MCB has done a good job of participating in the rebound of capital spending in the global energy markets, particularly here in Alberta. I work in the oil+gas service sector, so I felt comfortable with MCB. My plan was to pick a company that was cheap and had the potential to appreciate when money started pouring back into the energy markets. I don’t mean the share prices of Suncor and Encana, I mean when the major firms started spending again. This is where MCB gets their revenue from.
Last year, MCB’s management was very cautious about the future. Oil was around $70-75/barrel (double from its lows), but spending in the oilsands hadn’t picked up materially. I wasn’t until Q3 2010 when the announced capital spending projects really started to show up for MCB.
More importantly than price is stability. If oil stays at $90, eventually you will see more spending in the oilsands than if oil was to shoot up to $150, then back down to $75. Stability gives management the confidence to go ahead with those massive capital intensive projects. Here is a 3 year price chart of oil.
Here is a one year chart of MCB.
I wish all of my picks looked like this after a year, but they don’t. With MCB ploughing through the low-end of my fair value range, I need to revisit the position.
The chart shows how illiquid MCB really is. Small trading volumes can really move this company as there seemed to be a large accumulation of shares.
Deciding when to sell cyclicals is tough. If we are in a secular bull market for oil then not only will the earnings of MCB have a significant tailwind, but so will valuations. I don’t know if we really are in a secular bull market, but I know we are a long way from replacing fossil fuels as our primary source of energy. At $1.50 or less, I wasn’t paying for any real growth, just some mean reversion. At $3.50+, you need growth to justify the price. That growth may happen, but I don’t like paying for it.
As I said, I work in the oil+gas services sector. I have an advantage as to when a slowdown hits, though I wouldn’t use that alone. I guess one could equate it to Buffett counting the rail cars in the train yard.
Since having a net cash position, MCB has announced a dividend. Nothing big (1% yield), but it is a start. The dividend is likely to increase substantially from here as the recovery takes hold. This is a positive sign as management seems to recognize that cash in my hands is better than cash on MCB’s balance sheet doing nothing.
There has been no insider buying or selling.
- Priced at a conservative EPV
- 20x TTM earnings
- 12x smoothed Owner Earnings
- 11x Peak earnings
- 2.3x Tangible book
- Around 10x 2011 estimated EPS
We can speculate as to a fair price for growth but I am not sure how relevant that would be. MCB hit an all time high of $9.00 in 2006. We are a very long way from those earnings though. If the secular argument is true, then $9.00 might seem reasonable, but that was over 5x tangible book value. At 5x tangible book value, you get $9.65 fair value for MCB. I would consider that a very aggressive growth fair value.
Summary and Plan of Action
Management is confident that 2011 earnings will be higher than 2010, how much higher, I don’t know. There has been a huge move in the stock. We value investors always seem to sell too early, and I must get used to that. I was able to get almost 10% of my portfolio in MCB before it started its run. It is now around 15% of my portfolio. I am uncomfortable with that much exposure at current prices. I will par back my position and look for other opportunities. I will keep 5% of my portfolio in MCB unless there are some other screaming buys in the energy sector (that I can understand).
I just wanted to point out that this is post number 20. I have just inserted my first image. Some things I can pick up right away, others I struggle with. I will give myself a gold star for inserting the image (it is a pretty big step for me).
Disclosure: The author is long MCB.to at time of writing.