HWO - High Arctic Energy Services

[JayGatsby]

Attached is half an idea presentation on High Arctic I put together to solicit feedback/thoughts. I haven't finished it, but figured I'd post it since I've been distracted and haven't made much progress on it recently. This covers the Papua New Guinea part of the story pretty well. I think the story here is pretty interesting, and there's been a small pullback in share price over the last week or two. We discussed the company a bit on the oil thread. Would be curious for other's thoughts. Thanks

 

Short summary:

1. "Dominant" driller in Papua New Guinea. They're merging their rigs into a JV with a customer. This will increase their market share, but give up some of their earnings. They currently lease and operate that customer's rigs. The PNG story is what I've focused my research on and I think there's a lot of long-term positives there. Oil Search Limited, a PNG focused oil company, is listed in Australia at a healthy multiple. I think the combination of HWO being i) Toronto listed, ii) a small cap, and iii) a PNG focused company, may cause it to be overlooked. Exxon is investing heavily in PNG and all signs seem to point to continued development / drilling.

2. Trades for 2.9x EBITDA. Unless oil prices increase and they're able to raise rates I think this will decline as a result of the JV. I think capex will be low over next few years given the lives of their assets.

3. Trades for less than 1x book

4. They have NOLs in Canada and did an acquisition there. I haven't spent much time looking at it. Apparently it was done at a good price, but will require some market improvement to really pay off (https://seekingalpha.com/article/4007111-high-arctic-energy-services-closer-look-best-o-and-g-acquisition-2016). One risk is that they continue to invest in Canada and don't get a good return.

5. Long-term history of the Company isn't very good. Cyrus Capital owns 41% after restructuring their debt in 2010. I don't know much about them, but I think that probably helps from a capital allocation perspective as it puts them in control rather than management.

6. There's been a ton of exec turnover. I'm not sure what to make of that.

 

Disclosure: I own shares.

HWO_Research_Draft.pdf

[jc1000]

I liked a lot of the risks that you identified in the presentation.  One thing I don't have clarity on and I think would be interesting to understand is who their competition is in PNG, if any.

 

I'm super intrigued by this company as well and it just seems to be hitting on so many levels - great balance sheet, no debt, growing revenues, steady and growing dividends, the Tervita acquisition that actually added value, and they seem to be saying all the right things on their conference calls talking about competitive advantages, barriers to entry,etc.  Management seems to be walking the talk, and as you point out the exec turnover is very high so I wonder if it's Cyrus Capital pulling the strings.  I tried to research more about Cyrus Capital and didn't find a lot.  I also tried to map out a short thesis to identify potential risks, and I agree with everything you identified - commodity prices, PNG issues, and the weird turnover numbers.  I feel like they are undervalued because their industry is under performing, small size, and it's a bit of a weird company with the PNG and Canadian operations.

 

I own shares as well, but I'd love to hear the argument against the company at these prices.

 

 

[bigbluffzinc]

I too have a position here & would love to here some dissonance beyond what's been posted above...