Macro Enterprises ($MCR.v) – Quick Update

About 6 months ago I posted about a position I have in Macro Enterprises. At the time shares were trading at $2.40 vs. $2.50 today. This is slightly outperforming the TSX over that time. My blended ACB position has performed slightly worse FWIW.

Given that I focus on business fundamentals as a large portion of my investment thesis, my timeframe is typically 9-36 months. However, for Macro there have been a couple of relatively big announcements that seem to have been overlooked by the market. Below is a quick summary:

  • May 19, 2021 – signed a construction contract for the Deep Valley South Section and Colt Sections of NGTL System Expansion Project. Scheduled to start Q3 2021 and finish Q1 2022. Estimated value was in excess of $190 million.
  • May 27, 2021 – released Q1 2021 and held AGM. During the presentation they confirmed $250 million in revenue for 2021.
  • August 19, 2021 – announced Q2 2021. Results were positive from an operations standpoint. They upped the estimated revenue for 2021 to be $300 million. Subsequent to quarter end they confirmed that they received the $20 million that was marked as receivables related to JV with Spiecapag.
  • September 7, 2021 – construction contract with Kiewit TMEP Corp for segments of the TMX along the Coquihalla-Hope corridor. Estimated value was approximately $180 million. As a result they are now expecting revenue to be $350 million in 2021. They will also increase the capex program from $8-$10 million to $20 million to meet demand. To me this demonstrates that they can still win high value contract as an independent.

Putting this all together I see the company as having being de-risked. They have more revenue visitibility than they had 6 months ago. In the short term we should see continued strong trend in EBITDA and revenue.

Risks

I went through some risks in the previous post, but I think they are worth looking at again.

  • There is a chance that they are unable to win more contracts in 2022 and they could see materially lower revenue at some point.
  • The political risks associated with pipelines and hydrocarbons in general.
  • The margins on the recent contract wins could be lower than prior contracts.
  • Using tangible book as a downside scenario could be incorrect.

Downside

Using the current tangible book value and $200 million in revenue coupled with prior multiples I derive a blended downside of 15-20%.

There are only a handful of times where the company traded below half of tangible book value for longer than a week or two over the last 10 years. I am comfortable using that as a worse case downside scenario.

The company could trade below these multiples of course. The business does have more project work and less recurring maintenance work than prior.

Upside

The upside uses a blend of $250 million in revenue for 2022, my estimated EBITDA and analyst estimated EBITDA.

Summary

I believe the share price in MCR does not reflect the recent developments. Of course, the market could have digested this news already and MCR could possibly be fairly priced at today’s prices.

Despite the headlines of oil hitting multi-year highs, MCR is still out of favor in my mind. Yes the business is capital intensive and lumpy, but I believe the price paid is at such a discount that MCR represents a decent bet here. If I didn’t have a position already, I would take one here.

Anyone else own MCR?

Dean

*the author is long MCR at time of writing

Leave a comment

Filed under Company Updates

September 2021 Update – $OSS.v, $ISV.to, $STC.v, $FTG.to, $VMD.to, $URB/A.to, $MCR.v

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below. They recently did an update that has added some more features.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

Nothing worth noting.

What I’m Reading

  • I have been spending most of my free time this month focused on the build out of my garage gym. Shoot me a message if you ever want to chat lifting.

Posts this month

Developments on Companies Mentioned

  • OneSoft Solutions – $OSS.v
    • Notice of the CEO selling some shares
      • He still has about 8.8% of the outstanding
      • This is something to monitor if it continues
  • Information Services Corp – $ISV.to
    • Upped dividend from $0.80 to $0.92
    • Now yielding over 3%
  • Sangoma Technologies Corp – $STC.v
    • Held Special AGM and passed motion to consolidate shares in plans to uplist to US exchange
    • Released Fiscal 2021 results and held conference call
      • Results were slightly ahead of previous guidance
      • Issued new guidance for fiscal 2022
        • Higher than expected EBITDA margin
        • Slightly higher than I expected for organic growth
      • Continuing to pursue uplisting
      • I would have thought the stock would have responded better to this news
      • I’m going to listen to the call again to see if there is anything I missed
  • Firan Technology – $FTG.to
  • Viemed – $VMD.to
    • has been hitting new 52 wk lows consistently
  • Urbana Corp – $URB/A.to
    • Renewal of NCIB announced
      • Any purchases at this large of a discount to NAV should be highly accretive
    • NAV continues to march higher
  • Macro Enterprises – $MCR.v
    • Announced Subcontract for Trans Mountain Expansion Project
      • Revenue to reach 350 mil in 2021 with some additional investment in PPE
      • I thought the stock would have popped even more given how much visibility they have into next years revenue

Have a good one.

Dean

Long $OSS.v, $STC.v, $VMD.to, $URB/A.to, $MCR.to

Leave a comment

Filed under Uncategorized

Some Thoughts on Oil & Gas Activity – International

As an investor, I look for mispriced bets. I tend to be somewhat industry agnostic as long I feel that I can get an understanding of the mechanics of the industry. Though I like to take long term concentrated bets on individual businesses, I have taken top down bets when I feel it’s appropriate. Parts of the Oil & Gas industry is something that I feel I understand well enough to commit capital to. As such, I follow the rig count consistently to sniff out a potential disconnect between share prices and activity. I prefer to find more service focused companies rather than producers, so the focus on marginal drilling activity drives the businesses.

This post will take a quick look at the industry with a emphasis on international rig count.

Demand

Like any commodity, oil is subject to supply and demand. Though there are differences in the types oil in the various geographies, oil supply and demand should be looked at globally (in my opinion of course). When prices stay below the marginal cost to extract oil then we see underinvestment and vice versa when prices are high.

Here is one (of many) sites that provides supply and demand numbers.

Supply

Obviously the cost curve is important. Below is a global comparison with the average cost of production in 2020.

You can purchase a very detailed report here, although I just stole the free image.

Looking at the cost curve at a set point in time can be misleading. Currency fluctuations, transportation infrastructure, refinery capacity, remaining reserves, unplanned additional supply, depletion rates, EV transition cadence, local government agendas and political risks are some of the thing I try to keep in mind when investing in the space. EIA gives regular updates like this one.

Historical Prices

Of course, price drives investment. Though this post talks about International rig count, I can only find inflation adjusted data for WTIC. Regardless it provides some interesting context.

OPEC

You can’t google anything related to oil without getting a bunch of news on OPEC and what they are doing or planning to do with supply. Understanding the intentions of OPEC at any point in time is difficult. Countries come and go, production is raised or lowered, and sometimes the countries can’t agree on production quotas.

I have no advantage over anyone else in predicting what OPEC will do or won’t do. Therefore, I don’t trade off short term news and expectations. I wouldn’t go so far to say that I ignore what OPEC is doing, but I tend to focus on what happens and what the impacts are after that. I have made premature decisions when OPEC says they will raise or lower production, only to get caught off guard when it doesn’t happen.

Rig Count Globally

Interesting to see the role that the various geographies have played in the contribution to the total rigs being utilized. Also noting that the total rigs deployed peaked in the 1980s. Given the equipment required to extract oil has only increased in complexity, we can see how many drilling rigs are needed today relative to the past. One could make the argument that we are underinvesting in oil discovery and production today, but the count is still lower throughout the 2000s than the late 1970s and early 1980s.

Looking at the previous chart in an area form, the US drilling activity from the 1970s proportional looks pretty impressive.

The spillover effects from the 1973 oil embargo made a lasting impact through time, though it was officially lifted in 1974. The devaluation of the US dollar coupled with the supply reduction drive prices higher. I’m going to go a little more about the US into this in a separate post.

When removing North America from the global rig count with monthly data rather just annual average, gives an interesting perspective on activity. The Middle East has been growing rig count while Latin America is utilizing lower than previous.

How I Think About the Industry

I have found that over the years I utilized EIA more and more as I tend to find myself following data and not speculation on what will or won’t happen. Understanding the type of investor I am and my behavior to news and price swings is important if I want to commit capital to the industry. I find the focus on service companies, having a 9-24 month timeframe, invest with high integrity management teams, focus on stable balance sheets and keeping positions small is the what works for me.

Anyone else follow the rig count closely?

Dean

8 Comments

Filed under Random Thoughts