Tag Archives: HWO

HWO.to Q1 2017 – quick update

I picked up some shares of High Arctic Energy Services post Q1 earnings and after the AGM. I like the risk/reward of this company given where I think we are in the cycle.

The company has a strong position in PNG and recent acquisition in Canada should ensure that earnings stay at least flat through the cycle.  Concord Well Servicing (came over with the Tervita assets acquisition) has a large fleet in the WCSB and the stabilization in oil should bring stronger utilization throughout 2017.

I believe there are other opportunities in Canada to pick up some assets on the cheap. Hopefully we will see more in 2017.

Management is conservative with leverage and has done a good job of taking advantage of the downturn.

Another nice tidbit is the board is going to limit the total dilution potential via stock options to management. The proposal passed at the AGM but 15-20% of shares voted against the option, DSU and RSU plan.

Valuation

HWO.to nearly net cash and trading at 5-6x ttm FCF. Shares trade quite cheap for a few reasons:

  • cyclical company during the worst downturn in oil and gas in many cycles
  • I don’t think the investment community appreciates their PNG operations
  • 42% of shares are held by Cyrus Capital making this company quite illiquid

Risks

  • the obvious is activity based on the price of oil
  • PNG may be lumpy given that the company operates a small amount of rigs and having 2 idle for a long duration will hurt revenue from PNG
  • short term volatility if Cyrus decides to liquidate their position in such an illiquid stock

Feel free to comment;

 

Dean

 

The author is long HWO.to at time of writing.

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Filed under Company Updates

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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Filed under Company Analysis

What’s Dean been doing??

Once again I have strayed from blogging. Here (for like the 3rd time) is an attempt to rekindle my romance with Petty Cash. The ideas and feedback from readers has more than paid for the time it takes me to write a post, so I should continue to post regularly.

The Market

I don’t have any insight on the market. But it is tough to find anything meaningful to buy. As always I remain cautious, especially on residential real estate in Canada. Deny, deny, deny seems to be the theme. I don’t know if we get a “soft landing”, but things are eerie to say the least. What is the most perplexing, is that as Canadians we are quite certain that a real estate bubble won’t happen to us. I think it’s because we are so polite. I mean it’s like we believe that some sort of greater power will prevent horrible things from happening to nice people. We seem to think that “bad” things only happen to “bad” people. I think even an orangutan would learn not to do something if he seen a friend of his get hurt from doing it. I really shouldn’t say anything as I have made enough mistakes to fill a (near) million dollar house in Vancouver.

As well there seems to be renewed vigor for stocks again. Though my portfolio often goes in the opposite of the market, I remain skeptical of a liquidity fueled stock market that is now priced at greater than 18 times earnings. I have been hearing “pro-forma” and “adjusted” more than ever and analysts have been reaching up to 18-24 months into the future to justify valuation. Not a market call, but I doubt you can see anywhere near 10% returns over the next 10 years.

2013 Performance

Umm. Well, fine. I guess. I have done better than the market and made up much of the losses I had relative to the market when I questioned if I should be running my own portfolio. Having said that, I could do a 180 in no time flat. I constantly reassess holdings and position sizes. Currently north of 35% cash.

New Position

As per Chip’s suggestion in a previous post (see comments), I researched and added HWO.to to the portfolio.

The company is really cheap (less than 3.o ev/ebitda) and pays a monthly dividend. Management admitted that growth is limited and elected to pay a monthly dividend. A large shareholder is looking to liquidate, so we could see a depressed share price for awhile yet. 65% of revenue is from Papua New Guinea. The 3 rigs there are now under contract for a few years, so earnings and cash flow should be pretty certain.

Other Position Changes

I have been adding to OML.v and I have a few other positions that haven’t been blogged about. I think I will do a post with a quick thesis/summary on all unmentioned positions in the near future. I want to emphasize how many of my ideas are robbed/borrowed from others.

Thanks for reading,

Dean

Disclosure: long HWO.to

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Filed under Portfolio Performance, Random Thoughts