a range of non-CSG Oil and Gas target areas including the Cooper Basin and Canning Basin. Further, a range of potential infrastructure and mining opportunities also exist in the Northern Territory and Queensland. The common theme associated with all of these potential targets is they are likely to require camps, transport & logistics and catering services similar those provided by TTN.
Figure 9 - TTN growth opportunities ex CSG

SOURCE: COMPANY DATA

Investing now for the medium to long-term

Our analysis suggests TTNs strategic plans in relation to growth outside of CSG are serious given we estimate the company is currently spending around $1.5m-$2.5m per annum dedicated to this objective. This amount comprises the wages and on-costs of four additional business development managers, marketing, promotion and other initiatives. The company appears to have taken the opportunity to invest now in an attempt to deliver new revenue streams for the medium to long-term. While we are yet to see any material tangible benefits from this expenditure and focus, we consider it a logical extension of TTNs business and indicative of a forward looking company.

Conclusion Key Driver 3 Expansion beyond CSG a logical next step but early days
We believe TTNs plans outside of CSG represent a significant potential opportunity for the company and consider the decision to invest now for the medium-term a sound strategy. On face value we can see no reason why TTNs camps, transport & storage and catering services cannot prove competitive outside of CSG but note it is early days in this regard.

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Financials
Income Statement
In broad terms, we expect organic growth and the impact of the Hofco acquisition to underpin strong revenue growth over the short to medium-term. This is likely to be further enhanced by the impact of additional acquisitions given the Companys history in this regard. This thesis underpins our key profit and loss forecasts for TTN as follows: 1. Increase in rooms capacity and catering to drive strong revenue growth over short to medium-term We consider the Company well positioned to continue the recent trend of strong organic growth in room capacity driven by the level of CSG activity in Australia. Further, this is expected to drive growth in catering services to both existing camps and drilling clients and new customers. In totality, these factors are expected to underpin strong revenue growth over the medium term; Hofco acquisition to impact full year in FY14 The Hofco acquisition was effective 1 January 2013 hence it contributed six months worth of earnings in FY13 (revenue $3.7m and EBIT $2.9m). We have assumed it contributes revenue of $8m and EBIT of $5.3m in FY14 given the likely need to reinvest in the business; and
Figure 11 - TTN EBITDA Historical and Forecast
45

2.

Figure 10 - TTN Revenue Historical and Forecast

160 140 120 100 80 60 40 20 0 FY12 FY13e FY14e FY15e FY16e FY17e

Revenue Forecast CAGR FY13-FY15 = 30% pa

Acquisition of higher margin Hofco business

30.0%

40 35 30 25 20 15 10 5 0 FY12 FY13e FY14e FY15e FY16e FY17e EBITDA $m - LHS EBITDA margin % - RHS 20.0% 22.5% 25.0% 27.5%

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

3.

EBITDA margins to level off post Hofco Group EBITDA margins improved significantly in FY13 driven primarily by the mix impact of the Hofco acquisition given it has historically delivered EBITDA margins of around 70%. We consider this a one-off step up change in margins with marginally higher levels likely in the coming years given the pace of revenue growth.

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Balance Sheet, Capital Expenditure and Cashflow

The TTN business could generally be categorised as one that has medium level capital expenditure requirements assisted by the fact that RCH rooms are generally rented not owned. The business is currently in sound financial shape with a solid balance sheet and cashflow generating capabilities. The key points to consider in this regard include: 1. Sound balance sheet, modest gearing and excellent interest cover TTN reported net debt of $12.4m as at 30 June 2013 (including $5.8m of deferred consideration relating to the Hofco acquisition. We note this equated to a gearing (net debt/equity) ratio of 23.9% as at 30 June 2013. We expect net debt to decline to around $5m by 30 June 2014 and then move to a net cash position in FY15/16 driven primarily by increasing earnings. Further, Interest cover at the EBIT level equated to over 12x in FY13; Capital expenditure requirements currently around $10m per annum In general terms we would regard TTN as a medium level capital intensity business given the nature of the rig, camps and equipment hire offerings. Our estimates assume that rig levels remain unchanged (3 owned, 1 rental) with only maintenance capital expenditure included in our forecasts for the rig business. We have also assumed that the current financing model employed in the camps business remains unchanged resulting in the bulk of new rooms rented not owned. At the same time we expect capital expenditure requirement for the Hofco business to increase as the company looks to expand its offering across the TTN group;
Figure 13 - TTN Operating Cash Realisation
40.0%

2.

Figure 12 - TTN Gearing

15 10 5 0 FY12 -5 -10 -15 -20 Net Debt $m - LHS Gearing % - RHS 0.0% -10.0% -20.0% FY13 FY14e FY15e FY16e 10.0%

Operating Cashflow $m - RHS 120% Operating Cashlow Realisation % - LHS 30 25 20 15 10 5 0 FY12 FY13 FY14e FY15e FY16e

30.0%

100%
20.0%

80% 60% 40% 20% 0%

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

3.

Operating cash realisation generally around 100% despite FY13 Operating cash realisation (OCF/NPAT +D&A) has generally been around 100% with the exception of FY13 where the company was adversely impact by the Hofco acquisition, late payment of material amounts due from major customers and investment for growth. We expect this to normalise over the medium-term. Attractive ROE and ROIC metrics We expect TTN to generate attractive ROE and ROIC (pre-tax) numbers in FY14 of 23.5% and 33.4% respectively.

4.

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Titan Energy Services (TTN)

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Valuation
Long-term DCF valuation of $3.97
Our long-term DCF valuation of TTN equates to $3.97 per share. Major assumptions are a post-tax WACC of 13.6% and a terminal growth rate of 2.5%.

12-month price target of $3.42 using ROIC methodology

Our 12-month price target of $3.42 has been derived utilising an ROIC based model that looks at rolling 1-year forward earnings. This price target is derived using a rolling 1-year forward ROIC of 34.0% (pre-tax) and a pre-tax WACC of 15.1%. This derives a rolling 1year forward EV/EBITDA multiple of 5.79x.
Figure 14 - TTN EV/EBITDA valuation using ROIC model

ROIC pre-tax rolling 1-year fwd Growth Rate WACC pre-tax D&A rollng 1-year fwd EBITDA rolling 1 -year fwd

34.0% 2.5% 15.1% 6.24 29.63

Multiple EBITDA rolling 1-year fwd EV Net Cash (Debt) rolling 1-year fwd Value Equity No of shares Valuation per Share
SOURCE: BELL POTTER SECURITIES ESTIMATES

5.79 29.63 171.51 -5.52 165.99 48.43 3.43

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Management
Shaun Scott Independent Non-executive Chairman Shaun joined Arrow Energy in 2004. Shaun has 20+ years of experience in upstream and downstream projects, mergers and acquisitions and finance in the energy sector in Australia, Asia, and the United States. Shaun is currently an Executive Director of Dart Energy Ltd and a Non-executive Director of ACER Energy Ltd and Site Group International Ltd and Chairman elect of Anaeco Ltd. Shaun previously held the roles of Chief Executive Officer, Chief Commercial Officer and Chief Financial Officer with Arrow Energy Limited prior to its acquisition by Royal Dutch Shell plc and PetroChina in 2010. Jim Sturgess Managing Director Jim has been Managing Director of Titan Energy Services since May 2011. Jim was previously CEO of the City of Brisbane Investment Corporation. Prior to this, Jim spent 7+ years at Flight Centre as Chief Financial Officer and then Executive General Manager of Global Property, Procurement & Projects. Jim was a Regional General Manager at Ernst & Young and the Director of Finance and HR at Starwood Hotels & Resorts. Jim Diakos General Manager of Atlas Drilling Jim is a co-founder of Atlas Drilling and has 18 years experience in the oil and gas industry in Australia. Jim has held various positions in a number of large and small operating companies during his career including Santos, Inland Oil Refiners, Oil Company of Australia, Origin Energy and Blue Energy and has been involved in the drilling service sector since the formation of Atlas Drilling in 2007. Stephen Bizzell Non-Executive Director Stephen is the Chairman of boutique corporate advisory and funds management group Bizzell Capital Partners Pty Ltd. Stephen was previously an Executive Director of Arrow Energy Ltd from 1999 until its acquisition in 2010 by Royal Dutch Shell plc and PetroChina. He has had further experience in the CSG sector as an Executive Director of Dart Energy Ltd and Non-executive Director of Bow Energy Ltd and Apollo Gas Ltd. He is also a Non executive Director of Hot Rock Ltd, Stanmore Coal Ltd, Diversa Ltd and Renaissance Uranium Ltd. He is Chairman of Renison Consolidated Mines NL. Simon Keyser Non-Executive Director Simon has over 20 years experience in the finance industry and has held senior investment banking positions with Wilson HTM and Chase Securities (now JPMorgan Chase). Simon is a director of XLX Pty Ltd and is also a director of XLX Capital Pty Ltd. Simon is a minority shareholder of XLX Pty Ltd and also the co-owner and a director of Ironstone Capital Partners Pty Ltd. Mark Snape Independent Non-Executive Director Mark is currently the Chief Executive Officer of the Rivercity Motorway Group and previously held various senior management positions including as Group General Manager Infrastructure Finance and Investment at John Holland Pty Ltd, Managing Director in Australia for American Electric Power Co. Inc., Director Deloitte Corporate Finance, Director County Natwest Corporate Finance and Director BZW Corporate Finance. Prior directorships include non-executive director of ASX listed entities Connecteast Group, Brisconnections Group and Pacific Hydro Limited. In addition he has served as nonexecutive director of Connector Motorways Group, Asia Pacific Transport Pty Limited, Southern Hydro Pty Limited and AEP Resources Australia Pty Limited.

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Titan Energy Services (TTN)

Gus van der Heide Chief Operating Officer

25 September 2013

Gus has more than 30 years experience in the Oil and Gas industry, much of that on international assignment throughout Asia as well as significant time in Australia. Most of this was with Halliburtons Baroid product line, starting in field service and progressing through technical and operations roles to management responsibility for fluids and waste management operations. Prior to this, Gus was Far East Vice President for NOV Well Site Services based in Singapore, with responsibility for organic and geographical growth in solids control and waste management businesses.

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Key Shareholders
Figure 15 - Top 20 shareholders

Holder Pie Funds Management Ltd. Gaffw ick Pty Ltd. XLX Pty Ltd Wilson HTM Investment Management Pty Ltd Haggarty, Anthony James Davies, Allan J. Plummer, Andrew Henderson Lujeta Pty Ltd. Bizzell, Stephen Grant BCP Alpha Management Zagla Pty Ltd. Elkington, Paul HFTT Pty Ltd. Dalara Investments Pty Ltd Sturgess, James Bravic Capital Investments Pty Ltd Scott, Shaun Edw ard Keyser, Simon J. Seabrook, Wayne Ronald Ranamok Pty. Ltd.
SOURCE: CAPITAL IQ

No Shares 5,139,080 3,809,523 2,434,953 1,511,393 1,305,849 1,305,849 994,361 960,000 946,251 869,450 862,221 734,548 704,540 704,540 684,985 650,813 603,817 444,399 437,315 404,761

% 10.61% 7.87% 5.03% 3.12% 2.70% 2.70% 2.05% 1.98% 1.95% 1.80% 1.78% 1.52% 1.46% 1.46% 1.41% 1.34% 1.25% 0.92% 0.90% 0.84%

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Titan Energy Services (TTN)

Company Description
Titan Energy Services Limited engages in the provision of energy and infrastructure services primarily to the coal seam gas and associated industries in Australia. It operates through four segments: Drill Rigs, Camps, Catering, and Equipment Hire.

Investment Strategy
We rate TTN as a Buy with a 12-month target price of $3.42. We consider the company has strong growth potential underpinned by CSG market in Australia and attractive growth options outside of CSG. The company also generates a very high ROE, has a strong balance sheet and has medium level capital intensity.

Valuation
Our long-term DCF valuation of TTN equates to $3.97 per share. Major assumptions are a post-tax WACC of 13.6% and a terminal growth rate of 2.5%. Our 12-month price target of $3.42 has been derived utilising an ROIC based model that looks at rolling 1-year forward earnings. This price target is derived using a rolling 1-year forward ROIC of 34.0% (pretax) and a pre-tax WACC of 15.1%. This derives a rolling 1-year forward EV/EBITDA multiple of 5.79x.

Risks
We believe there are five key risks to our investment thesis as follows: Loss of key customers Despite the fact that TTN has diversified client portfolio, the loss of a number of key customers has the potential to negatively impact the company; Competition TTN could be adversely impacted by material market share gains and irrational pricing behaviour of a competitor; Material deterioration in the outlook for the Oil and Gas sector TTNs business is heavily exposed to development in the Oil and Gas sector (particularly CSG to LNG). Any material deterioration in the outlook for this sector over the medium-term has the potential to adversely impact TTNs business; and New markets A key component of the TTNs strategy over the medium to long-term is expansion into new geographies. We consider this both a risk and an opportunity for the company given its lack of experience in these markets.

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Titan Energy Services

Titan Energy Services (TTN)
Table 1 - Financial summary
June Year end Profit & Loss (A$m) Sales revenue . . . Change EBITDA Deprec. & amort. EBIT Interest Non recurring items Pre-tax profit Tax expense . . . tax rate Minorities Net Profit Reported NRI's post tax Net Profit pre-NRI's Normalisation adjustments Net Profit Normalised 33.4 n/a 7.4 (3.5) 3.8 (0.6) 3.3 (1.0) 30.4% 2.3 2.3 2.3 72.6 117.3% 18.9 (4.4) 14.5 (1.2) 13.3 (4.2) 31.7% 9.1 9.1 9.1 108.6 49.5% 28.4 (6.0) 22.4 (1.0) 21.4 (6.6) 31.0% 14.8 14.8 14.8 123.3 13.6% 33.3 (6.9) 26.4 (1.0) 25.4 (7.9) 31.0% 17.5 17.5 17.5 2012 2013 2014e 2015e

as at 25 September 2013

Recommendation Price Target (12 months)

Buy $2.92 25 September 2013 $3.42

2016e 134.1 8.8% 36.9 (7.8) 29.1 (0.8) 28.4 (8.8) 31.0% 19.6 19.6 19.6

Price Recommendation Diluted issued capital (m) Market cap ($m) Target Price (A$ps) June Year end Valuation Ratios Core EPS (ps) . . . % change PE (x) EV/EBITDA (x) EV/EBIT (x) NTA ($ps) P/NTA (x) Book Value ($ps) Price/ Book DPS (ps) 9.0 n/a 32.4 20.9 40.0 0.79 3.7 0.52 5.64 2.0 22.2% 100.0% 0.7% 22.0 143.6% 13.3 8.1 10.6 0.76 3.9 1.07 2.73 5.5 25.0% 100.0% 1.9% 30.5 38.8% 9.6 5.4 6.9 0.76 3.9 1.30 2.25 7.6 25.0% 100.0% 2.6% 36.2 18.7% 8.1 4.6 5.8 1.03 2.8 1.57 1.86 9.0 25.0% 100.0% 3.1% 2012 2013 2014e 2015e

$2.92 Buy 48.4 $141.3 $3.42 2016e 40.4 11.8% 7.2 4.2 5.3 1.33 2.2 1.87 1.56 10.1 25.0% 100.0% 3.5%

Cashflow (A$m) Reconciliation Net Profit Deprec. & amort. Change in working capital Other Net operating cashflow Investing Cashflow Capex Payment for businesses Other Net investing cash flow Financing Cashflow Issue of shares Buy backs Dividends paid Debt Others Net financing cash flow Effects of exchange rate Net change in cash held Balance Sheet (A$m) Cash assets Receivables Inventories Other Total current assets Plant and equipment Intangible assets Other / financial assets Deferred tax assets Total non-current assets Total assets Short term debt Payables Current tax liabilities Provisions Other liabilities Total current liabilities Long term debt Deferred Tax Liability Other Total non-current liabilities Total liabilities Net assets Contributed equity Reserves & outside equity Retained earnings Total equity Net debt/(cash) $m 1.4 6.5 0.4 0.1 8.5 28.5 5.3 0.0 0.7 34.5 43.0 2.1 7.4 0.8 0.1 0.1 10.5 7.4 0.0 0.0 7.4 17.9 25.1 22.6 0.3 2.2 25.1 8.0 6.6 14.6 1.9 0.3 23.5 39.6 20.4 0.0 1.5 61.5 85.0 3.6 15.3 3.3 0.5 0.7 23.4 9.6 0.0 0.2 9.8 33.2 51.8 40.8 0.8 10.2 51.8 12.4 5.9 16.3 1.9 0.3 24.4 43.6 26.2 0.0 1.5 71.3 95.7 3.6 13.5 3.3 0.5 2.2 23.0 9.6 0.0 0.2 9.8 32.8 62.9 40.8 0.8 21.2 62.9 7.3 13.3 21.0 1.9 0.3 36.6 46.7 26.2 0.0 1.5 74.4 111.0 3.6 15.3 3.3 0.5 2.5 25.2 9.6 0.0 0.2 9.8 35.0 76.0 40.8 0.8 34.4 76.0 -0.1 26.9 20.1 1.9 0.3 49.2 48.9 26.2 0.0 1.5 76.6 125.9 3.6 16.6 3.3 0.5 1.3 25.4 9.6 0.0 0.2 9.8 35.2 90.7 40.8 0.8 49.1 90.7 -13.7 11.1 4.8 15.9 1.4 17.7 (1.2) 3.8 20.3 5.2 (3.7) (3.7) (0.8) (4.4) (4.4) 7.5 (4.9) (4.9) 13.5 (6.3) (14.7) 0.1 (20.9) (9.7) (15.1) 0.4 (24.4) (10.0) (5.8) (15.8) (10.0) (10.0) (10.0) (10.0) 2.3 3.5 (0.1) 0.7 6.5 9.1 4.4 (4.7) 0.6 9.3 14.8 6.0 (2.1) 18.7 17.5 6.9 (2.6) 21.9 19.6 7.8 1.1 28.4

. . . % pay-out Franking (%) Yield (%) Performance Ratios EBITDA/sales (%) EBITA/sales (%) OCF realisation (%) FCF realisation (%) ROE (%) ROIC (%) Asset Turn (years) Capex/Depn (x) EBIT Interest cover (x) Net debt/EBITDA Net debt/equity (%) Divisional Revenue $m Drilling Camps Catering (external only) Equipment Hire Adjustment Total EBIT $m Drilling Camps (exc internal catering) Catering Equipment Hire Corporate Adjustment Total Half yearly Sales revenue . . . Change vs pcp EBITDA Deprec. & amort. EBIT Interest expense Non recurring items (NRI's) Pre-tax profit Tax expense . . . tax rate Minorities Net Profit Reported NRI's post tax Net Profit pre-NRI's Norm adj post tax Net Profit Normalised

22.0% 11.5% 112% 257% 9.1% n/a 2.1 1.8 6.6 1.1 32.0%

26.0% 20.0% 69% 94% 17.6% 29.8% 4.3 2.2 12.3 0.7 23.9%

26.2% 20.6% 90% 121% 23.5% 33.4% 4.7 1.7 22.3 0.3 11.7%

27.0% 21.4% 90% 119% 23.1% 36.2% 4.8 1.5 25.5 0.0 -0.2%

27.5% 21.7% 104% 137% 21.6% 38.1% 4.7 1.3 38.6 -0.4 -15.1%

24.3 9.1 0.0 0.0 0.0 33.4

35.4 33.9 0.0 3.4 0.0 72.7

42.8 54.2 3.5 8.1 0.0 108.6

44.1 65.7 3.6 9.9 0.0 123.3

45.5 73.8 3.7 11.1 0.0 134.1

2.8 2.8 0.0 0.0 -1.8 0.0 3.8 1H12 14.9 n/a 2.4 (1.7) 0.7 (0.2) 0.4 (0.2) 35.0% 0.3 0.3 0.3

4.2 9.0 1.9 2.8 -3.4 0.0 14.5 2H12 18.5 n/a 5.0 (1.9) 3.1 (0.3) 2.8 (0.8) 29.7% 2.0 2.0 2.0

5.1 14.2 3.4 5.3 -5.7 0.0 22.4 1H13 29.6 98.2% 6.5 (2.2) 4.3 (0.9) 3.3 (1.0) 30.5% 2.3 2.3 2.3

5.4 17.4 4.1 6.6 -7.0 0.0 26.4 2H13 43.0 132.8% 12.4 (2.2) 10.2 (0.3) 10.0 (3.2) 32.1% 6.8 6.8 6.8

5.5 19.6 4.6 7.4 -7.9 0.0 29.1 1H14e 50.8 71.5% 13.3 (3.0) 10.3 (0.5) 9.8 (3.3) 33.9% 6.5 6.5 6.5

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Titan Energy Services (TTN)

Research Team
Staff Member Title/Sector Head of Research Industrials Industrials Industrials Industrials Industrials Industrials Industrials Associate Healthcare Healthcare/Biotech Banks/Regionals Diversified Oil & Gas Bulks & Copper Bulks & Copper Gold Quantitative & System Research Assistant Fixed Income Fixed Income Phone

25 September 2013

Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Hold: Expect total return between -5% and 15% on a 12 month view Sell: Expect <-5% total return on a 12 month view
Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an exceptionally high level of capital risk and volatility of returns.

@bellpotter.com.au tslim shaddad jkriska joshea csavage jsnape sbyrnes bcalwell jhester tnjain tslim lsotiriou dbrookman showe ftruong blai jtai tpiper dwilliamson bziegler

TS Lim Industrials Sam Haddad Jonathan Kriska John OShea Chris Savage Jonathan Snape Sam Byrnes Bryson Calwell John Hester Tanushree Jain Financials TS Lim Lafitani Sotiriou Resources Di Brookman Stuart Howe Fred Truong Bernard Lai Quantitative Janice Tai Tim Piper Fixed Income Damien Williamson Barry Ziegler

612 8224 2810 612 8224 2819 612 8224 2820 613 9235 1633 612 8224 2835 613 9235 1601 612 8224 2886 612 8224 2879 612 8224 2871 612 8224 2849 612 8224 2810 613 9235 1668 612 8224 2859 613 9235 1782 613 9235 1629 613 9235 1731 612 8224 2833 612 8224 2825 613 9235 1958 613 9235 1848

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