In @Strawman’s straw on #competition, the following conclusion got me thinking:

“From what I can see, the real danger for AIH is a structural shift in energy investment or a chemical breakthrough that renders their patented phenolic or silicone formulations obsolete.”

and it led to think about some further, related questions:

1.     How might the market opportunity in oil & gas evolve?

2.     How well positioned is AIH to adapt to change through innovation?

What follows is my exploration of those questions.

1. Evolution of the Market Opportunity in Oil & Gas

Ultimately, what’s driving the risk in oil and gas is the global energy transition in response to climate change, which is why I am lumping AIH oil revenue exposure (c. 55%) and LNG (c. 10% - my guesstimate) together – and calling it a two-thirds exposure.

Today, combined global oil and gas production (which includes LNG) is some 177 mmboe/d (million of barrels of oil equivalent per day). How this evolves in uncertain.

In the Bear Case, the "IEA Net Zero by 2050" case would see production fall to 39 mmboe/d – a 78% decline. Most sector commentators believe that’s not going to happen, and that Net Zero is more likely to be achieved some time from 2060 to 2080, unless there is a concerted and significant change in global political will. (Xi is targeting 2060 for China!)

More bullish scenarios that carry titles like “Current Policies”, “Stated Policies” and “Current Trajectory” by energy experts yield 2050 production levels anywhere from 163 – 207 mmboe/d - pretty much where we are today, and maybe more!

Of course, in all scenarios, a certain mount of depletion replacement is required. Annual depletion is around 6% (not the 8-10% Andrew indicated on the Strawman meeting). And what this means is that if oil and gas production remain flat, then over the 25 years to 205.0 some 265mmboe (or 150% of current production) needs to be brought online through capital investment.

Given collective global behaviour today, that might be considered a “Base Case”, and something getting down towardsthe "2050 Net Zero" scenario a Downside Risk.

Of course, investors will see this coming. First, it will take time for a renewed global political consensus to emerge, and then years more for the shift in infrastructure investment to impact aggregate production and capex. Changing global aggregate investment in the energy system is like turning a supertanker. We’ll see it coming.

2. How Well it AIH Positioned to Adapt?

It is clear from the Strawman meeting, that CEO Andrew and his team are alert to the risks of exposure to oil and gas! The downturn from 2014 - 2016 was a wake-up call. At the time, the business had 90% of its revenues exposed to oil. And over the following decade they have progressively evolved that to 55% (plus my “10%” for LNG).

Despite arguing in an earlier post that the oil and gas market is currently too attractive for them to want to diversify away much further at the moment (moat, lack of competition, relationships, reputation, margins, margins, margins), the relevant the point is that if they needed to, they could, albeit into more contested markets (lower margins).

So, my next question to understand is: how well they are positioned to adapt, i.e., how strong is their ability to innovate?

There are four relevant insights.

First, in the Strawman CEO interview, Andrew Bennion describes AIH’s culture as strongly entrepreneurial, problem-solving oriented, and deliberately unstructured to encourage innovation. If true, then that’s a culture consistent with being able to adapt to changing market realities. Tick.

Second, in the prospectus, the company's commitment to innovation in materials science is demonstrated by several key factors:

• Dedicated R&D Workforce: AIH employs a multidisciplinary team of approximately 60 scientists and engineers. This team is structured around specific disciplines such as polymer chemistry, composite engineering, and new energy applications.
• Proprietary Formulation Chemistry: Over three decades, AIH has developed proprietary libraries of core chemistries, including phenolics, silicones, epoxy resins, polyurethanes, rubbers, and composites.
• In-House Testing and Optimization: The company operates an integrated R&D platform that combines formulation chemistry, numerical modelling, and full-scale physical testing. Using on-site mixing capabilities, pilot scale reactors, and proprietary testing laboratories, AIH formulates, tests, and optimizes materials in-house to meet specific and extreme mechanical, thermal, and fire performance requirements.
• Next-Generation Product Rollout: This ongoing, capitalized investment in research and development is explicitly aimed at driving innovation and enabling the rollout of new products tailored to both traditional and emerging transition energy markets

Ok, that's Prospectus-speak, and I'm not entirely sure what to make of it. But, this IS a company with the in-house ability to innovate, and that's not necessarily common in an industry several decades down the path of outsourcing.

Third, the Prospectus refers to an annual investment in R&D of $5.2 million – about 1.7% of revenue. So, we can examine how this benchmarks. With the help of my BA (ChatGPT), I’ve assembled the following R&D benchmarks relevant to this industry.

In terms of R&D spend, AIH is a little underwhelming. And of course, that’s compounded by the fact that it is a small cap.

So, this brings me to the fourth and final insight – M&A. Clearly, the company has been reinvesting to build capability and market reach via M&A. But I think this has also assisted advancing the diversification strategy, as the following table indicates.

Table: AIH Acquisitions and Their Diversification Impact

And we can add to the in progress acquisition of $MCE – but this is predominantly an O&G play, with some minor exposure to defence, resources and mining. $MCE is more about an Australian base, including manufacturing and local content competitiveness on tenders.

My Conclusions

With it’s strong balance sheet, $AIH is clearly pursing M&A to build capabilities and it has to be recognised that it has come a long way in diversifying its oil and gas exposure over the last 10 years. Moreover, the O&G “Golden Goose” is far from dead. And if AIH can continue to build market share through its growing reputation and capability, there is every prospect that it can enjoy another decade or two of exploiting the relationships, reputation, and high barriers to entry this sector offers.

I believe that, having already shown it can evolve from a 90% to 55%+ revenue exposure to one sector in a decade, it is well-positioned to manage the uncertainty ahead.

Should the Global Community “hard pivot” to Net Zero in the next few years, there is no doubt in my mind that this would push AIH into more contested markets. So, yes this is a risk. But it is one I am confident management is alert to.

So where have I ended up. Back where @Strawman started “From what I can see, the real danger for AIH is a structural shift in energy investment or a chemical breakthrough that renders their patented phenolic or silicone formulations obsolete.”

I'm less concerned about the risk of the structural shift in energy. Yes, it will challenge margins over time and force the business to build new heartlands. But, overall, I consider AIH are as well-positioned as they can be to evolving global energy markets.

However, they are unlikely to be at the cutting edge of developments in materials science and engineering, and so this is the key vulnerability given their scale and relatively low level of investment in R&D.

As a potential long-term investment, this is not a flag (red or orange) for me, but a risk to monitor over time.

Disc: Not held