New West Energy Services (NWE.v)

I won’t spend a bunch of time on the post for NWE, only go over the highlights…

Oil production in the United States is rising dramatically. Couple that with ever increasing production out of the WCSB and limited refining capacity has created a condition where Western Canadian Select trades at a massive discount to WTI. Over the last 12 months oil transport by rail has increased dramatically to compensate for Alberta oil being land-locked. I think this is a trend that continues until pipelines are eventually built. Several Alberta based projects just got the green-light. And I also think that production in the U.S. continues to rise. I mentioned most of it in a previous post. I wanted to find out who would benefit and build a basket of a few names. I ended up looking for companies that met the following criteria:

  • Under-followed by the analyst community
  • Exposure to WCSB and/or Bakken oil production or exploration
  • Cheap valuation TTM and NTM

NWE made the cut even though it has only really earned sustainable economic profit after 2011 with the acquisition of Bearstone from Newalta. This is when the newest (Kerkhoff) CEO took over after the previous CEO stepped down. At the same time William Rand (director) purchased 15% of the company. The current CEO owns a little more than 1x salary in common stock.

NWE_margins

You can see the company turning into something sustainable in late 2010. I get about 20-25% ROC over that last 3 years. So it looks like they are adding value.

I should mention that the last few acquisitions have been paid at a reasonable price. There are opportunities for these little companies to move the profitability needle without having to shell out a ton of cash or pay a huge premium price to gain critical mass.

Another note is that in June there was a bunch of warrants that expired that would have been extremely dilutive.

Risks

  • Obviously oil prices (and the spend on services)
  • Also with these small companies is the lack of a moat. They may provide a niche, but that doesn’t mean they have a moat.
  • Execution of the integration of recent acquisitions.
  • And of course, potential general corporate governance.

Valuation

  • 0.75x tangible book
  • 3.2 EV/EBITDA ttm
  • likely less thatn 2.0 EV/EBITDA once run rate revenue flows through the financials from recent acquisitions

I should be able to post the other ideas in the coming weeks.

Dean

Disclosure: Long NWE.v

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