Thoughts on Flint

Flint Energy Services has been on my watch list for a long time. Living and working in Alberta, I have heard the Flint name many times. I finally pulled the trigger recently, and here’s why…

Flint is a different animal in the energy services industry. The “Build it then maintain it” has given Flint a more diversified revenue stream. Flint trades on the TSX under ticker FES. They report Q2 in a few weeks.

Everything was going along fine in the energy sector until the financial crisis. Money was pouring into the Alberta oil sands, and you didn’t have to be too smart to make money. Things got a little carried away when oil went from $145 to less than $50. It is tough for energy companies to budget expenditures (where Flint gets its revenue) when you don’t know the price of oil will likely be in the next 6 months. The Alberta government see-sawing on its royalty rates doesn’t exactly instill confidence. Of course Flint has revenue from outside of Alberta, but a good portion comes from the oil sands.

Cyclical companies can be gravy for a value investor. Certain industries are likely to grow faster than GDP for years into the future, and it is not unreasonable to expect previous peak earnings to be taken out. Albeit, not in the immediate future.

I think we should start with a brief summary of Flint’s divisions…

Rev 2005 2006 2007 2008 2009 TTM
Production Services      674.40       936.10   1,107.10   1,146.90      792.00       751.22
Facility Infrastructure      238.80       410.90      425.80      585.50     592.50      589.49
Oilfield Services         65.80         88.90      225.70      278.80       212.40       210.86
Maintenance Services                –             4.10         57.70      303.40      279.60       316.14
Total      979.00   1,440.00   1,816.30   2,314.60   1,876.50   1,867.71
             
EBITDA            
Production Services         80.86         97.70       101.80       112.63         45.67         41.01
Facility Infrastructure      25.91         44.30         30.70         43.40   70.75     77.50
Oilfield Services           8.12         20.90         38.80         25.78         16.27         13.92
Maintenance Services                –   –         0.30           3.80         19.86         16.54         14.04
Total 114.89 162.60 175.10 201.67 149.23 146.47
             
EBITDA margin            
Production Services 12.0% 10.4% 9.2% 9.8% 5.8% 5.5%
Facility Infrastructure 10.8% 10.8% 7.2% 7.4% 11.9% 13.1%
Oilfield Services 12.3% 23.5% 17.2% 9.2% 7.7% 6.6%
Maintenance Services 0% -7.3% 6.6% 6.5% 5.9% 4.4%
             
Rev Mix            
Production Services 68.9% 65.0% 61.0% 49.6% 42.2% 40.2%
Facility Infrastructure 24.4% 28.5% 23.4% 25.3% 31.6% 31.6%
Oilfield Services 6.7% 6.2% 12.4% 12.0% 11.3% 11.3%
Maintenance Services 0.0% 0.3% 3.2% 13.1% 14.9% 16.9%
             
EBITDA mix            
Production Services 70.4% 60.1% 58.1% 55.8% 30.6% 28.0%
Facility Infrastructure 22.5% 27.2% 17.5% 21.5% 47.4% 52.9%
Oilfield Services 7.1% 12.9% 22.2% 12.8% 10.9% 9.5%
Maintenance Services 0.0% -0.2% 2.2% 9.8% 11.1% 9.6%

 

Production services provides tubular management and manufacturing, day-to-day field facility installation and maintenance, pipeline, and plant shutdown and turnaround. This segment was almost 70% of revenue and has fallen to 40% currently. Profitability has also fallen, EBITDA margins have gone from over 10% to less than 6%. Much of this is the result of significantly lower drilling activity, but margins have been on a slow and steady decline for 5 years now.

Maintenance Services consists of routine maintenance and turnaround services. The company operates maintenance services through three joint ventures. Though revenue has grown strongly, EBITDA margins have not. This segment seems to be better insulated from the downturn than others.

Oilfield services is focused on transportation and hauling. Same story as the rest of the company, we are dealing with a very cyclical industry after all. Revenue in excess of 200 million and EBITDA around 14-16 million.

Finally, the meat and potatoes of the thesis, facility infrastructure. This is where the “full-cycle” approach to the energy industry has paid off. Healthy margins, over 10% EBITDA, and revenue near all time highs. This segment used to contribute just over 20% of consolidated EBITDA, now it contributes around 50%.

Lets look at the company on a consolidated level.

  • Pretax ROIC on average is above 10%.
  • The company is proud that during the recession, they have managed to lower the DSO to under 70 from over 90. DPO seems to be holding steady around 40 days.
  • Consolidated revenues CAGR is 16% since 2003, while the share count has grown around 5% per year.
  • The debt load seems manageable with D:E at 0.45, and interest coverage, by EBITDA, over 9 on a ttm basis.
  • The current ratio is 2.7, with 130 million in cash.

Valuation

  • EV/EBITDA – EBITDA is around 150 million now, and this should be trough numbers. This gives the company an EV/EBITDA of 4.9. Not dirt cheap, but not expense for a company that should see earnings grow sharply in the next few years. Not only will EBITDA grow, but there is certainly room for multiple expansion.
  • DCF – Warren Buffet said that  owner’s earnings are net income plus depreciation and amortization minus the average amount of capital expenditures needed to stay competitive. Another thing to watch out for is companies reporting still decent FCF but are just adjusting working capital, this is ususally just a temporary kick to FCF. 5yr averge net income + depr and amort is 118 million. Whether you use average capex, average capex to PPE or average capex to revenue, you get a more normalized capex budget of 60million, or you could just use the high 50s million in depreciation and amortization over the last 2 years. How much of the cap ex is for growth and how much is for maintenance? Who knows exactly. Given the tailwinds in this industry and rapid revenue growth from Flint, I will say that 40% of capex is for growth. 50 million times 60%(100%-60%) is 30 million for maintenance. Giving you owner earnings of around 68 million. Using my DCF, I get a value of $20-24.
  • TBV – tangible book value has grown steadily of the last 5 years from under $5 to over $11. The company took a huge write-down of goodwill assets (400 million) in 2008, so you see why simple price to book can be misleading. Current price to tangible book is 1.1.
  • EPV – using an adjusted net income to reflect only maintenance expenses and expenditures, I get 186 million in net income. Dividing by the cost of capital of 12.3% (10% for debt and 15% for equity), you get a value of $30.
  • Using more than one  valuation metric is a must, it will ensure consistancy and give you an extra margin of safety. Though each metric has it’s uses, they are have drawbacks. I also don’t really like pricing in the “upside” of cyclical industries, the future is too uncertain.

Risks

  • Obviously the risk of double dip is there. If the US goes into recession, Flint’s markets will suffer.
  • Chinese growth slowing also plays a factor in future growth prospects for Flint.
  • Execution risk is present, but I don’t think it is a big one.
  • Though not a risk, management doesn’t own a huge amount of shares. If I am going down, I like to know I’m not alone.

Catalysts

  • Potential dividend
  • Takeover
  • Rise in risk appetite
  • Earnings rebound

Summary

If you can get your hands on FES under $13, I would consider buying. Future fair price can be between 25-30 on the high side, but over 20 isn’t a very far stretch. You are buying a quality company near book in a secular bull market to help them achieve record revenue and earnings hopefuly sometime in the future. Revenue is now ticking up sequentially and the compnay is winning new contracts. Oil sands expenditures are expected to jump at least 20% yoy and build on those gains in 2011. In a world with low-interest rates, you are almost forced into equities. It’s a little easier when you are in good company, ABC funds has done a recent write-up on Flint, here.

Dean

Disclosure: Long FES

Links

2009 Annual Report

Latest Investor Presentation

Q1 2010 earnings

Annual Information Form

2 Comments

Filed under Company Analysis

2 responses to “Thoughts on Flint

  1. Rahim

    Great write up!!!

  2. Pingback: 2010 Performance and Thoughts | Petty Cash

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s