E.TO - Enterprise Group

[sculpin]

Pdf attached - gives more info on this drilling system

 

Earlier today, Enterprise announced that it has obtained its first contract for the recently delivered Direct Pipe® System.

The system will be used to install a 42” pipe casing under the Bow River in the City of Calgary, Alberta. This project is to

be completed in Q4/14 and contribute revenue of ~$2.5 million.

We view the announcement positively. This is a small contract relative to the revenue capability of the system, as we

understand a number of major customers are already very familiar with the technology’s attributes. While we are

maintaining our estimates for now, a successful installation could position Enterprise to generate significant revenue in

F2015.

Enterprise_-_drill.pdf

[shhughes1116]

I can't put my finger on the document where I saw this, but I think that Enterprise has some sort of exclusive deal with the manufacturer for the first couple of years in Canada. 

[shhughes1116]

http://www.enterprisegrp.ca/2014/10/15/enterprise-group-completes-acquisition-of-westar-oilfield-rentals-inc/

 

Completed aquisition of oil services company. Issuing 2.5 million shares, and purchase price is 3.3 EBItDa.  Gross margins for this company look like 47%, and the intention is to invest 3.0 million in capex.

 

With this aquistion, looks like pro forma EV/EBITDA for 2015 is about 2 after the recent sell-off.

[doc75]

I find it interesting (and disconcerting) that there haven't been any substantial insider buys during the past few days of turmoil.  (Not on Enterprise or basically anything else in the O&G space.)  I mean  these guys were buying a couple weeks ago at substantially higher prices.  I was fully expecting to see some opportunistic buying with E at 0.55 etc.  I know you can't read too much into such things, but it does make me wonder whether everyone in the Canadian oil patch looked at the crude price and suddently realized the music may have stopped.

[shhughes1116]

I am not a lawyer, nor do I have a background in securities law.  However, I wonder if it is permissible to purchase shares in your publically-traded company at the same time you are closing a transaction with another business.  It would seem that buying shares at the same time might open yourself up to accusations of trading on inside knowledge. 

 

 

[doc75]

So in the Q2 release they were saying they expect margins to improve considerably in Q3 and Q4.  That was in August, in the middle of Q3.  How did they not see the writing on the wall at that point?  They went from 39% gross margin in Q2 to 37% in Q3.

 

And in their "Utilities/Infrastructure" segment, they did an additional $2.4mm in revenue over last year ($9.6 --> $12), but had $1.8mm LESS in EBITDA ($5.4 --> $3.6). That's horrendous!  Obviously they're making low-ball bids to keep market share or build customer base and they're doing a lot of work at a loss.  They claim this is because they're renting equipment, but the proportions look pretty silly to me.

 

 

[Laxputs]

Conference call 8am PST.

[shhughes1116]

@ Doc75 - agreed that the quarter's margins were less than expected and less than advertised.  I think the three important questions to ask are: (1) What would the margins have been if they had used "owned" equipment as opposed to "rented" equipment?; (2) Was this work part of long-term contracts? (3) Why should be believe anything you (the CEO) say about margins and revenue/EBITDA forecasts given the disparity between your August prediction and the Q3 filing?   

 

If my memory serves me correctly, the purchase of the new HydroVac trucks was supposed to improve margins for the utilities/infrastructure group....I thought they were doing this while adjusting their service so as to no longer provide technicians.  This should have bumped up their gross margins. 

 

In a previous life, I worked in a business where we bid on RFP's for long-term contract work knowing that we would have to rent equipment initially.  This resulted in fairly low margins for the initial few months of the contract while we arranged for the purchase of equipment.  The remainder of the contract (usually 75%-80%) of the contract would then be operated using "owned" equipment with substantially higher margins.  There were also a few instances where we bid contracts very well (i.e. excellent margins going into the contract), but particulars in the RFP were misrepresented by the entity contracting the work.  This would result in negative margins for the duration of the project...it would take a few quarters to go back and recover money from the other party based on misrepresentation of information in the RFP.  Because of this experience, I am keeping an open mind on the margin compression, at this point.   

 

 

 

[Gamecock-YT]

Some old guy lit them up on the conference call. Hopefully they make it available.

[shhughes1116]

I wasn't able to listen...anything notable or redeeming?

[Laxputs]

Extremely interesting. I'll post some highlights later.

[doc75]

Extremely interesting. I'll post some highlights later.

 

Please and thanks -- I also missed the call.

[shhughes1116]

@ Laxputs - Awesome, thank you for offering to do that. 

[Laxputs]

Let's get a discussion going and work on hard facts and numbers and projections and multiples.

 

Highlights from the call:

-Margins were hit due to 3rd party rentals and a couple of lemons in the Hyrdovac fleet.

-New equip has arrived so significantly less 3rd party rentals for next quarter.

-Gross margins would be normalized if not for 3rd party rentals

-Their earnings were not indicative of their asset base because several components (i.e flameless heaters and other weather related rentals) sit idle due to weather this time of year.

-75% of their earnings are from 4q and 1q.

-Suggested margins in 4q14 will be as good or better as 1q14.

-Suggested guidance for 2015 is unchanged.

-Stated several times demand very strong even with oil prices falling. Demand for products "outstanding" "prices not coming down at all". They derive ~4% of revenues from oil sands related projects. Energy related earnings more LNG focused and of course lots of Utilities and Infrastructure Construction Services.

-Calgary Tunneling: "Rock Solid"

-It was TC Backhoe that took a hit this quarter. And 32-34% margins from large Fortis contract.

-Direct Pipe system margins are ~40%. One contract is 7-10mm. The 2.5mm Calgary Bow River is a small project and will be completed in 4q14. They state ~6 projects in 2015 for DP or 30-45mm Revenue. (That is fucking huge, obviously, at 1/3 of their current revenue). There is a backlog. And they are likely buying another one in 2015. The projects go quickly, the man power required to run it is small. They are the only ones in Canada providing the service. If I recall correctly, the didn't offer this info, it was brought about by analyst questions.

 

"We are really excited for 4Q and 1Q and we know we are going to deliver for you guys". "We won't issue new shares". "There are companies trading at 1.5x EBITDA we would like to acquire but we need to show you that we can also make money with the companies we acquired". Management could be seen as promotional in the past.

 

I have a 4Q EBITDA number. It falls short of their previous ~33mm guidance for 2014. What is yours? What are your 2015 numbers?

 

Here is a question I want feedback on. They are likely going to miss their guidance and they delivered very poor margins. What is a fair multiple in times of normalized margins? Will the market forget it once they deliver? Or will it be tainted and never get 6x EBITDA?

 

 

 

 

[Gamecock-YT]

Only other things I can add from my notes:

 

- Westar did 8.7mm in revenue last year and are scheduled for 3mm in capex for 2015.

- There was significant repair and maintenance costs added in for Q3. Most is done and all should be done by the end of Q4. Estimate is total cost for subcontract & repairs came to an extra 1mm - 1.5mm for Q3.

- Direct Pipe 6.5mm capex for 2015. None is included in the 2014 numbers.

- Shooting for 15mm total capex for 2015. Large majority of that should be growth capex, and only 5-10% maintenance capex.

- Some EBITDA pressure on TC backhoe will continue in the near term, probably max out around 32-34% EBITDA margin.

- Still seeing no rate compression for the equipment rentals. "Demand still healthy"

- They sold off 3 mm in equipment from E1 and sent the rest of the equipment to their equipment rental business. Also moved some Hart equipment to Westar.

- Westar well positioned for work on the BC Hydro dam. Westar is only 3km from the project site.

 

Need to do some more work this weekend. But overall, came away feeling better after listening to the call. But might be put up or shut up time for management.

[shhughes1116]

My EBITDA estimate for 2014 was ~28 million.  I used the following assumptions for that estimate:

1. They stated that they do ~75% of their EBITDA in Q1 and Q4 (so about 37.5% of their EBITDA is earned in each of these quarters).

2. I assumed 28% EBITDA margin for utilities/infrastructure segment and 35% EBITDA margin for equipment rental (Hart, Artic Therm, etc). 

3. I've used 2014Q1 as my baseline numbers since Q4 and Q1 results seem to be similar.  2014Q1 also happens to include the first full quarter of contributions from Hart, so this quarter probably best represents the company's earning power. 

4. 2014Q1 EBITDA was ~7 million.  My assumption was that they would probably do ~15% growth (2014Q4 relative to 2014Q1) on this number simply from acquisition synergies and cross-selling.  So maybe ~8 million EBITDA if one excluded the impact of capex.         

2. The purchased 14 new hydrovac machines for 500k per piece.  They bill out 750k in revenue per machine per year @28% EBITDA margin.  So 10.5 million in added revenue per year, 2.94 in added EBITDA per year.  2.94 million EBITDA * 37.5% = 1.1 million in incremental EBITDA for 2014Q4 relative to 2014Q1. 

3.  Westar generated ~3.2 million EBITDA on an annual basis.  37.5% * 3.2 = 1.2 million EBITDA....probably a little bit less than that since the acquisition closed on 15 October.  So an additional 1.2 million incremental EBITDA for 2014Q4 relative to 2014Q1.   

4.  New drilling/tunneling unit will generate 2.5 million in revenue for Q4 based on Bow River job.  At a 28% EBITDA margin, this yields ~ 0.7 million EBITDA.  So an additional 0.7 million incremental EBITDA for 2014Q4 relative to 2014Q1.     

5.  They invested 20 million in Hart.  I had trouble quantifying the incremental EBITDA from this capex so I will shamelessly steal Red's note on this one.  According to Red, "...Hart turns its fixed assets over 1x at 37.5% EBITDA margin."  I was a bit more conservative and assumed a ~35% EBITDA margin, so ~7 million EBITDA on an annual rate.  37.5% * 7 = 2.6 million EBITDA in Q4.  So an additional 2.6 million incremental EBITDA for 2014Q4 relative to 2014Q1. 

 

So for 2014Q4 ---- 8 million EBITDA (1.15 x 2014Q1) + 1.2 million EBITDA (Westar) + 1.1 million EBITDA (new hydrovac units operating in Q4) + 0.7 million EBITDA (new drilling/tunneling unit) + 2.6 million EBITDA (Hart capex) == 13.6 million EBITDA. 

 

If 2014Q4 is at 13.6 million EBITDA, then 2014 EBITDA would be ~27.85 million EBITDA.  So an EV/EBITDA multiple of 5 gives us a share price of $0.68 (5 * 27.85 million = 139 million; 139 million - 40 million debt = 99 million in equity; 99 million / 145 million shares = $0.68 per share).

 

For 2015, I assumed the following:

1. 25% EBITDA growth based on continued growth due to synergies, cross-selling, and reinvestment of free cash flow.  This yields $35 million EBITDA. 

2. EBITDA growth due to new drilling/tunneling machine.  Eight jobs per year, at $2.5 million per job, yields $20 million annual revenue and $5.6 million in incremental EBITDA.  This assumption obviously needs to change based on what was communicated during the call today.     

3.  No acquisitions. 

 

So my 2015 estimate is $40.6 million EBITDA.  So an EV/EBITDA multiple of 5 yields a 2015 share price of ~$1.12.

 

Badger Daylighting is probably the most comparable Canadian company in terms of services offered.  Badger's share price is ~$27, they did ~90 million EBITDA in TTM, thus they currently trade at an EV/EBITDA of ~13 (1,079 million equity + 82 million debt / 90 million EBITDA).

 

As Enterprise's EBITDA continues to grow, I expect their EV/EBITDA multiple to converge with Badger's EV/EBITDA.  So there should be two tailwinds behind this stock: (1) Increasing EBITDA; and (2) Increasing multiple as EBITDA grows and run-rate EBITDA becomes more visible to potential investors. 

 

 

 

[Laxputs]

Shhughes: In regards to your 2014 EV Calc: Shouldn't you add the 3q14 8.6mm cash in to your EV calculation plus the cash they will do in 4q14 given you account for their 40mm debt but you haven't made it a net debt figure?

 

Myself and another shareholder independently arrived at around 11.5mm 4q14 EBITDA.  Also, I'm getting a conservative 40-50mm EBITDA 2015. With EV of 120 currently, that's less than 3x.

 

I would like to hear anyone say if they think Enterprise is not entitled to a 5.5x EBITDA multiple due to them over-promising and under-delivering. I have heard it stated before. Does the market have short-term memory and if GM normalize, the multiple will normalize?

 

I think management realizes many investors feel burned and they now need to deliver. But most importantly, customers want their business. They are in demand and 2015 looks ripe. The company is healthy. The just missed on guidance. I'm not trying to be promotional, I hope to hear from those that think it is not a buy and is not cheap.

 

I'll post some of my calcs later.

 

[doc75]

I did a very rough calc trying to be conservative and got 10-11mm EBITDA for Q4.

 

Thanks to those who reported on the conference call - much appreciated.

 

Out of curiosity, did they address the fact that they said in Q2 that Q3 would be much improved?

 

It's great that they sounded confident about Q4 on the call, but the obvious question is how much they can be believed.

 

As per your comment on multiples:  My opinion is that if they have a few quarters of solid performance, and actually deliver what they promise, then the natural greed of the market will dominate and punch up the multiple.

 

 

[Laxputs]

.

[shhughes1116]

@ laxputs - you are correct, I neglected to add back in their cash when calculating the EV/EBITDa multiple.  However the delta on that change is pretty inconsequential relative to the thesis for this company.

 

With respect to the multiple, as they grow their EBITDA and string together more than one quarter of solid performance, their EV/EBITDA multiple will begin to converge with the higher multiple of their peers. I'm not sure I understand why you feel the need to predict a "fair" multiple for this stock.  I think it is a given that the multiple will re-rate once they grow their EBITDA and put together more than one solid quarter....

 

By all means, please post your calculations for Q4 and for 2015.  I am curious to see where the differences are in our EBITDA projections.  I also have trouble understanding how you got to a 2015 estimate of 40-50 million EBITDA.  Either you are expecting a very high year-over-year growth rate (possible but then not really a conservative estimate), or you are assuming more acquisitions in 2015  (also possible, but not a conservate estimate...more importantly, additional acquisitions add additional execution risk and make this company very hard to value for the typical investor..not necessarily a bad thing, but these things do not facilitate a re-rating of the multiple...market generally seems to wait for execution risk to go away and company to prove earnings power before re-rating the multiple).

 

Please don't interpret my comments as being negative on the company...I am in fact very long on this company.  I'm just not sure your expectations are realistic/conservative for 2015.

[yadayada]

yeah so the warrantts might be dead in the water.

 

Can anyone get to their website? Is it down since earnings release?

 

It seems they will have to prove themselves in Q4 and Q1 of next year. If they can get at least 10m in ebitda, then the stock should rerate.

 

I was under the impression that only Q2 was bad. This was not due to the weather right? Roads are usually only bad in Q2. But then again, we should probably not trust management too much at this point.

 

It is strange though that they bought warrants with their own money. That really says something. Makes me think it wasn't so much dishonesty but more unexpected events?

 

The way I look at ebitda in Q4 and Q1 is this. They spent over 20 million and apparantly there is serious demand for these things. They talked about payback periods of 1-2 years. Sow ith ebitda of 7 million in Q1, you would at least expect to double that... Would relaly like to get to listen to that call. 

[Gamecock-YT]

yeah so the warrantts might be dead in the water.

 

Can anyone get to their website? Is it down since earnings release?

 

It seems they will have to prove themselves in Q4 and Q1 of next year. If they can get at least 10m in ebitda, then the stock should rerate.

 

I was under the impression that only Q2 was bad. This was not due to the weather right? Roads are usually only bad in Q2. But then again, we should probably not trust management too much at this point.

 

It is strange though that they bought warrants with their own money. That really says something. Makes me think it wasn't so much dishonesty but more unexpected events?

 

The way I look at ebitda in Q4 and Q1 is this. They spent over 20 million and apparantly there is serious demand for these things. They talked about payback periods of 1-2 years. Sow ith ebitda of 7 million in Q1, you would at least expect to double that... Would relaly like to get to listen to that call.

 

There was some seasonality in Q3 they said (I think they mentioned arctic therm not being able to do certain things) and not all the equipment they purchased was online even though the purchases had been made.

[Laxputs]

I was looking at it a few different ways:

 

4Q14 Run Rate Revenue

1q14 2014 revenue 21.1

20mm capex at 40% GM. 75% Realized in 2 Qs. 50% realized of that in 4q. 3

Westar 3.3

Direct Pipe 2.5

Total 29.9

Ebitdas @ 30% 8.97

Ebitdas @ 32.5% 9.7175

Ebitdas @ 35% 10.465

 

4Q14 Pro Forma EBITDA

UTICS 2.37

Equip Rental 5.88

Corporate -1.2

10mm Deployed into UICS @ 30%. 75% profits in 4q and 1q. And 50% of that in one q) 1.13

10mm Deployed into Rentals @ 30%. 75% profits in 4q and 1q. And 50% of that in one q) 1.13

Direct Pipe (2.5mm rev 4q. At 40%) 1

Westar (4.1 ebitda. 75% in 4q and 1q. And 50% of that in month) 1.54

11.85 Total EBITDA

 

2014 Run Rate 5.5 Multiple

1q 7.05

2q 2.67

3q 4.55

4q 10

24.27

11/14/14 04/01/15

88.8 -107.485

IRR 65.71%

 

 

2014 Revenue Run Rate

Q1-Q3 revenue 53.89

4q Rev based on 1q14 rev 21.1

10mm Deployed into UICS @ 30% EBITDA. 75% profits in 4q and 1q. And 50% of that in one q) 3.76

10mm Deployed into Rental @ 30%. 75% profits in 4q and 1q. And 50% of that in one q) 3.76

DP 2.5

Westar revenue 3.3

Total 88.31

 

 

2014 Pro Forma (this discounts their 3Q14 Margin flub and assumes 40% GM)

Revenue 88.31Gross Margin 35.324

G&A -11.9

EBITDAS 23.424

EBITDAS Margin 26.52%

Shares 148

5.5x EBITDAS 128.832

Debt 40

Cash 14

EV 102.832

88.8 -102.832

11/14/14 04/01/15

IRR 47.41%

 

 

OE Analysis

EBITDAS 2014 Run Rate 24.27

Interest -2.6

D&A -5.81

Taxes -3.172

OE 12.688

Shares 148

OE/Share 0.09

Price 0.60

Price/OE 7.00

 

 

2015 Pro Forma 5.5 Multiple

1q Conservative Run rate on 4q14 11

2q-10% growth YOY 2.937

3q-10%growth YOY 5.37394

4q-Similar to 4q14 11

Additional DirectPipe (guidance of 30-45mm at 40% margins) 10

EBITDAS 40.31094

11/14/14 04/01/16

YE debt 10

cash 10

88.8 -221.71017

IRR 93.99%

 

The 10mm DP is on the low end of guidance. Also, they may have a 2nd DP in 2015. I would bet 45-55mm EBITDA 2015 is more likely as 4q15 I did not add any growth and it is merited.

 

 

[shhughes1116]

I made a grievous mistake in my spreadsheet for 2014Q4 results, which impacts my 2014Q4 and 2015 EBITDA estimates.  The 2014Q4 13.6 million EBITDA needs to be reduced by my 2014Q4 G&A estimate (3.5 million).  So my 2014Q4 estimate should really be ~10 million EBITDA. 

 

If 2014Q4 is at ~10 million EBITDA, then 2014 EBITDA would be ~24.25 million EBITDA.  So an EV/EBITDA multiple of 5 gives us a share price of $0.58 (5 * 24.25 million = 121.25 million; 121.25 million - 36 million debt = 85.25 million in equity; 85.25 million / 145 million shares = $0.58 per share).

 

For 2015, I assumed the following:

1. 25% EBITDA growth based on continued growth due to synergies, cross-selling, and reinvestment of free cash flow.  This yields $30.3 million EBITDA. 

2. EBITDA growth due to new drilling/tunneling machine.  Eight jobs per year, at $2.5 million per job, yields $20 million annual revenue and $5.6 million in incremental EBITDA.  This assumption obviously needs to change based on what was communicated during the call today.     

3.  No acquisitions. 

 

So my adjusted 2015 estimate is $~36 million EBITDA.  So an EV/EBITDA multiple of 5 yields a 2015 share price of ~$0.99.  If you strip out the assumption of 25% growth, the expected share price is $0.78 with a EV/EBITDA multiple of 5. 

[yadayada]

You assume that 26m capex is basically pissed away. I think that is much too pessimistic