November 2021 Update – $CSW/B.to, $OSS.v, $REPH, $ISDR, $ISV.to, $STC.to, $VLN.to, $VMD.to & $VMD, $SYZ.to, $MCB.to, $FRii.to, $FXC.to, $PZA.to, $MCR.v, $KUT.v

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

The market has reacted to the news of another variant that seems to spread quicker than Delta. Governments around the world have reacted quickly by imposing some requirements for traveling to the affected zones (at least those currently affected). It will be interesting to see how effective the current vaccines are against this variant and if the mandatory vaccination movement gains more or less traction. Of course, I have no idea and haven’t changed by portfolio.

My portfolio has underperformed the market this year. It is hard to determine how much has been poor decisions vs. some returns being pulled forward in 2020.

I have been on the lookout for tax loss selling opportunities.

What I’m Reading

  • What The Dog Saw: And Other Adventures by Malcolm Gladwell

Posts this month

  • None

Developments on Companies Mentioned

  • Corby Spirit and Wine Limited – $CSW/A.to & $CSW/B.to
    • Reported fiscal Q1 2022
      • Revenue down 4-5% vs last year
        • Covid is making yoy comparisons hard
      • Cash balance down from the upfront fee to represent Pernod Ricard brands in Canada
    • Shares seem to have an equal upside vs downside at the moment and I’m going to stop updating CSW.
    • I do think the company represents a decent bet in an income portfolio.
  • OneSoft Solutions – $OSS.v
    • Reported Q3 2021
      • Rev growth was better than I expected
      • I was expecting slightly less cash burn by this stage although they are getting closer to break even and seem to have enough cash to get there
      • They are continuing to add customers (up to approx. 20)
      • Outlook seemed positive
      • Still expensive price to sales so will need high growth to justify committing capital to this company
  • Recro Pharma – $REPH
    • Reported Q3 2021
      • Was weaker than expected
      • I’m watching from the sidelines but won’t follow as closely as prior
      • I am going to stop updating REPH here
  • Issuer Direct – $ISDR
    • Reported Q3 2021
      • In line with my expectations
      • I’m hoping they can outgrow any significant margin pressure from here on in
  • Information Services Corp – $ISV.to
    • Reported Q3 2021
      • Quarter was pretty good
        • They benefited from Sask real estate
          • Likely wont’ see the same growth in 2022
        • Subsidies ending in Q4 2021 could bring some opportunity for Paragon
  • Sangoma Technologies Corp – $STC.v
    • 7 for 1 share consolidation announced
    • Reported fiscal Q1 2022
      • Slightly stronger than expected and guidance was maintained
    • IPO in the US
      • Issuing 5.5 mil shares
    • Then pulled the share issuance – ???
  • Velan – $VLN.to
    • Formalized the appointment of Bruno Carbonaro as CEO as they announced previously
  • Viemed – $VMD.to
    • Reported Q3 2021
      • Seemed like a decent quarter
      • Rev came in at the top end of guidance
      • Guiding to a bit lower growth in Q4 from the core biz relative to Q3
      • Margins slowly coming back
      • Looking to get back to traditional growth rates in 2022
      • Lots of uncertainty
  • Sylogist – $SYZ.to
    • Announced 5.9mil in contracted revenue
      • Good to see some wins
  • McCoy Global – $MCB.to
    • Reported Q3 2021
      • Was better than I was expecting
      • Backlog is up and outlook is positive from here
  • Freshii – $FRII.to
    • Announced a new franchise deal in Texas
      • 20 units over 6 years
    • Reported Q3 2021
      • Was weaker than I expected – particularly gross margin
        • Urban locations still significantly affect by covid
      • Not expecting a significant cash burn from Natura
      • Continued to invest in franchise partners during the quarter
      • Long term see lots of opportunity in Canada
  • FAX Capital – $FXC.to
    • Reported Q3 2021
      • Deployed some capital into Hamilton Thorne during the quarter
      • Accumulating shares in another public Canadian company
      • Purchased 2 mil shares of Avante Logixx
    • I have liquidated my position and will no longer be updating $FXC.to
  • Pizza Pizza Royalty Corp – $PZA.to
    • Nice bounce in activity with some more mobility in Canada
    • Still some stores shut down and yet to reopen so I don’t think we are not at peak earnings
  • Macro Enterprises – $MCR.v
    • Reported Q3 2021
      • Results were in line with my expectations
        • Revenue was 110 mil vs 94 mil last year
      • Expects revenue to exceed 385 mil for 2021
      • Trading about 2.5 EV/EBITDA and likely less than 2x EV/EBITDA if they maintain 350+ in rev
  • RediShred Capital – $KUT.v
    • Reported Q3 2021
      • Results were better than my expectations
      • EBITDA grew 53% from acquisitions and organic growth
      • Trading at 10x EV/FCF given my run rate estimate with stable paper prices

Long – $OSS.v, $ISDR, $$STC.to, $VLN.to, $VMD.to & $VMD, $MCB.to, $FRii.to, $MCR.v, $KUT.v

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October 2021 Update – $REPH, $PSD.to, $ISV.to, $STC.v, $FTG.to, $VLN.to, $SYZ.to, $FRII.to, $RELL, $URB/A.to, $KUT.v, $DWSN

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

Nothing really eye opening here. Lots of inflation talk out there. Markets near all time highs.

What I’m Reading

  • I’ll be on the platform in another 5 weeks for a powerlifting meet. I’ve been focusing on training and building my garage gym.

Posts this month

  • MCR Update
  • O&G Activity – USA

Developments on Companies Mentioned

  • Recro Pharma – $REPH
  • Pulse Seismic – $PSD.to
    • Reported Q3 2021
      • Results were good
      • They have paid off all the long term subordinated debt
      • Issued a special dividend of 0.04
      • Started regular quarterly dividends of 0.0125
    • Announced NCIB for up to 10% of float
    • Here is the companies latest presentation
  • Information Services Corp – $ISV.to
    • CEO is leaving at end of Jan 2022 for personal reasons and the current CFO will become CEO
  • Sangoma Technologies Corp – $STC.v
    • They have graduated from the venture to the TSX starting Nov 1, 2021
  • Firan Technology – $FTG.to
    • Reported Q3 2021
      • Still seeing slow grind higher in activity in commercial aerospace
      • Current and immediate near future valuation looks fair, upside looks to be if activity gets back to pre-pandemic levels in the next couple of years
  • Velan – $VLN.to
    • Reported fiscal Q2 2022 and held a conference call
      • No questions on the call
    • Results were good
      • They look to be turning around from an operational standpoint
    • CEO transition
      • I wasn’t expecting this though I’m not surprised
    • I continue to hold my position
  • Sylogist – $SYZ.to
    • Small acquisition
      • Valuation and earn out look to be quite reasonable although somewhat small top line in the context of their entire business
      • Still I think it shows that they continue to focus on M&A as promised
  • Freshii – $FRII.to
    • Announced acquisition of Natura
      • 9.6 mil EV
      • 19 mil in ttm rev
        • 0.5x ttm sales
      • Buying 60% for 5.7mil with some additional earnout based on performance in 2022
      • Right to buy the remaining 40% through Q1 2025
  • Richardson Electronics – $RELL
    • Reported Q1 fiscal 2022
      • Revenue was way higher and the highest in 11 years
      • Demand seems strong
    • I continue to monitor
  • Urbana Corp – $URB/A.to
    • The company bought 600k shares privately from EdgePoint
    • The NAV has been above $7
  • RediShred Capital – $KUT.v
    • Filed a preliminary base shelf prospectus
      • Up to 25mil for 25 months once effective
  • Dawson Geophysical – $DWSN
    • Though I stopped following DWSN closely they announced that the Wilks Brothers LLC wants to purchase them for $2.34 per share
    • And the Attorney General of Louisiana released this
    • This will be interesting to watch

Long – $PSD.to, $VLN.to, $FRII.to, $STC.v, $URB/A.to, $KUT.to

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O&G Activity – USA

About a month ago I went over the International Oil and Gas activity. Today I’ll take a high level look at the US, with the focus being on rig count. It’s quite topical as oil has now come back into fashion for investors. I’m going to use WTIC as the benchmark for US oil.

For some additional background, I think this podcast with Todd Sullivan on The Contrarian Investor Podcast goes over the current landscape for US.

WTIC history

I was able to find some data going back to 1946. It’s interesting to see how oil seems to trade sideways for a long period of time. Below is the average nominal price per year and in a logarithmic scale.

Taking a look at the inflation adjusted price tells an interesting story. It looks like the inflation adjusted price has been the same for an entire generation.

70s boom

In the previous post I mentioned the 1970s oil boom. Looking at just the US in isolation, the rig count in the late 70s/early 80s dwarfs all the other time periods.

Of course, rigs have advanced immensely over the last couple decades. 100 rigs in the 1970s does not equal 100 rigs in the 2010s.

The boom of the 70s was related to several factors; US production peaked sometime in the 1960s, continual increase in consumption, the Arab oil embargo, Yom-Kippur War, and other factors all contributed to prolonged higher prices and increase in investment to discover and produce oil domestically.

Mid 1980s to 2000s

After the 1970s boom, oil was left for dead for about 15 years. You can see in the chart below that the price essentially went sideways from 1985 until 2000. The rig count remained under 1,000 for most of this time.

2000s

After the tech bubble and 9/11 marked the start of a gradual recovery in oil activity. The US rig count went from around 1,000 in 2003 to nearly 2,000 in 2008 right before the GFC.

Despite the increase in investment in the 2000s, the production of oil slowly declined.

https://www.eia.gov/todayinenergy/detail.php?id=43015

FWIW I remember many experts calling for $200 oil when I was first getting into picking stocks in 2006/07. This was during the last commodity boom when we thought China was just going to consume everything.

GFC

Of course, oil crashed hard during the GFC. Oil went below $40 (from over $140) for the first time in 5 years. Though, it bounced back above $60 in short order.

Shale boom

The shale boom really started to move the needle on production after the GFC. There was a ton of interest around shale and the sharp increase in production. In a very short time, the US went from an importer to an exporter of oil. The price remained in the $80-100 from 2011 to the end of 2014.

2015/16 Bear Market

The ever increasing supply, strong US dollar, stable OPEC production, removal of sanctions against Iran, weaker than expected global demand all led to a sharp contraction in price. Oil went back under $40 for the first time since the GFC. This was a very sharp contraction in activity.

Late 2016 to 2020

The stabilization in price eventually led to a rebound, although muted. You can see the 2017/18 rig count wasn’t much more than half of the rig count from 2011-2014. As an investor, I noticed a more conservative tone from the producers when allocating capital to drilling and exploration relative to other cycles.

It’s interesting to see the different regions and how they all contribute to the overall rig count.

Today

After the sharp decline in demand due to the covid lockdowns (which resulted in negative prices temporarily), we are now in phase of higher prices. There is so much noise with covid variants, lockdowns, supply chain challenges, OPEC spare capacity, EV transition, political challenges, etc. that producers with long term reserves have prioritized cleaning up their balance, paying dividends and buying back shares over expanding existing production.

After the covid lockdowns, there has been a very slow increase in rig count. Though the rig count has essentially doubled year over year, it’s only at the same level as the previous cycle’s trough.

When looking at the rig count when oil is $80, we have a long way to go before activity gets back to prior levels. Having said that, I’m not sure that is our path. President Biden has put a halt on new leases for drilling on federal lands. Specific regions are affected more than others, for example the Permian is less affected than others. As well, the Keystone XL pipeline was halted as the permits were revoked. This additional layer of complexity by the current government(s) make allocating capital to anything hydrocarbon related murky at best. High prices may not be enough to get the large producers to open up the capital budgets.

I have no idea how this all pans out eventually. At the same time that we are having more and more political pressure to lower hydrocarbon production and transition to EV; consumers, businesses, and politicians are once again remembering how much we depend on oil. My sense is that the risk is to the upside from an activity standpoint.

Anyone have thoughts on this?

Dean

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