Here is a quick idea for those interested.
Company: Macro Enterprises
MC: 75 mi CAD
EV: 80 mil CAD
Macro Enterprises Inc., together with its subsidiaries, provides pipeline and facilities construction, and maintenance services to companies in the oil and gas industry in western Canada. It is involved in the construction, alteration, repair, and installation of pipeline and facility pressure piping, and structural steel facilities, as well as provision of pipeline integrity digs services. The company was founded in 2006 and is headquartered in Fort St. John, Canada.
As noted above, they are heavinly dependent on Western Canada. Construction activity here relies on more traditional O&G, pipeline, and LNG facilities and related infrastructure.
Managment & Operations
Frank Miles founded Macro in 1994. He is the current CEO and comes acrross as quite conservative on how the business is run. They traditionally have low debt loads and reinvest cash generated into the business.
Compensation seems reasonable for a company this size.
The company is based in western Canada and has a local presence. They employ local workers including unionized and first nations. The company has worked in western Canada for many years and has experience with the terrain, seasons and various building conditions.
Large construction company’s must have a strong safety record which MCR possesses. The repeat business with large clients is a testament to the work they have put in build relationships. The specialized work can lead to margins above industry peers.
Construction companies like this are interesting as they can be lumpy and tend to provide an opportunity.
You can see the share price take off in 2013. This corresponds with the increase in business activity and the company’s profitability. The company’s earnings continued until 2016 when construction activity in western Canada dried up. It loosely tracks the price of oil produced in Alberta, Western Canadian Select (WCS) which is delivered at Hardisty as well as the natural gas price.
For those unfamiliar, Alberta’s oilsands produce nearly 3 million barrels per day. The oil produced is “land-locked” and is sent via pipeline, rail and truck. Continued production with limited pipeline capacity and the heavy crude being less ideal for refiners to process has led to WCS trading at a discount to WTI.
The CEO owns 9.2 mil shares or about 27% of the outstanding shares. Mike Nielsen (VP) also owns over 1% of the company. Other holders of note are Gate City Capital at 11.7%.
As expected the majority of assets are comprised of fixed assets. PPE (net of depreciation) has historically been over 40% of stated assets. I think it’s important to monitor working capital as well.
In order to win business, MCR needs a large modern inventory of equipment. Though salvage prices likely fluctuate during boom/bust times, the use of tangible book value I believe provides a decent proxy for replacement value at a minimum. They also have significant real estate and maintenance facilities that it likely understated on the balance sheet.
Income Statement & Cash Flow
Now that we have that out of the way, below is a quick look at the income statement in ttm for MCR. I don’t think looking at this business (or really any business) on a quarterly basis is a good idea.
Earnings are lower than the recent peak but are not quite as low as the previous downturn when the was EBIT negative. As with many cyclical companies, there tends to be floor in the valuation based on trangible assets.
The chart shows the company can trade at well under tangible book value during downturns. It goes as low as 0.50 P/TB in 2016, but hovers around 0.60. I think this represents the downside potential if activity does not return (or return for some time).
Though the company does lose money, they do not tend to bleed a ton of cash for an extended period.
At a stated value of $3.32 per share and a multiple of 0.60 gives us a downside potential of $1.99 or approximately 20%.
I think it’s important to make an estimate of what the potential is if activity returns. Looking at previous cycles to get an indication of where MCR could trade provides an upside scenerio.
In 2019 EV/EBITDA hasn’t been much higher than 3x. It’s pretty much the same story for 2014/15. The chart is hard to read as they trade at high multiples of EBITDA in downturns.
EV/Rev can be another indicator and also apears to be trading below mean, but higher than the lows.
The company recently stated that they anticipate 2021 to have at least 250mil in rev. We can take an estimate of what EBITDA will be based on history. I get about 36mil using previous gross margins and operational cost requirements. There are few estimates from analysts stating 32-34mil in EBITDA in 2021. Any additional increase in revenue will mean even more upside.
TMX Pipeline Expansion
The Canadian government purchased the in 2018 from Kinder Morgan.
Therer has been some interesting developments frecently with their JV and Trans Mountain. MCR has written off the JV in the quarter ending Dec 2020. They are still entitled to recieve 20 mil in cash by end of Q2 2021. I have no opinion on the matter other than what has been stated by MCR management. There was a contract signed with Trans Mountain in Feb 2021 for an initial value of over $50 mil CAD. I think this bodes well for their ability to win contracts as the expansion continues.
I believe that the TMX expansion continues (even if it’s over budget). There really isn’t a reason to replace MCR as a contractor at this point in the project. The increased capacity will be a major benefit to Canada as a country as oil is a largest portion of our trade and the oilsands are the 3rd largest proven reserve of oil in the world.
- Activity could remain lower (or go lower), particularly in western Canada.
- The business could perform well, but may not reach the multiples that I have indicated.
- The tangible book value of the assets that I am relying on for my downside scenerio could be worth less than stated.
- MCR may win contracts with the TMX expansion, but margins may be lower than previous projects that I am using to benchmark my analysis on.
- One must acknowledge the polical risk with pipelines and hydrocarbons in general. Decisions made by political leaders are not always based on sound economic decisions and you never know if the TMX could end up in the political crosshairs.
- Environmental reasons specific to the work MCR provides specifically. Here is a recent example.
- There is no dividend to support the share price if earnings don’t materialize.
- There is not a meaningful NCIB presence.
- The CEO (Frank Miles) has been at this for 30 years. If he decides it’s time for a transition, there could be some additional uncertainty in the business.
With a 4:1 upside to downside ratio, I think MCR is worth a position here. The CEO runs the business conservatively and has skin in the game.
NGTL is of particular interest to MCR as will connect natural gas from BC and AB to major LNG export points. I think a project win from the NGTL pipeline project(s) would propel the shares higher as this would ensure meaningful equipment utilization for MCR.
Big thanks to UV for the collaboration on MCR.
Anyone else own or have an opinion on MCR? Stockhouse has some good information on MCR.
*the author is long shares of MCR.v at time of writing.