Energy Services Bets – Postmortem

So I made some bets on energy services company’s over the last 18-24 months or so. I thought now might be a time to do some sort of postmortem on the trades and see how they have performed. Full disclosure: recently I have added to some, sold some and continue to hold some of the company’s mentioned. See the Portfolio page for current holdings.

This post will be structured in 4 parts:

  1. Was it wise to bet on Energy Services sector relative to the overall market for the given time period? This should provide an indication of whether looking at the sector from a top down standpoint was a wise decision.
  2. Within the sector, did I pick stocks that outperformed? This should help me understand my stock picking abilities on an individual company basis for the time frame.
  3. Did the stocks that I chose outperform the market?
  4. Did the stocks chosen produce a positive total return?

Before getting started, below are the 4 companies I bought shares in. The first 3 are based in Canada, with the last one being Nasdaq listed.

Ticker Purchase Price Purchase Date Dividends Current Total Return Hold Time (yr)
psd.to $2.30 22/11/2016 $0.20 $3.10 43.5% 1.22
hwo.to $4.75 11/05/2017 $0.12 $4.01 -13.1% 0.76
ave.v $0.49 16/10/2017 $0.00 $0.53 8.2% 0.33
pfie $1.26 20/07/2017 $0.00 $2.19 73.8% 0.57

*Note the average hold time is 0.75 years (or 9 months)

Was it wise to bet on Energy Services sector relative to the overall market for the given time period?

When grading the bet on energy services vs. the overall market I chose the XIU.to (iShares S&P/TSX 60 Index Fund) and SPY (SPDR S&P 500 ETF Trust) for the overall market. For the energy services sector I chose the XEG.to (iShares S&P TSX Capped Energy Index Fund) and IYE (iShares Dow Jones US Energy Sector (ETF)) for the energy services sector.

Here’s how the bets have panned out:

Date Energy Services Market
22/11/2016 -17.6% 5.0%
11/05/2017 1.9% 2.5%
16/10/2017 -7.1% -2.4%
20/07/2017 4.5% 7.8%
Average -4.6% 3.2%

The results show that buying this sector because it was depressed may not have been the wisest strategy.

Within the sector, did I pick stocks that outperformed?

Using the same dates, how did the stocks that I chose do against their peers in the sector? This is definitely a nuanced question. Especially if you look at all the names in the ETF. Not sure it’s fair to grade a 50mil market cap Canadian company against a much larger company. Regardless, the results are below:

Date Energy Sector Stocks
22/11/2016 -17.7% 43.5%
11/05/2017 1.8% -13.1%
16/10/2017 -7.2% 8.2%
20/07/2017 4.5% 72.2%
Average -4.7% 27.7%

As you can see, on average I did better than the energy services sector during the time frame.

Did the stocks that I chose outperform the market?

When you stack up my picks against the market, you get the following results.

Date Market Dean
22/11/2016 5.0% 43.5%
11/05/2017 2.5% -13.1%
16/10/2017 -2.4% 8.2%
20/07/2017 7.9% 72.2%
Average 3.2% 27.7%

This is with the most recent pullback in the markets.

Did the stocks chosen produce a positive total return?

The results showed an average return of 28% over a 9 month time frame. No complaints here. Not sure I can really draw much of a conclusion over a 9 month period and with only 4 stocks being chosen.

Regardless, I wanted to share the results and invite any feedback readers may have.

 

Thanks,

Dean

Disclosure: See portfolio tab for current holdings.

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Aveda Transportation and Energy Services $AVE.v

Another energy related name….

I own things that aren’t energy related, but the recent downturn has brought some interesting opportunities forward. The market seems to be fixated on when Tesla will be able to remove all fossil fuels from our transportation needs and when machine learning will replace everyone’s job.

In the meantime, the broader oil and gas market has stabilized and activity is returning to more normal levels. Costs have been rationalized from contractors, service company’s and producers and the cost per barrel has dropped. While the rig count has bottomed, it remains well off historic highs. Many WCSB companies are once again complaining about crew shortages going into the drilling season.

Enter Aveda

Aveda Transportation and Energy Services Inc. is a Canada-based company engaged in the transportation of products, materials, and equipment required for the exploration, development and production of petroleum resources, including rig moving, heavy haul and hot shot services, and the rental of equipment associated with oilfields operations. The Company carries on its oilfield hauling activities in Canada and the United States under the name, Aveda Transportation and Energy Services; carries on its rental operations under the name, Aveda Rentals, and carries on specialized transportation services under Aveda Heavy Haul. Its rental operations include the rental of tanks, mats, pickers, light towers, well-site shacks and other equipment necessary for oilfield operations. It has presence in the Western Canadian Sedimentary Basin and in the United States, principally in and across the states of Texas, North Dakota, Pennsylvania, Oklahoma and West Virginia.

Their operations are strongly tied to oil and gas activity, particularly in the US. Entering the recession the company was able to do over $150 mil in revenue. They have recently eclipsed that with their Q3 2017 numbers.

See the income statement charts below…

Why I like it

  1. The idea is simple (like the author)
    1. The company is a cyclical and I believe the bottom is in for this cycle.
    2. Recent mention of higher opex in Q3 is indicative of activity levels.
      1. the company believes that many of the increased costs (example lodging) will be passed onto end users as budgets refresh in 2018.
  2. Easy capital allocation decisions
    1. Aveda will use 3rd party contractors to service the customer if they are unable to get some of their equipment to the site.
      1. this represents over 30% of consolidated revenue for Aveda and is very low margin (typically 1-3% gross margin). Aveda has equipment that was previously idled during the downturn to bring back online to capture some of this lost opportunity. See chart below.
      2. It should be noted that 3rd party contractors will always play a role in Aveda’s value proposition to customers, just a smaller role moving forward.
    2. They have also identified gaps in their equipment portfolio to dedicate capital towards, this being hoisting equipment.
    3. They have a pretty levered balance sheet, which means paying off debt with cash generated by the business will help derisk the thesis and improve the valuation.
  3. Recent addition to the management team.
    1. Ronnie Witherspoon recently joined the team and my impression is that he is a strong operator. The company has used the recent downturn to capture more market share.

Valuation

As with any cyclical in transition, current earnings are depressed and the valuation looks high. There are estimates of north of 20mil in EBITDA in 2018. Current market cap is just under 30mil and enterprise value is a shade over 100mil.

If the rebound materializes then I believe $0.50/share will be way too cheap for Aveda.

Other Items

Recent financing was subscribed heavily by the chairman.

AGM was held in October in Calgary and only 1 shareholder attended.

 

Dean

 

Disclosure: the author is long at time of writing.

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$CCNI – Command Center quick update

It’s only been just over 3 months since I originally wrote about Command Center. You can check out the original write-up here.

Long story short, nothing has changed except I feel the thesis is slightly derisked after a decent Q2. Since mid-2016 the organization has been focused on right-sizing operations and the results are showing.

  • The company is growing mid single digits organically
  • The aqcuisition of Hancock has delivered as expected
  • Margins and revenue are expanding at the individual store level
  • It sounds like the bottom is in for North Dakota business activity

The company now trades at a market cap of 21.3 mil with 4.1 mil in net cash. They have bought back some stock and are looking at potential acquisitions. I estimate ttm FCF at just over 3 mil. Though the shares responded well to Q2 earnings, they are only back to where they traded in April of this year.

I believe that CCNI is a buy at this price.

 

Dean

 

Disclosure: the author is long CCNI at time of writing.

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Pulse Seismic Quick Update

Quick update on what is a low risk high uncertainty stock in the portfolio.

  • Q2 2017 numbers came out and were a little better than last year. The outlook provided was murky at best. Given how lumpy the transactional revenues are, it’s too be expected.
  • And very recently the company announced the largest transactional licensing sale in history at 29.5mil. This is a pretty big deal given that revenue for the previous 12 months was 15.4 mil.
  • on the news the company was up about 7.5% which equates to around 11 million in market cap. If you use the historical FCF margin for this business of 65%, the deal likely added closer to 20 mil in cash to the balance sheet.

Given how much hype there is around electric vehicles, I’m not sure there has ever been so much negativity around oil and gas production. At least not since the great recession.

Dean

Disclosure: the author is long PSD.to at time of writing.

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Profire Energy (PFIE)

Rounding out what is my 3rd bet on the beaten down energy sector is Profire Energy. This will be a quick post to encourage further conversation.

The company makes burner management systems used in the oil and gas industry. They recently launched a new product (PF3100) that encompasses more solutions for operators. The products not only have a value proposition from a cost to operator standpoint but from a safety standpoint as well. They are a dominant player in the space.

The company is cash flow positive even during this time of much lower business activity. This is speaks to their cost structure and discipline.

The CEO owns over 25% of the company though he sold some shares to the company recently.

They are cashed up, have zero debt and 0.40/share in net cash.

Profire Investor Presentation May 2017

The author is long PFIE at time of writing.

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Command Center – CCNI

If you have been checking the “Portfolio” tab you would have noticed that I have a position in CCNI. I’ll give some thoughts on the company and hope to instigate some discussion.

Company Description

Command Center, Inc. is a staffing company. The Company operates primarily in the manual labor segment of the staffing industry. The Company provides on-demand employees for manual labor, light industrial and skilled trades applications. Its customers are primarily small to mid-sized businesses in the wholesale trades, manufacturing, hospitality, construction, retail and auto auction industries. The Company owns and operates approximately 60 on-demand labor stores in over 20 states. In addition to short and longer term temporary work assignments, the Company recruits and places workers in temp-to-hire situations.

Some History

From 2007 to 2012 CCNI would bump around from being profitable to losing money, the recession certainly didn’t help and you can see the big drop in revenue from 2008 to 2010. The current CEO was brought in 2013 to turn around operations. And you can see the margin expansion taking place as the focus on operations took hold. Closing unprofitable branches, coaching the under-performing branches/managers, and strategically expanding location count drove margins higher.  Margins were at a record and the company was generating solid FCF. Focus shifted from day to day operations to expanding the footprint. North Dakota became 25% of revenue in 2014 and the future was looking bright.

A few things happened starting in late 2014 and early 2015 and hit margins.

  • the oil and gas industry seen the worst decline in a number of cycles
  • some of the branches (not sure exactly how many) were not taking on the correct work and focus on high margin, high value add work was lost

Management did recognize the issues and put provisions in place to right size them. In the meantime, share price suffered.

Through 2015 and H1 2016 comparable year-over-year results suffered. Investors became fatigued and some have been quite combative. Such things happen when expectations eclipse reality.

I’m not going to comment on the competency of management and what should or should not be done. Obviously, given that I have a position I feel I can trust them with my capital.

Today

The last 3 quarters we have started to see operational improvements and better communication to shareholders. Recent (small) acquisition is delivering as expected and is an example of what the cash can be used for to grow the business.

CCNI now trades at around 8x FCF without any margin expansion. The CEO has clearly stated that he feels that 2017 will see higher revenue and margins. The low multiple and cash generating ability of the business will open up options to increase shareholder value.

Given the risk/reward profile, I think CCNI is worth buying under $0.50.

Feel free to comment.

 

Thanks,

 

Dean

 

*the author is long CCNI at time of writing

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HWO.to Q1 2017 – quick update

I picked up some shares of High Arctic Energy Services post Q1 earnings and after the AGM. I like the risk/reward of this company given where I think we are in the cycle.

The company has a strong position in PNG and recent acquisition in Canada should ensure that earnings stay at least flat through the cycle.  Concord Well Servicing (came over with the Tervita assets acquisition) has a large fleet in the WCSB and the stabilization in oil should bring stronger utilization throughout 2017.

I believe there are other opportunities in Canada to pick up some assets on the cheap. Hopefully we will see more in 2017.

Management is conservative with leverage and has done a good job of taking advantage of the downturn.

Another nice tidbit is the board is going to limit the total dilution potential via stock options to management. The proposal passed at the AGM but 15-20% of shares voted against the option, DSU and RSU plan.

Valuation

HWO.to nearly net cash and trading at 5-6x ttm FCF. Shares trade quite cheap for a few reasons:

  • cyclical company during the worst downturn in oil and gas in many cycles
  • I don’t think the investment community appreciates their PNG operations
  • 42% of shares are held by Cyrus Capital making this company quite illiquid

Risks

  • the obvious is activity based on the price of oil
  • PNG may be lumpy given that the company operates a small amount of rigs and having 2 idle for a long duration will hurt revenue from PNG
  • short term volatility if Cyrus decides to liquidate their position in such an illiquid stock

Feel free to comment;

 

Dean

 

The author is long HWO.to at time of writing.

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