CCZ.TO - Critical Control Energy Services

[Cardboard]

This is a software/CRM company involved in the Canadian and U.S. energy patch selling software and equipment used to monitor pressure, production data for wells, storage tanks, pipelines, etc. I have started to buy in late 2015 and I have averaged down at different occasions so it has not been a great buy. At least not yet.

 

The current valuation is quite appealing for a company with light capital needs and with overall margins in the 40% range and software margins close to 60% or 0.35 times book and EV/Sales of 0.58 times. I would imagine that this firm, clients and software would be attractive to the GE's of this world.

 

Obviously, there is no profit to speak of yet or about breaking even. This should improve as capex budgets increase in the oil patch and as companies move from survival mode to at least properly maintaining their assets. The insiders also own over 20% of outstanding shares.

 

What is getting very interesting is this latest proposed transaction:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aCCZ-2470658&symbol=CCZ&region=C

 

If they are successful, the share count will be cut in half and they will also raise $5 million which will reduce their debt in half.

 

So on a per share basis, the value should go up significantly especially if the business is turning. Margins have been going up due to higher focus on recurring revenues, previous restructuring to cut cost/streamline the organization and as activity picks up their non-recurring revenues should move up nicely.

 

Preferreds at 8% is not a cheap form of financing but, there are no covenants, no maturity and you only need to keep paying the dividend and if they can't it just cummulates as an obligation. Based on the statement that this will improve cash flow, the current debt has to yield something like 15.4% which is pawn loan territory. Remember that this is a micro-cap involved in a sector that has seen a near 3 year bear market so lenders have been pretty tough.

 

In any case, I am looking for feedback from the group.

 

Cardboard

[fjm222]

Interesting proposal. Thanks for highlighting. Do you know if they actually have a competitive product? I met management once before the downturn and the business has changed a great deal since then. Are there any large clients that can point to them having a product that the industry needs. Going forward which product will be the focus of their sales team and why has it been so difficult to get traction over the years?

 

Thanks

[Cardboard]

One major change since then is that they sold their document and data management services business to focus only on their software/energy services business. They also acquired a firm in the U.S. during that time.

 

Based on the AIF, they have two large undisclosed clients representing each about 10% of revenues. Previously, you could see on their webpage CNRL and other large Canadian energy firms that were doing business with them. I know it is used by a lot of E&P's in the Canadian oil patch so any of them could likely give you feedback on the value of their offering. I could think of size of this firm vs competition potentially being an issue but, they certainly have billion dollar firms doing business with them and the margins are pretty high.

 

One issue that I see is that natural gas has been very weak in terms of pricing and development in recent years. Very much the same in the U.S. and their products are clearly more oriented towards natural gas production needs. The only place where demand should have gone up is in the Montney.

 

They likely also need some capital to re-inject into their various software and applications.

 

Cardboard

[jimjam]

Thanks, Cardboard, for bringing this up.

 

I looked at CCZ when it was mentioned on this site (by you and Sculpin I think?).

 

I am not an expert in oil and gas.

 

I have a long position built from averaging down via some limit order buys --- but without as much conviction as I would like.

 

Some random thoughts to continue the discussion...

 

- Major underinvestment in E&P for the past few years plus compounding decline rates should imply that substantial capital spending will be necessary over the next few years independently of exactly where the price of oil and gas goes. High margin, asset light, software for the industry seems like an attractive call option on this outcome. (Would be interested to know who are the software champions of oil and gas?)

 

- However, that thesis may not in fact be working for CCZ... Rig counts in Canada and the US are up substantially over the past quarters but CCZ doesn't seem to have won much business. Why?

 

- CCZ connects infield sensors with cloud servers to present all the data via the cloud. In principle this gives them leverage to engage in continuous "agile" improvement of their software to delight their customers. It's easier to roll-out small updates to a cloud server than to deploy major software upgrades to client machines. BUT, CCZ's website seems to lack any kind of marketing that celebrates how quickly they fix bugs and bring on new features. Is that because they aren't doing so? Or is it just that they aren't telling the story?

 

- CCZ should probably be given credit for surviving the industry downturn and reducing costs. To what extent are they retaining their most talented software engineers, sales people, ... despite their restructuring?

 

- Are you thinking that it makes sense to exercise your rights in the offering (if it goes forward) or to hold on to the common stocks?

 

Cheers!

[Cardboard]

I would be tempted to hold on to my common as these are simply preferreds (not convertible), so I would lose any potential upside in the equity and the recovery that should come.

 

However, we need to answer the good questions that you have raised.

 

Regarding staffing, I have noticed that they are looking for this:

 

"Critical Control Energy Services has an immediate opening for a Junior Asset Integrity Specialist involved in computational corrosion engineering work.

 

You will be involved in business analysis for developing world-class cutting-edge software to predict the rates of general corrosion and localized corrosion which appear in underground oil and gas pipelines. As well, you will be asked to work on client mandates for managing their asset integrity programs."

 

So they seem to still invest in their software development and the expenses over the last few years indicate that as well. Did it work?

 

The website also used to have a lot of their clients including very large firms as I mentioned. Why they took that out I am not sure?

 

Sounds to me like we need to discuss with their clients. If there is anyone who could share or update us that would be greatly appreciated.

 

Cardboard

[jimjam]

Thanks, Cardboard.

 

Would be happy to ask questions about the hardware/software/service from CCZ's clients if someone on the board could help make a connection.  I tried to reach out to CCZ's management and board but never received any replies.

 

I'm not an O&G expert (though I've been learning from the posters on COBF) but I am a computer scientist; I also know "lean" ("Toyota Production System") engineering and production.

 

So: anyone have a friend in the industry who uses CCZ software I could chat with? I would gladly report back notes to this forum.

 

Cheers,

jamj

 

 

[jimjam]

I'm with Interactive Brokers and haven't received any online message asking me to elect or not my shares for conversion.

 

Has anyone?

 

I don't want to elect my shares... but apparently this is not the default choice according to Critical Control's latest news:

 

http://criticalcontrol.com/corporate/important-shareholder-information-upcoming-proposed-plan-arrangement/

 

"SHAREHOLDERS ARE CAUTIONED THAT IF THEY DO NOT FILE AN ELECTION, SOME OR ALL OF THEIR COMMON SHARES MAY BE EXCHANGED FOR PREFERRED SHARES UNDER THE PROPOSED PLAN OF ARRANGEMENT."

 

I'm trying to reach IB by web chat to figure this out but they aren't responding for the moment.

[jimjam]

I never got through via chat. I phoned IB in Canada and spoke with a rep for half an hour. They didn't seem too clueful and suggested that I submit a support ticket, which I've done. I'll let the forum know what I find out...

[jimjam]

For those interested in CCZ... I received via IB the election announcement and voted to retain 100% of my shares unconverted.

[Cardboard]

25.1% of shares being bought back through this corporate action:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aCCZ-2484258&symbol=CCZ&region=C

 

Cardboard

[jimjam]

Thanks, Cardboard.

 

Good to see the share count reduction.

 

Any idea whether the strengthening rig counts in Canada and the US over the past few months will convert into better cash flow for CCZ?

 

[Cardboard]

I would say it is more when the new wells get into service as it then requires tanks, pipelines and the equipment/software that they sell to monitor pressure, level, etc.

 

Cardboard

[TBW]

How far have they gotten in the pipeline monitoring? Or is this still a well monitoring company?

[Cardboard]

This is another company in the oil & gas space that has not participated at all from a recovery in energy.

 

While they can claim all day long that AECO prices are poor, condensates and ultra light oil are not and exploration in the Deep Basin and Montney is still going strong in the search for liquids.

 

With no flaring allowed in Canada, you still have to treat and ship natural gas that come out as a by-product and with it should come demand for their products. Lots of processing plants have also been built over the last few years.

 

This is a tiny company into an enormous market. They have no excuse!

 

If you look at their sales, it has been going nowhere for 2 years now. Even their expansion in the U.S. is not showing much benefit at all. The only positive appears to be margins getting stronger and stronger on their cloud/software offering.

 

The AGM is coming up on June 19 and I intend to withhold my votes for all nominees. They need to hear the message that enough is enough. Time to look for strategic alternatives.

 

I am also tired of this CEO who keeps on repeating the same message in every quarterly PR that they are apparently doing well. Misleading at best.

 

He bought a fair bit of shares in recent days in a private transaction. Normally, this would inspire me confidence but, after seeing so many executives in the WCSB trying to protect their jobs instead of looking out for best returns and shareholders this could be another of these entrenching moves.

 

OUT!

 

Cardboard