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Posts from the ‘Leader Energy Services (LEA)’ Category

Leader Energy Services: Earnings should be out shortly

In the last month I sold off most of my oil related positions. Reliable Energy was bought out.  I sold Second Wave, sold Arcan Resources, and just this week sold Coastal Energy.

I haven’t sold Leader Energy Services.  The reason is partially because the stock hasn’t budged since I bought it.  With fourth quarter results coming out today, I am hoping for an uptick in the stock from strong earnings, but am worried about a disappointment.

The company closed a share offering at 70 cents.  It was the share offering that precipitated me to get back into the stock.

Leader Energy Services Ltd. (“Leader” or the “Company”) is pleased to announce that it has completed its previously announced bought deal short form prospectus offering (the “Offering”) entered into with AltaCorp Capital Inc. (the “Underwriter”). Pursuant to the Offering, Leader issued an aggregate of 9,790,000 common shares of the Company (“Common Shares”) at an issue price of $0.70 per Common Share, including 1,218,000 Common Shares pursuant to the partial exercise of the over-allotment option by the Underwriter, for aggregate gross proceeds of $6,853,000.

The company then used $6.1M of the proceeds to pay down debt.  In a subsequent press release the company said that after the pay down, the debt facility will be $8.9 million. The debt reduction will save Leader approximately $730,000 in cash interest per year.

I think the heavy debt load has been partially responsible for the cap on the share price.  Getting the debt down to $8.9M makes that debt load more manageable.  I would expect that they will bring down the debt even further as the year progresses.

The share offering increases the share count to 28,040,000 shares outstanding.  That puts the current market capitalization at $19.6M and the current enterprise value at $28.5M.

The company generated $2.2M of earnings (11 cents per share) in Q3 off of $10M of revenue.

The company guided Q4 revenue at over $11M back at the beginning of January.

Leader Energy Services Ltd. (“Leader” or the “Company”) today announced that it expects revenue for the fourth quarter ending December 31, 2011 to exceed $11.0 million, an increase of approximately 25% over the comparable quarter last year and approximately 10% higher than the third quarter of 2011.

Leader has consistently shown that they can achieve gross margins of around 50% for the 3 quarters that aren’t spring break-up (in Q2 every year the ground gets very wet in Alberta and Saskatchewan and so oil and gas drilling activity comes to a halt.  This causes Leader’s earnings to have a somewhat seasonal aspect to them, with a yearly dip in Q2).

From the company’s revenue guidance and the expectation of 50% gross margin it is easy to predict earnings of around $2.7M for the fourth quarter.  Using the new fully diluted share number this is about 10 cents per share.  This doesn’t include the 750K, or 2.5 cents per share, of savings the company will derive from reduced interest costs every year due to the debt pay down.

If I extrapolate earnings for a full year, the company has, on average, lost $2.6M during Q2 because of the spring break-up.  If you assume $2.5M of earnings for the other 3 quarters and add back the $750K of interest savings you get full year earnings of around $5.65M or 20 cents a share.

The company said that they plan capital expenditures for the full year of $4.5M  If I look at the cash flow that the company would generate, adding back amortization expense of $2.4M, the company should be able to generate about $8M in cash flow, or enough to pay down debt by another $3.5M.

So there you have it.  That’s why I remain a holder of the shares of Leader Energy Services.  It seems like the company is going in the right direction by paying down debt and at the current price I am getting the shares at the same price as the offering.  If my expectation that the company can generate $8M of cash flow this year, then they have a debt to cash flow ratio of just a little over 1 and that will come down further as more cash is used to pay down more debt.  Couple that with the fact that they are trading at under 4x what I expect them to earn for the year, and with no slowdown to oil drilling activity in sight, and I conclude that the stock looks cheap.  Its an illiquid stock, so I don’t want to own too much of it, but the valuation makes it compelling to own a piece.

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Week 36: Short-termism

Portfolio Performance

Portfolio Composition

Trades:

Short-termism

One of the unfortunate realities of being invested in the stock market is that while you have to keep your eye on the longer term problems, you can’t let them cloud your ability to look for short term opportunities.  So while I accept the view that the world could quite possibly go to hell in the medium term (see my post on Greece earlier day for the latest installment), in the short term we’re in another liquidity induced high.  Party on or something of that vein.

Buying the correction

As I wrote about on Tuesday, this week I bought the correction, buying Aurizon, Pan Orient and Golden Minerals (I screwed up the Golden Minerals trade in the practice account I post here and didn’t realize it until I checked this weekend so I will have to buy the stock next week to reconcile the practice account with my actual account.   As I mentioned earlier, I bought a fairly substantial portion in my trading account.  In a couple of my other accounts that I do not track with the RBC Practice account I also bought more Newcastle Investments and Atna Resources.  I’ve been doing work on both of these companies and I think these represent two of the best opportunities for appreciation in the next few months.

Never add to a losing position… except this time

I also bought more Equal Energy when it got down into the $3.80’s.  I am going against my rules with Equal.  Never add to a losing position.  I’m losing on Equal.  But I’m simply of the mind that even with low natural gas prices this is getting ridiculous.  The activist shareholder movement posted a new slide to their presentation that showed just how undervalued Equal is compared to some peers, particularly NAL.  NAL has ok assets but I would not say they are that much better than Equal’s.  Yet NAL trades at a valuation that is more than double of what Equal is at.  Something has to give here.

Back into Leader Energy Services

The other stock that I bought recently (was actually last week that I bought it, not this week, but I haven’t mentioned it yet) was Leader Energy Services.  Leader did a bought deal financing two weeks ago.  They raised about $6M with 8.5M share dilution.  For those that have followed this blog for a while, I owned Leader back in the summer but sold the stock when Europe broke out because I feared (rightfully) that a company in a cyclical business with a lot of debt would have a tough time in that environment.  I wrote up my thoughts on why I originally bought Leader in this post.  I wrote up my thoughts on why I sold Leader in this one.  The basic thesis of why to own the stock is still valid.  With the financing, many of the debt concerns are not.  Given that, and given that the immediate problems in Europe having receded, I decided it was probably the right time to take back a starter position in the stock.

What I’ve Been Doing

On the weekend I posted the reasons why I am very afraid that the situation in Europe is about to get a whole lot worse.  At the end of that post I highlighted a number of things that I planned to do to deal with this risk.  Over the last 3 days I have mostly completed these items.

  1. Get out of Gramercy – I sold out of Gramercy today at $2.56.  In retrospect I could have waited and sold out 10 cents higher.  We can’t know which way the market will go on any given day.  I may regret this.  Gramercy is likely coming ever closer to the day they settle their Realty division issues with their lending consortium.  The stock could make quite the pop on that day once the deal is announced.  I will be watching the news very closely for that day and will pounce if it settles positively.
  2. Trim Oils – I did this in my actual account but not in the practice account.  In my actual account Arcan, Coastal and Equal Energy were all trimmed by 10%.  I am dealing with somewhat larger positions in my actual account, so trimming is a more reasonable proposition.  I have found that using my strategy of taking off little bits at a time leads to extraordinarily high commissions with the practice account.  If and when I get to the point where I want to trim these positions to 25%, I will do the same in the practice account in one move.
  3. Cut the Banks in half – Oneida Financial was cut in half.  I held onto all the Community Bankers Trust that I own.  I sold all of Xenith Bancshares.  I don’t think I will regret these moves.  The US economy, at best, will be sluggish for the next few months.  I don’t expect big moves in the banks for a while yet.
  4. Cut Leader Energy Services by as much as I can – In my actual account I cut the position by half.  In the practice account I had a stink sell order at 69 cents and low and beyold it got filled today so I am out of Leader entirely there.  Some might say this is hypocritical.  How can I write up Leader a few short weeks ago and then suddenly turn around and liquidate my position.  All I can say is that when the facts change…  look I underestimated the crisis that is occuring in the Eurozone.  Leader Energy is in a cyclical business and has a lot of debt.  This is a good company to be in during a economics expansion and especially during a time when oil prices are highly profitable.  This is not a good company to be invested in during a time when debt markets tighten.
  5. Watch Gold Stocks Closely – I haven’t done a lot here, though I did lighten up on Jaguar on Monday and add to Argonaut Gold today.   I’m still of the mind that gold stocks are breaking out and have higher (maybe much higher) to go.  But I reserve the right to change my mind here. I am wary of how far this gold correction will go.  However, the stocks never priced in the move anyways.  To take an example, should Newmont be crushed as gold moves from $1900 to $1600 when its price is lower than when gold was $1200?  Its ridiculous.

We’ll have to see how the next few days play out and what Bernanke announcement comes out of Jackson Hole.  But for the moment I feel a lot more secure after having made these moves.

Leader Energy Services – Finally a Move in the Stock

I had large moves over the last couple of days in 2 stocks that I own, Leader Energy Services and Prophecy Coal.  I want to talk about one of them, Leader Energy Services (lea.v), in more detail in this post.

To be perfectly honest I’ve been pissed off with myself for buying as much of this stock as I did.  Its affected my decision making in other stocks and that has cost me.  Because I didn’t want to be too leveraged to the Oil Services sector, owning so much of Leader has kept me from feeling comfortable holding on to Open Range.  When the market looked like it was going to tank because of Europe, I went to lighten up on some stocks.  Because Leader was illiquid, it was difficult to sell without cratering the share price.  Open Range has lots of liquidity, so rightly or wrongly I dropped Open Range and held onto Leader.

Well now Open Range is almost $7 and Leader was, until Friday, languishing under a $1.  I had clearly made a bad choice and it was discouraging.  Fortunately Friday’s move of 20% in the stock helped wipe away some of those frustrations.

Leader is the small (~$20M market cap, $35M EV), illiquid little stock of a oil services company located here in Calgary.

The Oil Services Leader Provides

Leader provides the following services:

  1. Coiled Tubing: you put coiled tubing down the well generally with the intent of pumping some sort of fluid thru the tubing down into the wellbore.  There are a whole bunch of reasons you might do this, and they are actually described in good detail on wikipedia.  Calfrac also has a good description.
  2. Nitrogen Services: One of the reasons you put coiled tubing downhole is to pump a fluid down.  Nitrogen is sometimes pumped down to either flush out unwanted materials trapped in the wellbore or to lighten the fluid coming out of the formation, making it easier to flow more readily.
  3. Fluid Pumping Services: This really goes part and parcel with the tubing.  After you have injected the coiled tubing, you need a pump to get the fluid down the hole

The coiled tubing operations are more and more in demand.  Raymond James recently described the market as extremely tight.  The tightness is also mentioned anecdotally here , here and here.  Xtreme coil explained the usage in horizontal multi-frac wells succinctly with this snipit from their Q1 release:

“[There is] robust demand for coiled tubing services, especially in developing complex resource plays where long horizontal wells are the norm. Since these wells are completed with multiple-stage fracture treatments, they require cleaning out after all the stages of treatment are completed. The application of coiled tubing can dramatically improve the outcome of this complicated work scope.”

A Growing Business

Leader has been growing their business.  Below is the quarterly EBITDA for the company for the past 3 years.  Note that the cyclical nature of drilling in Alberta (spring break-up) always leads to a weak second quarter, but ignorning that the trend is clearly bottom left to upper right.

Margins have held up well too.  Below is gross margins over the same period.

Too Much Debt

The biggest problem that Leader has is the amount of debt on its balance sheet. There is about $14M in debt right now, which compares to a company Enterprise Value of $31M, making the company fairly leveraged, particularly for a tiny company in a cyclical business.

I think this is why the stock performs so poorly every time there is a worry about European debt.  When you have a lot of debt you are a slave to the underpinnings of the debt market.  I have heard the company expects to devote cash in 2011 to reducing the debt load.  I think this is a good idea; investors will be a lot more confident in the long term performance of the stock if it isn’t so leveraged.

The debt load used to be worse.  Going into 2008 the company have over $31M in debt.  This was obviously not a great position to be in when the debt markets seized up. To deal with the problem at the time they had to issues convertibles at a low price and restructure and it got messy.  Hopefully Leader has learned their lesson that debt is ok if its done in moderation.  The commitment to using free cash to reduce debt instead of to fund growth suggests they have.

And they should be able to reduce debt quite quickly.  Leader had operating cashflow of about $6M in 2010.  They generate $4.5M of operating cashflow in Q1 alone.  By the end of the year they should be able to make a good sized dint in their long term debt.

Peer Comparison

Leader compares well to its peers.  Below I have provided a comparison I did a while ago of a number of the oil services companies that (in most cases) specialize in coiled tubing and/or pressure pumping.  You can see that Leader is at a discount to most of them.

For all the EBITDA calculations I tried to ex-out any one time charges or non-operating effects.  Note that of the above companies that are listed, that Technicoil Group was taken over by Essential and so the stock price is TEC is as of the takeover date.  Open Range is difficult to value because of the natural gas business, so I used Canaccord’s EBITDA estimate for Poseiden (the name of Open Range’s services business) for 2011, and I subtracted a simple $40,000/boe flowing using the 2011 estimate of production to ex out the exploration business).

Dalmac is the only company cheaper than Leader.  They might be worth a look themselves.

There is a pretty decent report put out by some firm called eresearch that has a similar comparison done.

Conclusion

So I guess that my investment thesis is two-fold.  The company is undervalued compared to its peers, and I suspect that valuation gap will close as the company brings down its debt.  Second, as the company pays down debt that enterprise value should move from the debt into equity.  And third, the company is in a business that is experiencing growing demand and so margins should stay high for at least the short and medium term, allowing the company to generate a lot of cash and potentially begin to grow their business in 2012 once the debt load has been reduced.  The stock has been slower to move than many of its larger peers that have brokerage attention (ie. Open Range), but hopefully Friday’s move is evidence that the move is upon us.