Tag Archives: PSD

Pulse Seismic $PSD.to – opportunity?

Mean reversion can create opportunity. The set up of an established business with experienced management coupled with very low expectations looking ahead can create opportunity. I have had some success with mean reversion in cyclical industries. It can be hard to think that the current out of favor companies will see brighter days ahead (at some point).

Enter Pulse Seismic

It’s been about 3 years ago since I owned Pulse. Here is a quick update from the summer of 2017.

Pulse recently released their Q1 2020. Top line was weak. Who would have thought that record low oil prices coupled with the covid lockdown would have led to the lowest utilization of their data library for as long as I can remember. During Q1 they and to negotiate the covenants on their debt which sent the shares up over 50% initially. Shares are down 50% and 60% ytd and over the last year. At $0.96/share Pulse has a market cap of just over 50mil and an EV of just over 80mil (CAD).

Since then, the company has had a rough couple of years.  Last year they had the opportunity to purchase their largest competitor (Seitel) in the WCSB. The purchase price was very attractive given the cost to shoot new data.

The Deal

See below for a statement on the deal from the 2019 President’s Letter. Highlights are mine. 

For many years Seitel Canada Ltd. provided Canada’s largest library of licensable seismic data, growing aggressively by shooting its own 3D data in active play areas. Pulse had wished to acquire Seitel for quite some time. I would say that the combination of the extended industry downturn and a change in ownership of Seitel’s U.S. parent company last year improved the prospects for a transaction.
Pulse’s overarching desire was to position itself for a longer-term industry recovery, at valuations that would set us up for success in the emerging environment. Bluntly, while others appeared to be giving up on Canada, we were casting a vote of confidence in the producing sector’s long-term future. This was, for us, the optimum set of conditions to bring home the deal.
We did, however, expect the short term to remain difficult, probably as bad as last year and perhaps even worse. So we structured the acquisition financing to have low principal repayments and favourable debt-to-EBITDA covenants. Combined with our absence of debt going in, our strong cash position, low costs, lack of a dividend and continued shareholder free cash flow amidst record low sales, we were confident that we were properly managing
the acquisition’s financial risk.
For $53.6 million cash (plus up to $5 million more based on sales over the next two years), we have acquired 36,354 net square km of 3D seismic data, enlarging our most valuable asset by 126 percent, and 379,207 net km of 2D seismic data, increasing our 2D data by 84 percent. (For further details please see the January 15, 2019 press release or the MD&A for the year ended December 31, 2018.) The 3D data, from which most of the revenue will likely be generated, is complementary, having minimal overlap with Pulse’s 3D data, while the widely spread 2D data is also complementary for the most part, with slightly more overlap than the 3D.
The valuation is very favourable, with the price per square km being approximately one-third the price Pulse paid in its Divestco acquisition in 2010. The Divestco metrics amounted to an estimated 10 percent of the costs of shooting new data. The valuation of the Seitel acquisition, at $1,600 per square km (with zero value assigned to the 2D data), amounts to perhaps 3-5 percent of shooting costs. While the two libraries have been largely depreciated in balance sheet terms, their replacement value is, therefore, in the billions of dollars. We formerly  provided an estimated replacement value for Pulse’s data library, but the figure for the combined library would be so large that it no longer sounds credible. Certainly, replicating Pulse’s data library would take decades of work. And a quick reminder for newcomers to the Pulse story: our seismic library consists of data–pure information — not software. It does not become obsolete, deteriorate or expire, and it can be relicensed and reused an indefinite number of times.

Read that again, the deal was done at 5% of shooting costs. That’s crazy. Having capital at the right time in the cycle can be very lucrative.

Covid and oil prices

If you have been under a rock during lockdown, your internet was cut off and you have made zero effort to pay attention to economy; you would have missed oil trading below zero and making headlines. Thankfully, the same people who seen the trade war, flash crash and the pandemic coming came out during the oil price crash and told everyone what they should have done. Nonetheless, activity in the WCSB is at an all time low. Active rig count is a good proxy for activity in AB and WCSB. Below is a 10 year chart.

Summary

They now have over double the revenue generating opportunity with very low incremental operational costs. This was already a business that generated substantial cash for shareholders over the entire economic cycle, and now it’s pretty much twice the size. The replacement cost of the assets is easily worth more than the market cap of the company and they are still producing cash at this level of activity. Since 2008, their average quarterly EBITDA and CFFO was 7.4mil and 6.9mil or just under $30mil and 28mil annually. They are now twice as big. If they can even get back to that level of activity with twice the data library then they are trading at about 1.4x EV/Average EBITDA and 1.5x EV/Average CFFO. I believe that EBITDA and CFFO are decent metrics for what the business can generate for the owners and feel comfortable using them.

Again, they have almost doubled the size of their data library without materially increasing opex. Management has proven to be make shareholder friendly decisions in the past with dividends, buybacks and debt reduction.

Low risk, high uncertainty for sure.

 

Thanks,

 

Dean

Disclosure: The author is not long shares of $PSD.to at time of writing, but I may initiate at any time.

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Energy Services Bets – Postmortem

So I made some bets on energy services company’s over the last 18-24 months or so. I thought now might be a time to do some sort of postmortem on the trades and see how they have performed. Full disclosure: recently I have added to some, sold some and continue to hold some of the company’s mentioned. See the Portfolio page for current holdings.

This post will be structured in 4 parts:

  1. Was it wise to bet on Energy Services sector relative to the overall market for the given time period? This should provide an indication of whether looking at the sector from a top down standpoint was a wise decision.
  2. Within the sector, did I pick stocks that outperformed? This should help me understand my stock picking abilities on an individual company basis for the time frame.
  3. Did the stocks that I chose outperform the market?
  4. Did the stocks chosen produce a positive total return?

Before getting started, below are the 4 companies I bought shares in. The first 3 are based in Canada, with the last one being Nasdaq listed.

Ticker Purchase Price Purchase Date Dividends Current Total Return Hold Time (yr)
psd.to $2.30 22/11/2016 $0.20 $3.10 43.5% 1.22
hwo.to $4.75 11/05/2017 $0.12 $4.01 -13.1% 0.76
ave.v $0.49 16/10/2017 $0.00 $0.53 8.2% 0.33
pfie $1.26 20/07/2017 $0.00 $2.19 73.8% 0.57

*Note the average hold time is 0.75 years (or 9 months)

Was it wise to bet on Energy Services sector relative to the overall market for the given time period?

When grading the bet on energy services vs. the overall market I chose the XIU.to (iShares S&P/TSX 60 Index Fund) and SPY (SPDR S&P 500 ETF Trust) for the overall market. For the energy services sector I chose the XEG.to (iShares S&P TSX Capped Energy Index Fund) and IYE (iShares Dow Jones US Energy Sector (ETF)) for the energy services sector.

Here’s how the bets have panned out:

Date Energy Services Market
22/11/2016 -17.6% 5.0%
11/05/2017 1.9% 2.5%
16/10/2017 -7.1% -2.4%
20/07/2017 4.5% 7.8%
Average -4.6% 3.2%

The results show that buying this sector because it was depressed may not have been the wisest strategy.

Within the sector, did I pick stocks that outperformed?

Using the same dates, how did the stocks that I chose do against their peers in the sector? This is definitely a nuanced question. Especially if you look at all the names in the ETF. Not sure it’s fair to grade a 50mil market cap Canadian company against a much larger company. Regardless, the results are below:

Date Energy Sector Stocks
22/11/2016 -17.7% 43.5%
11/05/2017 1.8% -13.1%
16/10/2017 -7.2% 8.2%
20/07/2017 4.5% 72.2%
Average -4.7% 27.7%

As you can see, on average I did better than the energy services sector during the time frame.

Did the stocks that I chose outperform the market?

When you stack up my picks against the market, you get the following results.

Date Market Dean
22/11/2016 5.0% 43.5%
11/05/2017 2.5% -13.1%
16/10/2017 -2.4% 8.2%
20/07/2017 7.9% 72.2%
Average 3.2% 27.7%

This is with the most recent pullback in the markets.

Did the stocks chosen produce a positive total return?

The results showed an average return of 28% over a 9 month time frame. No complaints here. Not sure I can really draw much of a conclusion over a 9 month period and with only 4 stocks being chosen.

Regardless, I wanted to share the results and invite any feedback readers may have.

 

Thanks,

Dean

Disclosure: See portfolio tab for current holdings.

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Pulse Seismic Quick Update

Quick update on what is a low risk high uncertainty stock in the portfolio.

  • Q2 2017 numbers came out and were a little better than last year. The outlook provided was murky at best. Given how lumpy the transactional revenues are, it’s too be expected.
  • And very recently the company announced the largest transactional licensing sale in history at 29.5mil. This is a pretty big deal given that revenue for the previous 12 months was 15.4 mil.
  • on the news the company was up about 7.5% which equates to around 11 million in market cap. If you use the historical FCF margin for this business of 65%, the deal likely added closer to 20 mil in cash to the balance sheet.

Given how much hype there is around electric vehicles, I’m not sure there has ever been so much negativity around oil and gas production. At least not since the great recession.

Dean

Disclosure: the author is long PSD.to at time of writing.

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