Tag Archives: FES

Flint Re-buy.

Flint didn’t have a great year. They had some non-recurring expenses and tough comps in some of their segments.

I originally bought FES.TO right around these levels in 2010. When the price rose dramatically faster than the fundamentals, I sold out. Now the opposite has happened. Flint has had its share price lose 30% YTD and the fundamentals of the company seem to be improving over the last 2 quarters.

They had a pretty major oil sands contract awarded (at $430 million). They also made a strategic acquisition that was funded partially by shares. The issue was that FES was actually quite cheap, so I would have preferred if they used all debt instead.

According to analysts Flint should do $200 mil in EBITDA and $1.65 EPS in 2012. That’s gives you a EV/EBITDA of 3.6x and a 7.4 P/E. Though I don’t like to rely too much on future estimates, I take comfort in the fact that right now you can buy FES.TO at 1.1x tangible book. With earnings trends pointed in the right direction and increased expenditures from the major oil sands players, I can live with expensive ttm numbers for Flint. Oil seems to be stable even during the Euro-crisis.

Living in Alberta, I can tell you that nobody really knows about the crisis in Europe and it doesn’t seem to be affecting the energy sector one bit. As long as oil stays above $75, we are in expansion mode here.

Under $13 I think Flint is a buy. I promise to have more detailed posts than this one going forward.

Dean

Disclosure: The author is long FES.TO

http://www.valueinvestigator.com/en/valuefavourites/fes.php

DA+Davidson+Conference

2 Comments

Filed under Company Updates

Flint Energy…sold

The last sale from earlier this year was FES.to. I bought around this price and sold just over $17.

The timing of contracts for Flint makes it tough to value. You can have a couple of contracts finish right before the end of the reporting period and artificially inflate earnings.

Flint has struggled to win new meaningful contracts. This is even in light of the recent economic activity in the WCSB.

Flint could earn $1.00-1.20/share in 2012. That puts the current P/E between 11 and 13. Not cheap enough given the risks. There is some balance sheet leverage as well as a high degree of economic leverage.

I like the space (oil and gas services), but will be looking at smaller companies with a more incentivized management team.

Dean

1 Comment

Filed under Company Updates

Q1 2011 Performance, Updates and Thoughts

Performance

I have ended Q1 2011 almost at the exact same spot as I left 2010. Still trailing my target portfolio by almost the exact same amount. Though both me and the mock portfolio ended  up around 3.7% for Q1 2011. There has been some changes to the portfolio so I would expect the underperfomance to continue, especially if this rally in the equity market continues.

Updates

I have sold WJA, FES and EQI (formerly GHC). WJA was around 25% below my low end fair value. The same with FES. EQI was almost at fair value. None of the companies have done anything wrong, but I am finding better value in smaller names. I added to MGO and have bought a few new companies. I hope to have write-ups on them in the coming weeks.

Thoughts

The markets have had a very nice run. The higher they move, the less I like them. I start to get nervous about my holdings in large companies. QE2 is ending soon, and we will this economy on its own footing for the first time. I think that “the economy” is no longer a catalyst going forward. Picking specific companies that have their own internal catalysts will be more important than just plowing money into what’s hot. I don’t think that you will see another recession, but I doubt the mean reversion growth rates in GDP continue. Some large US companies are cheap and some look cheap. Looking back over the last 10 years you see excess. Excess borrowing and spending. I don’t think that profit margins and growth rates will look so rosy over the next 10 years. Profit margins are quite high and have the potential for mean reversion to the downside. With steady revenue and closer to normal margins will take away any margin of safety in the broader market. That is why I am focusing more and more on small companies with their own internal catalysts.

Given the extreme debt levels, a small increase in interest rates will dramatically increase the cost to service those debts. That’s money that won’t be spent further to buy more flat-screens, cars, or other discretionary items.

Japan

Japan was horrible. The damage isn’t completely tallied yet. The Nikkei is off 7-8%. That’s not really that much. Japan is not a long term investment. Their companies are not shareholder friendly. The have an even worse debt/GDP ratio than America. Their aging demographics are the worst in the first world. Japan would be nothing more than a sentiment trade. In order to minimize risk on that type of a trade you need panic. I don’t see panic. As soon as Buffett says “buying opportunity” you money flowing in whether it’s warranted or not. Maybe the eventual trade would be uranium, but again I see no panic.

Dean

1 Comment

Filed under Company Updates, Portfolio Performance

Thoughts on Flint

Flint Energy Services has been on my watch list for a long time. Living and working in Alberta, I have heard the Flint name many times. I finally pulled the trigger recently, and here’s why…

Flint is a different animal in the energy services industry. The “Build it then maintain it” has given Flint a more diversified revenue stream. Flint trades on the TSX under ticker FES. They report Q2 in a few weeks.

Everything was going along fine in the energy sector until the financial crisis. Money was pouring into the Alberta oil sands, and you didn’t have to be too smart to make money. Things got a little carried away when oil went from $145 to less than $50. It is tough for energy companies to budget expenditures (where Flint gets its revenue) when you don’t know the price of oil will likely be in the next 6 months. The Alberta government see-sawing on its royalty rates doesn’t exactly instill confidence. Of course Flint has revenue from outside of Alberta, but a good portion comes from the oil sands.

Cyclical companies can be gravy for a value investor. Certain industries are likely to grow faster than GDP for years into the future, and it is not unreasonable to expect previous peak earnings to be taken out. Albeit, not in the immediate future.

I think we should start with a brief summary of Flint’s divisions…

Rev 2005 2006 2007 2008 2009 TTM
Production Services      674.40       936.10   1,107.10   1,146.90      792.00       751.22
Facility Infrastructure      238.80       410.90      425.80      585.50     592.50      589.49
Oilfield Services         65.80         88.90      225.70      278.80       212.40       210.86
Maintenance Services                –             4.10         57.70      303.40      279.60       316.14
Total      979.00   1,440.00   1,816.30   2,314.60   1,876.50   1,867.71
             
EBITDA            
Production Services         80.86         97.70       101.80       112.63         45.67         41.01
Facility Infrastructure      25.91         44.30         30.70         43.40   70.75     77.50
Oilfield Services           8.12         20.90         38.80         25.78         16.27         13.92
Maintenance Services                –   –         0.30           3.80         19.86         16.54         14.04
Total 114.89 162.60 175.10 201.67 149.23 146.47
             
EBITDA margin            
Production Services 12.0% 10.4% 9.2% 9.8% 5.8% 5.5%
Facility Infrastructure 10.8% 10.8% 7.2% 7.4% 11.9% 13.1%
Oilfield Services 12.3% 23.5% 17.2% 9.2% 7.7% 6.6%
Maintenance Services 0% -7.3% 6.6% 6.5% 5.9% 4.4%
             
Rev Mix            
Production Services 68.9% 65.0% 61.0% 49.6% 42.2% 40.2%
Facility Infrastructure 24.4% 28.5% 23.4% 25.3% 31.6% 31.6%
Oilfield Services 6.7% 6.2% 12.4% 12.0% 11.3% 11.3%
Maintenance Services 0.0% 0.3% 3.2% 13.1% 14.9% 16.9%
             
EBITDA mix            
Production Services 70.4% 60.1% 58.1% 55.8% 30.6% 28.0%
Facility Infrastructure 22.5% 27.2% 17.5% 21.5% 47.4% 52.9%
Oilfield Services 7.1% 12.9% 22.2% 12.8% 10.9% 9.5%
Maintenance Services 0.0% -0.2% 2.2% 9.8% 11.1% 9.6%

 

Production services provides tubular management and manufacturing, day-to-day field facility installation and maintenance, pipeline, and plant shutdown and turnaround. This segment was almost 70% of revenue and has fallen to 40% currently. Profitability has also fallen, EBITDA margins have gone from over 10% to less than 6%. Much of this is the result of significantly lower drilling activity, but margins have been on a slow and steady decline for 5 years now.

Maintenance Services consists of routine maintenance and turnaround services. The company operates maintenance services through three joint ventures. Though revenue has grown strongly, EBITDA margins have not. This segment seems to be better insulated from the downturn than others.

Oilfield services is focused on transportation and hauling. Same story as the rest of the company, we are dealing with a very cyclical industry after all. Revenue in excess of 200 million and EBITDA around 14-16 million.

Finally, the meat and potatoes of the thesis, facility infrastructure. This is where the “full-cycle” approach to the energy industry has paid off. Healthy margins, over 10% EBITDA, and revenue near all time highs. This segment used to contribute just over 20% of consolidated EBITDA, now it contributes around 50%.

Lets look at the company on a consolidated level.

  • Pretax ROIC on average is above 10%.
  • The company is proud that during the recession, they have managed to lower the DSO to under 70 from over 90. DPO seems to be holding steady around 40 days.
  • Consolidated revenues CAGR is 16% since 2003, while the share count has grown around 5% per year.
  • The debt load seems manageable with D:E at 0.45, and interest coverage, by EBITDA, over 9 on a ttm basis.
  • The current ratio is 2.7, with 130 million in cash.

Valuation

  • EV/EBITDA – EBITDA is around 150 million now, and this should be trough numbers. This gives the company an EV/EBITDA of 4.9. Not dirt cheap, but not expense for a company that should see earnings grow sharply in the next few years. Not only will EBITDA grow, but there is certainly room for multiple expansion.
  • DCF – Warren Buffet said that  owner’s earnings are net income plus depreciation and amortization minus the average amount of capital expenditures needed to stay competitive. Another thing to watch out for is companies reporting still decent FCF but are just adjusting working capital, this is ususally just a temporary kick to FCF. 5yr averge net income + depr and amort is 118 million. Whether you use average capex, average capex to PPE or average capex to revenue, you get a more normalized capex budget of 60million, or you could just use the high 50s million in depreciation and amortization over the last 2 years. How much of the cap ex is for growth and how much is for maintenance? Who knows exactly. Given the tailwinds in this industry and rapid revenue growth from Flint, I will say that 40% of capex is for growth. 50 million times 60%(100%-60%) is 30 million for maintenance. Giving you owner earnings of around 68 million. Using my DCF, I get a value of $20-24.
  • TBV – tangible book value has grown steadily of the last 5 years from under $5 to over $11. The company took a huge write-down of goodwill assets (400 million) in 2008, so you see why simple price to book can be misleading. Current price to tangible book is 1.1.
  • EPV – using an adjusted net income to reflect only maintenance expenses and expenditures, I get 186 million in net income. Dividing by the cost of capital of 12.3% (10% for debt and 15% for equity), you get a value of $30.
  • Using more than one  valuation metric is a must, it will ensure consistancy and give you an extra margin of safety. Though each metric has it’s uses, they are have drawbacks. I also don’t really like pricing in the “upside” of cyclical industries, the future is too uncertain.

Risks

  • Obviously the risk of double dip is there. If the US goes into recession, Flint’s markets will suffer.
  • Chinese growth slowing also plays a factor in future growth prospects for Flint.
  • Execution risk is present, but I don’t think it is a big one.
  • Though not a risk, management doesn’t own a huge amount of shares. If I am going down, I like to know I’m not alone.

Catalysts

  • Potential dividend
  • Takeover
  • Rise in risk appetite
  • Earnings rebound

Summary

If you can get your hands on FES under $13, I would consider buying. Future fair price can be between 25-30 on the high side, but over 20 isn’t a very far stretch. You are buying a quality company near book in a secular bull market to help them achieve record revenue and earnings hopefuly sometime in the future. Revenue is now ticking up sequentially and the compnay is winning new contracts. Oil sands expenditures are expected to jump at least 20% yoy and build on those gains in 2011. In a world with low-interest rates, you are almost forced into equities. It’s a little easier when you are in good company, ABC funds has done a recent write-up on Flint, here.

Dean

Disclosure: Long FES

Links

2009 Annual Report

Latest Investor Presentation

Q1 2010 earnings

Annual Information Form

2 Comments

Filed under Company Analysis