Category Archives: Company Analysis

Aveda Transportation and Energy Services $AVE.v

Another energy related name….

I own things that aren’t energy related, but the recent downturn has brought some interesting opportunities forward. The market seems to be fixated on when Tesla will be able to remove all fossil fuels from our transportation needs and when machine learning will replace everyone’s job.

In the meantime, the broader oil and gas market has stabilized and activity is returning to more normal levels. Costs have been rationalized from contractors, service company’s and producers and the cost per barrel has dropped. While the rig count has bottomed, it remains well off historic highs. Many WCSB companies are once again complaining about crew shortages going into the drilling season.

Enter Aveda

Aveda Transportation and Energy Services Inc. is a Canada-based company engaged in the transportation of products, materials, and equipment required for the exploration, development and production of petroleum resources, including rig moving, heavy haul and hot shot services, and the rental of equipment associated with oilfields operations. The Company carries on its oilfield hauling activities in Canada and the United States under the name, Aveda Transportation and Energy Services; carries on its rental operations under the name, Aveda Rentals, and carries on specialized transportation services under Aveda Heavy Haul. Its rental operations include the rental of tanks, mats, pickers, light towers, well-site shacks and other equipment necessary for oilfield operations. It has presence in the Western Canadian Sedimentary Basin and in the United States, principally in and across the states of Texas, North Dakota, Pennsylvania, Oklahoma and West Virginia.

Their operations are strongly tied to oil and gas activity, particularly in the US. Entering the recession the company was able to do over $150 mil in revenue. They have recently eclipsed that with their Q3 2017 numbers.

See the income statement charts below…

Why I like it

  1. The idea is simple (like the author)
    1. The company is a cyclical and I believe the bottom is in for this cycle.
    2. Recent mention of higher opex in Q3 is indicative of activity levels.
      1. the company believes that many of the increased costs (example lodging) will be passed onto end users as budgets refresh in 2018.
  2. Easy capital allocation decisions
    1. Aveda will use 3rd party contractors to service the customer if they are unable to get some of their equipment to the site.
      1. this represents over 30% of consolidated revenue for Aveda and is very low margin (typically 1-3% gross margin). Aveda has equipment that was previously idled during the downturn to bring back online to capture some of this lost opportunity. See chart below.
      2. It should be noted that 3rd party contractors will always play a role in Aveda’s value proposition to customers, just a smaller role moving forward.
    2. They have also identified gaps in their equipment portfolio to dedicate capital towards, this being hoisting equipment.
    3. They have a pretty levered balance sheet, which means paying off debt with cash generated by the business will help derisk the thesis and improve the valuation.
  3. Recent addition to the management team.
    1. Ronnie Witherspoon recently joined the team and my impression is that he is a strong operator. The company has used the recent downturn to capture more market share.

Valuation

As with any cyclical in transition, current earnings are depressed and the valuation looks high. There are estimates of north of 20mil in EBITDA in 2018. Current market cap is just under 30mil and enterprise value is a shade over 100mil.

If the rebound materializes then I believe $0.50/share will be way too cheap for Aveda.

Other Items

Recent financing was subscribed heavily by the chairman.

AGM was held in October in Calgary and only 1 shareholder attended.

 

Dean

 

Disclosure: the author is long at time of writing.

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Profire Energy (PFIE)

Rounding out what is my 3rd bet on the beaten down energy sector is Profire Energy. This will be a quick post to encourage further conversation.

The company makes burner management systems used in the oil and gas industry. They recently launched a new product (PF3100) that encompasses more solutions for operators. The products not only have a value proposition from a cost to operator standpoint but from a safety standpoint as well. They are a dominant player in the space.

The company is cash flow positive even during this time of much lower business activity. This is speaks to their cost structure and discipline.

The CEO owns over 25% of the company though he sold some shares to the company recently.

They are cashed up, have zero debt and 0.40/share in net cash.

Profire Investor Presentation May 2017

The author is long PFIE at time of writing.

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Command Center – CCNI

If you have been checking the “Portfolio” tab you would have noticed that I have a position in CCNI. I’ll give some thoughts on the company and hope to instigate some discussion.

Company Description

Command Center, Inc. is a staffing company. The Company operates primarily in the manual labor segment of the staffing industry. The Company provides on-demand employees for manual labor, light industrial and skilled trades applications. Its customers are primarily small to mid-sized businesses in the wholesale trades, manufacturing, hospitality, construction, retail and auto auction industries. The Company owns and operates approximately 60 on-demand labor stores in over 20 states. In addition to short and longer term temporary work assignments, the Company recruits and places workers in temp-to-hire situations.

Some History

From 2007 to 2012 CCNI would bump around from being profitable to losing money, the recession certainly didn’t help and you can see the big drop in revenue from 2008 to 2010. The current CEO was brought in 2013 to turn around operations. And you can see the margin expansion taking place as the focus on operations took hold. Closing unprofitable branches, coaching the under-performing branches/managers, and strategically expanding location count drove margins higher.  Margins were at a record and the company was generating solid FCF. Focus shifted from day to day operations to expanding the footprint. North Dakota became 25% of revenue in 2014 and the future was looking bright.

A few things happened starting in late 2014 and early 2015 and hit margins.

  • the oil and gas industry seen the worst decline in a number of cycles
  • some of the branches (not sure exactly how many) were not taking on the correct work and focus on high margin, high value add work was lost

Management did recognize the issues and put provisions in place to right size them. In the meantime, share price suffered.

Through 2015 and H1 2016 comparable year-over-year results suffered. Investors became fatigued and some have been quite combative. Such things happen when expectations eclipse reality.

I’m not going to comment on the competency of management and what should or should not be done. Obviously, given that I have a position I feel I can trust them with my capital.

Today

The last 3 quarters we have started to see operational improvements and better communication to shareholders. Recent (small) acquisition is delivering as expected and is an example of what the cash can be used for to grow the business.

CCNI now trades at around 8x FCF without any margin expansion. The CEO has clearly stated that he feels that 2017 will see higher revenue and margins. The low multiple and cash generating ability of the business will open up options to increase shareholder value.

Given the risk/reward profile, I think CCNI is worth buying under $0.50.

Feel free to comment.

 

Thanks,

 

Dean

 

*the author is long CCNI at time of writing

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High Arctic Energy Services – (HWO.to)

I started this post in late 2016. Since then the company has released Q4 2016 numbers. Though not 100% up to date, all the arguments are relative today.

I will be the first to admit that I have had mixed results investing in oil and gas related names. I think it’s pretty safe to say that we are closer to the bottom of the cycle than the top, but who knows.

I have owned HWO.to in the past and was lucky enough to sell mid 2014. Recently I have been sniffing around the O&G services companies in hopes of finding a company that will not only survive the current environment, but be bigger and better for the next cycle.

I believe HWO is a great example of a company taking advantage of the downturn by purchasing assets on the cheap in a non-dilutive manner.

PNG

The majority of their revenue comes from Papua New Guinea (see below for quarterly revenue).

geo_split

They own some high quality rigs in an environment where they have been able to keep several rigs utilized at any given time. PNG has been stable due to the large natural gas reserves and their LNG prospects. HWO has operated their for 9 years and built strong relationships with the major players. Admittedly, there is risk that the rigs in PNG are able to find work after their contracts are up.

Canadian Operations

For most part HWO’s Canadian operations have followed the overall business activity in Canada. Some decent Q’s, some lackluster and the typical spring break-up that’s associated with Western Canada.

This summer HWO acquired assets from TerVita. This including 85 rigs with various capabilities, rental equipment, engineering services, 5 owned locations, 300 employees and the right to use the legacy brand (which has a 30 year history in the marketplace). Apparently TerVita had too high of a debt load going into the downturn.

Thesis

The thesis is quite simple. The PNG operations I think are worth at least the current share price. They have a handful of high quality rigs, equipment rentals, and of course their existing presence.

The upside comes from two places:

  1. Increased activity in Western Canada. I’ll let the reader draw their own conclusions, but prices and activity seem to have stabilized in Alberta. Many service companies are recalling crews for the winter.
  2. Strong management team with several levers to pull to grow the business. I think the recent acquisitions show a patience and discipline in the current environment. Holding cash and waiting for the right opportunity takes time. I have seen several companies enter this downturn with excess cash only to wait too long to cut expenses and waste the opportunity. The chart below shows when HWO made major growth expenditures. (I did have to make some assumptions on what constitutes “growth”) As you can see the majority has been in the last quarter. The interim CEO was the former President and CEO of IROC Energy Services. He is interested in growing HWO given the current opportunity.

capex

Valuation

Market Cap and Enterprise Value are around $260mil. Using some assumptions, I think 40-50 mil in FCF is reasonable from operations. Making HWO trading at 5-7x FCF. Pretty cheap without having much contribution from Canadian operations.

I’ll be at the AGM in May.

hwo-investor-presentation-oct2016

Q4_Investor_Presentation_March_2017_03232017

Anyone else own HWO or finding value in the O&G market?

 

Thanks,

 

Dean

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BioSyent – RX.v

This post will be a short post as BioSyent is well known in the investment community and I have nothing material to add. Instead I will focus on how my view of a BioSyent type company has changed.

BioSyent almost perfectly embodies my maturity as investor. The company has grown rapidly, operates in a market that I am not well versed on, and is expensive.

In the past I would have overlooked BioSyent immediately. And to be honest I had initially overlooked it when it was first mentioned on twitter when shares where less than $1.00. As I was developing my qualitative skills as a microcap investor I wanted to get exposure to best in class management teams. A tagged along with a friend as was introduced to management of BioSyent. I was impressed and was willing to at the very least follow RX.v to see if there would ever be an opportunity to purchase shares at a more reasonable valuation.

I started formally tracking BioSyent in mid 2015. Shares were trading about where they are today after running all the way from under $1.00 to over $12.

I have seen a pattern with many high growth companies. The company usually is dramatically undervalued and shares trade extremely cheap. Then something changes the future of the business and the market is slow to react. The share price increases but not as quickly as the fundamentals of the business. As the company continues to execute the increase in valuation is higher than the increase in earnings. Suddenly, the company can do no wrong. Eventually the company’s momentum wanes and there is nothing to support the high valuation. Shares come back down to earth on the slightest stumble or pause in growth.

There are a few different likely outcomes:

  1. The rise in earnings was a temporary phenomenon and the shares will continue to trade lower.
  2. The rise is earnings is sustainable but the growth has disappeared as the share price needs to re-rate to the new reality.
  3. The rise in earnings is temporarily paused and the company enters transition mode. New products/services are being introduced, but do not drive enough revenue to have an impact to overall results. While the transition period drags on the shareholder base is slowly churned through. Many start to question whether or not they will see growth again. Short term investors are slowly replaced by longer term investors who believe in the story.

Being long RX.v I obviously believe we are in the middle of the 3rd outcome. The valuation of RX.v is high, but I am comfortable that my capital is being put to work wisely and management is aligned with shareholders.

The share price may be volatile in the short term, but looking out 2-5 years, I beleive $8/share will appear cheap. BioSyent may have fallen victim to tax loss selling and/or additional selling pressure as a Canadian investor’s shun all things pharma related after the blowup of Valeant.

Are there company’s that you are willing to pay a premium for?

Thanks,

Dean

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Pulse Seismic (PSD.to)

I recently purchased some shares in Pulse Seismic. I have been loosely following Pulse for several years but never in any detail. It has been profiled on a couple of blogs some time ago.

http://www.aboveaverageodds.com/2011/01/24/investment-analysis-pulse-data-inc-psd-to-it-doesnt-get-more-asymmetric-than-this/

http://www.punchcardresearch.com/pulse-seismic-a-wide-moat-company-drowning-in-cash/

I mentioned on twitter way back in August that I was looking at O&G service companies again.

og_twitter

Thankfully I didn’t have to look far. My thought process for investing in oil and gas companies in the current environment is:

  1. Must have the ability to cut expenses and run at or near break even (on a full year basis) at the current level of activity
  2. Must have a clean balance sheet so the company can use the downturn as an opportunity to expand the business
    1. The last thing I want is to have the company do a large dilutive share raise and multi-year lows in the share price
  3. Must have a capable management team with high integrity and spacial awareness to understand where the current opportunities are

The idea is to find a company that can ride out the downturn and be a larger business providing more value for all stakeholders during the eventual recovery. If I am able to find a company that meets all three of these, then I should theoretically be hoping for a long pronounced downturn as it will only expose more opportunities for the business to grow.

Brief description of Pulse

Pulse Seismic Inc. is a Canada-based seismic data library company. The Company is engaged in the acquisition, marketing and licensing of two-dimensional (2D) and three-dimensional (3D) seismic data for the energy sector in Western Canada. The Company has a seismic data library in Canada, which includes approximately 28,600 net square kilometers of 3D seismic and 447,000 net kilometers of 2D seismic. The Company’s library covers the Western Canada Sedimentary Basin (WCSB). The Company’s seismic data is used by oil and natural gas exploration and development companies to identify portions of geological formations that may to hold hydrocarbons. The Company’s seismic data is used in conjunction with well logging data, well core comparisons, geological mapping and surface outcrops to create a map of the Earth’s subsurface at various depths. It designs, markets and operates participation surveys and grants licenses to the seismic data acquired to parties that participate in the surveys.

Let’s take a closer look at Pulse to see if it ticks all the boxes.

  1. Ability to cut expenses to get to breakeven.

Given the nature of their product and the overall cost of the survey relative to the large expense of drilling for oil, they are able to maintain high margins regardless of activity. Their product is a very minor expense relative to the overall cost to drill. They are not interested in racing to the bottom in regards to pricing. That only damages their brand and will be very hard to claw back in the eventual upswing. Pulse has less than 20 employees and most costs for shooting the surveys are contracted out. As you can see below they have been able to maintain their margins with less business activity. The last chart shows that they have reduced opex to align with business activity. It’s reassuring that they are not sitting on their hands waiting for a recovery. They have also cut their dividend to preserve cash.

psd_ttm_s

psd_ttm_margin

psd_opex_ttm

2. Clean balance sheet to leverage as opportunities arise.

The company has paid back all the debt it took on from a large acquisition in 2010 and is now in a net cash position. They have also purchased shares and used to pay a dividend.

psd_bs

Given the ability to mirror opex with business activity, this company could take on a decent amount of debt without concern.

3. High integrity management team with ability to see opportunities.

This part of the due diligence process is subjective. The qualitative part of an investment is always the trickiest. The board is completely independent, experienced in the industry, versed on capital markets, and together own over 30% of the company. They also give a skill matrix in their MIC.

board_comp_psd

Management compensation is reasonable for a company this size. Their competition is global, were as they are not. So they need to know the geography inside and out. As well, the sales team needs to know the ins and outs of every project in the territory.

They have a couple of levers in regards to business growth.

  1. They can make a straight up purchase from E&Ps directly. The value of the contract may not be material to the overall costs associated with drilling for oil. Having said that, during a downturn all options are explored to be monetized.
  2. They could buy surveys from a competitor. Though not likely, it is always possible.
  3. They could conduct another participation survey. They help by doing some pre-funding but most initial costs are paid by end users.

Summing it all up

I think Pulse ticks all three boxes. In order to invest in this company you have to get comfortable to their exposure to oil and gas.

Pros

  • able to mirror expenses with activity quite easily
  • high value add product to customers
  • no debt

Cons

  • given how unique the business is, growth opportunities may not present themselves
  • they never really get expensive on a P/E or EV/EBITDA valuation
    • It’s likely from the fact that their revenues are not recurring and they have exposure to an industry which is extremely cyclical

Let me know if you are finding any value out there.

Thanks,

Dean

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Why I Sold MUEL

I recently sold Paul Mueller Co. I thought I would go into a little detail on the decision. The decision relates to how I have evolved as an investor. For those who want the history, please read my previous post.

Paul Mueller Company is a provider of manufactured equipment and components for the food, dairy, beverage, transportation, chemical, pharmaceutical, and other industries, as well as the dairy farm market. Overall I think that the company has done a decent job running the business. Of the four segments (Dairy Farm Equipment, Industrial Equipment, Field Fabrication and Transportation); Dairy and Industrial make up the majority of the top line for the consolidated company.

MEUL_segment_split

Dairy has been stable  since the acquisitions post 2007-08. I was hoping for the Industrial segment to post some sort of turnaround in 2015. That has not happened.

MUEL_dairy_and_ind

The company’s valuation is still quite cheap without any contribution from the Industrial (or Field Fab and Transportation) segments.

MUEL_valuation

So there are a few questions to get comfortable with the company as an investment:

  1. Does the Dairy segment continue to do well?
  2. Does Industrial turn around?
  3. If yes to the first two, does the valuation of the company improve?
  4. And aside from all 3 of those, is this a business run by quality mgmt?
  5. Lastly, does the pension liability on the balance truly reflect reality?

I honestly can’t really answer any of the above. I never really could. My original thinking was that if I buy shares cheap enough, I don’t really need to answer any of these questions. That’s not a bad way to invest, it’s just not the way I have gotten the most comfortable with.

When you buy a business like MUEL, you are buying a business with low(ish) product differentiation, capital intensive, and the business is subject to shocks that are beyond the control of the current management team. As well, you aren’t getting a ton of communication with the outside investor world. When buying microcaps, you hope for a business that is somewhat nimble, you aren’t getting that with MUEL.

It should be mentioned that MUEL has recently announced a share buyback. With such low volume on the stock, it could really move the stock higher.

In order to properly accommodate all the specific risks with MUEL you would need a portfolio that has 20-30 names. As well the amount of churn in the portfolio would have to be high. Something I don’t have time nor the personality for.

You may think that I will shun commoditized businesses or a business with little product differentiation to end users, that is not entirely correct. I have been putting a lot of thought into whether or not you buy companies that are part of a market that is commoditized or with little barriers to entry, and the answer of course….it depends. I’ll try and get some thoughts down to encourage conversation.

Thanks,

Dean

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