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Hughes Drilling Awarded New Blast Hole Drilling Contracts, Profit Growth On Track

Hughes Drilling (ASX: HDX) has been awarded two new production (blast hole) drilling contracts with existing multinational clients at two mine sites in Queensland's Bowen Basin.

This additional work is being performed with a combined total of three new rigs, plus an option for an additional rig at one site.

Importantly, production rig fleet expansion and revenue/profit growth remains on track.

The additional work takes Hughes' current operating production rig fleet to 35 rigs, an increase of eight rigs, or 30%, over the 27 contracted as of 30 June 2012.

For the 2013 financial year so far, production rig fleet expansion is now greater than the seven rig expansion in the 2012 financial year.

The year to date production rig fleet growth rate is at the upper end of the expectations previously outlined.

Hughes confirms the production rig fleet size guidance for 30 June 2013 of 38 to 40 rigs, a 40% to 48% step-up from the 27 rig fleet size at 30 June 2012.

The company's growth profile continues to reflect market demand for its services exceeding the availability of well-maintained efficiently operated rigs.

The company only acquires new rigs against secured and generally longer term contracts in long life mines. Hughes is generally operating in mines lower on the cost curve.

Growth continues to be driven by displacement of competitors - the largest component of recent growth, net expansion of the requirements of existing clients and opportunities in new pits.

The growth profile for Hughes' production drilling services particularly reflects the limited availability of well-maintained equipment by highly productive service providers.

Growth guidance

Hughes has indicated that revenue/profit growth remains on track. In 2012, Hughes said it expects to produce a profit of between $5.0 million and $5.3 million for the six months to 31 December 2012.


Hughes continues to operate and own the largest contract coal sector blast hole rig fleet in Australia, with its market share around 35% to 45%.

The company is undergoing a significant expansion of blast hole rigs in fiscal 2013, which is a strong indicator of Hughes' growth as new rigs are only acquired against secured and generally longer term contracts in long life mines.

Hughes' share of the Queensland and New South Wales markets, which produce 96% of Australia's coal exports, is now estimated at 37% of contractor and mine owner operated rigs and 46% of contractor owned rigs.

This market share reflects a large and growing market share in the Queensland market with strong growth opportunities off a lower base in the Hunter Valley.

A key factor in Hughes' strong growth is the company's blast hole service is not exploration drilling, nor are exploration rigs suitable for coal sector blast hole drilling.

With the contract wins and profit growth on track, Hughes Drilling is undervalued based on our estimate of earnings per share at a share price of $0.38.

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