Where Can You Still Find Great Leverage in the Oilpatch?

by Keith Schaefer on March 31, 2015

AVEDA TRANSPORTATION AND ENERGY SERVICES AVE-TSX

 

There are very few companies in the oil and gas services sector on my radar screen right now, but Aveda Transportation (AVE-TSX) is one of them.Now the largest drill-rig mover in the entire USA, they just reported year end and Q4 2014 revenue and cash flow that Beat the Street, AND they are continuing to pay down debt and buy back stock in this low energy price environment.

How often do you see that?

Not only that, they have something NOBODY else in the Canadian OilField Services (OFS) has: 19.1 million shares out. That’s how you spell LEVERAGE.  Leverage means outsized capital gains.  I am ALWAYS looking for LEVERAGE in one form or another.

(Generally speaking, Canadians fund with equity, and Americans funds with debt, so it’s really hard to find big, leading companies in the space with tight share floats.)

In the financials just reported yesterday, management showed they reduced debt by $10 million last quarter.  Overall cash flow for 2014 was $24.5 million on $156 million revenue; that was up 75% and 63% respectively.

The balance sheet is in great shape, with only $50 million in debt on $25 million EBITDA—for a 2:1 debt to cash flow ratio.

Four things struck me in the news release, the conference call and my subsequent talk with management this morning:

  1. They are the Big Dog in their market.  Most OFS companies have to compete against The Big 3—Weatherford, Schlumberger and Halli-Baker.  Aveda competes mostly against private mom-and-pops.  That’s another unique advantage to them.
        And that has become VERY important in the last few WEEKS, as this downturn has dramatically changed the way        large producers and drilling companies tender out jobs.There has been a big swing towards national and regional contracts; where the head office accountants want cost        certainty and are asking for a flat fee for rig moves across the board.  The field teams are often no longer doing the         job tendering.

Aveda has the size, the scale—and the modern computer systems—to effect that.  They recently just won a large,        year-long contract in Pennsylvania on this type of tender.

  1. Almost NO capex in 2015 or 2016.  Aveda has a lot of equipment—over 1000 pieces now and to only have $3 million in maintenance &  capex this year and $3-$5 million next year is VERY low.  That’s lean, and allows  revenue to turn into cash flow very easily.  In fact, they estimate their fleet can do $225 million in revenue and $40 million plus in EBITDA…which tells me the next 40% growth is essentially free.
  2. Upside in the North Dakota Bakken.  Aveda’s first big acquisition last year was a private company called M&K.  It took more time and more money to integrate that into the Aveda fold than expected.  But with almost entirely new management running the show since early January, that large division is now profitable again.  They’re creating the efficiencies that will help offset any further decline in rig counts.
            Interestingly, management says that three competitors left the Bakken very quickly once the downturn hit.
  1. I know this management team to be very pragmatic.  They’re bold, and they execute very well.  As the downturn hit, they closed a Canadian office, amalgamated a couple Texas branches only a few miles apart, they took salary cuts themselves, and consolidated the finance function to Calgary head office.  But the fact there has been no mass layoffs tells me their business is actually still doing pretty well.  This is a team willing to make tough decisions very quickly.

There are some other good investment points to make about the company, like tangible book value—what they could realistically sell their assets for—is $2.88 a share vs. share price today of $2.10.  But that’s for value investors, and I’m a growth investor.

The Friday morning Baker Hughes rig count has become the single most watched statistic in the patch now.  Nobody has more leverage to it than Aveda.

The industry was dropping over 90 rigs a week in February, it’s now down to 50.  Nobody knows when it will flatten out, or what the industry will look like when it does.  But I do know that Chairman Dave Werklund—who owns 35% of the stock—will have Aveda ready to attract M&A and the best people.

That keeps Aveda high high high on my watch list.

And when that rig count actually turns positive—the business will be in shape to show big jumps in revenue and cash flow.

With only 19 million shares out—and highly levered to the rig count—it will be one of the first OFS stocks to move up.

 

Aveda management has reviewed and sponsored this article.

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