CMG.TO - Computer Modelling Group

[bizaro86]

Did anyone else catch this nugget in the recent proxy/management information circular filing?

 

"The Corporation’s GEM simulator is industry-recognized as the only commercial simulator capable of modelling all of the applicable physics associated with GHG [greenhouse gas] sequestering processes. In such operations, GHGs are injected deep underground into saline aquifers where they can be safely and permanently retained."

 

Do you think this is positive or negative or just infoporn?

 

I can see both positive and negative interpretations for this:

 

Positive: New/additional business for GHG modelling. ESG funds invest in shares (if you want the shares to go up).

Negative: Management just added ESG promotional tidbit which generates no business, but promotes shares to ESG suckers investors.

Neutral: "Let's add this sentence and see if Foreign Tuffett anyone notices".  ;)

 

A management team that doesn't do earnings call or IR presentations inserted two sentences on page 48 of the annual proxy because it's trying to promote the stock to "suckers?" That isn't even plausible.

 

* Edited for clarity.

 

OK. How about this then: the company is described above as nerd/Ph.D. heaven. So perhaps they added two sentences because they thought it was cool from physics/engineering perspective, and they have the feature, and they are proud of it, but it's quite possibly not gonna add any significant business (anytime soon).

 

It would be interesting to hear if any customers are buying their product because of the GHG modelling capabilities.

 

I think this is the most likely reasoning. While I think their statement is true, I also don't think it's relevant. IMO, the limiting factor for CO2 sequestration doesn't seem to be the reservoir characteristics, which is what gem does. Don't get me wrong, GEM is great, and if you want to model CO2 added to reservoir fluids that is how I would do it.

 

But the bigger issue is cap rock. How will the overlying rocks stand up to high pressure in a highly acidic environment for thousands of years. GEM doesn't do geomechanics, so it's only part of the solution, and not the hard part.

 

Long CMG

[Foreign Tuffett]

Did anyone else catch this nugget in the recent proxy/management information circular filing?

 

"The Corporation’s GEM simulator is industry-recognized as the only commercial simulator capable of modelling all of the applicable physics associated with GHG [greenhouse gas] sequestering processes. In such operations, GHGs are injected deep underground into saline aquifers where they can be safely and permanently retained."

 

Do you think this is positive or negative or just infoporn?

 

I can see both positive and negative interpretations for this:

 

Positive: New/additional business for GHG modelling. ESG funds invest in shares (if you want the shares to go up).

Negative: Management just added ESG promotional tidbit which generates no business, but promotes shares to ESG suckers investors.

Neutral: "Let's add this sentence and see if Foreign Tuffett anyone notices".  ;)

 

A management team that doesn't do earnings call or IR presentations inserted two sentences on page 48 of the annual proxy because it's trying to promote the stock to "suckers?" That isn't even plausible.

 

* Edited for clarity.

 

OK. How about this then: the company is described above as nerd/Ph.D. heaven. So perhaps they added two sentences because they thought it was cool from physics/engineering perspective, and they have the feature, and they are proud of it, but it's quite possibly not gonna add any significant business (anytime soon).

 

It would be interesting to hear if any customers are buying their product because of the GHG modelling capabilities.

 

I think this is the most likely reasoning. While I think their statement is true, I also don't think it's relevant. IMO, the limiting factor for CO2 sequestration doesn't seem to be the reservoir characteristics, which is what gem does. Don't get me wrong, GEM is great, and if you want to model CO2 added to reservoir fluids that is how I would do it.

 

But the bigger issue is cap rock. How will the overlying rocks stand up to high pressure in a highly acidic environment for thousands of years. GEM doesn't do geomechanics, so it's only part of the solution, and not the hard part.

 

Long CMG

 

Thanks for that bizaro86. Perhaps it's not the possible incremental positive that I first understood it to be.

[bizaro86]

It is maybe an incremental positive if CO2 sequestration takes off. But probably would be a handful of licenses for a Co2 sequestration project versus maybe dozens for an oil sands project.

[Foreign Tuffett]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

 

1) CMG has actually been a long term winner. IPO'd in 1997 at $3.50 per share. Once you adjust for 2-for-1 stock splits in 2008, 2011, and 2014 + dividends, the stock has performed very well.

 

2) Building on bizaro86's point: look at the train wreck formerly known as the four largest oilfield services companies:

 

SLB -- $104 to $37

NOV -- $81 to $22

HAL -- $65 to $23

Weatherford -- recently filed for bankruptcy

 

I think we will see the cycle turn at some point.

 

NOV guiding for non-US revenue to be up in 2H 2019, while US revenue to weaken. The pendulum may be starting to swing a bit from US shale to international as shale E&Ps exercise more spending discipline and international tries to make up for several years of deferred spending.

[Foreign Tuffett]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

 

1) CMG has actually been a long term winner. IPO'd in 1997 at $3.50 per share. Once you adjust for 2-for-1 stock splits in 2008, 2011, and 2014 + dividends, the stock has performed very well.

 

2) Building on bizaro86's point: look at the train wreck formerly known as the four largest oilfield services companies:

 

SLB -- $104 to $37

NOV -- $81 to $22

HAL -- $65 to $23

Weatherford -- recently filed for bankruptcy

 

I think we will see the cycle turn at some point.

 

Just to update and expand this list:

 

SLB -- $104 to $35

NOV -- $81 to $21

HAL -- $65 to $20

Weatherford -- in bankruptcy

Core Laboratories -- $150 to $41.50  (I'm old enough to remember when this was a "compounder")

Transocean -- $39 to $4.70

Baker Hughes -- $68 to $23    (may not be comparable due to transaction with GE)

 

[tenyearsout]

Recent quarter results:

https://www.cmgl.ca/sites/default/files/uploads/docs/pdf/CMG_Q1_20_Results.pdf

 

They mention a further agreement with Shell regarding Coflow:

“Subsequent to quarter-end, CMG and Shell signed an amendment to the CoFlow agreement. In order to achieve specific development targets and deployments across a broader range of Shell’s assets, CMG will allocate more resources to CoFlow over the next two years, while Shell will increase its financial contribution accordingly. The costs of additional resources allocated to CoFlow are expected to be in the range of $4.5 – $6.5 million on an annualized basis by the end of fiscal 2020.”

 

They didn’t mention signing any new customers on Coflow this quarter.  Just wondering what people’s interpretations are about the new Shell agreement.  Positive or negative? 

It could be that the software isn’t yet ready yet and needs more work or maybe that it’s utility is being realized and can be further improved.  Just curious as to others thoughts. 

[Foreign Tuffett]

Recent quarter results:

https://www.cmgl.ca/sites/default/files/uploads/docs/pdf/CMG_Q1_20_Results.pdf

 

They mention a further agreement with Shell regarding Coflow:

“Subsequent to quarter-end, CMG and Shell signed an amendment to the CoFlow agreement. In order to achieve specific development targets and deployments across a broader range of Shell’s assets, CMG will allocate more resources to CoFlow over the next two years, while Shell will increase its financial contribution accordingly. The costs of additional resources allocated to CoFlow are expected to be in the range of $4.5 – $6.5 million on an annualized basis by the end of fiscal 2020.”

 

They didn’t mention signing any new customers on Coflow this quarter.  Just wondering what people’s interpretations are about the new Shell agreement.  Positive or negative? 

It could be that the software isn’t yet ready yet and needs more work or maybe that it’s utility is being realized and can be further improved.  Just curious as to others thoughts.

 

It's no secret that CoFlow needs more work, as its leadership was reshuffled recently. Shell remaining committed to paying for 50% of the development costs is the most important thing. For those concerned about the dividend being cut (as I am), the increased cash expenditures are concerning. So overall I would say neutral to somewhat negative.

 

One correction: They did sign new CoFlow customer agreements in FY Q1 (Earnings release: "As messaged in our fiscal 2019 Financial Report, in the current quarter we signed two agreements with two new customers for short-term use of CoFlow, our newest integrated asset modelling product, on specific projects.").

 

Finally, anyone looking for an oil name that didn't pop this morning on the Saudi news should take a look at this as it's only up ~1.5% today.

 

 

 

 

 

 

[tenyearsout]

A good addition to the board.

 

https://finance.yahoo.com/news/computer-modelling-group-announces-director-203005851.html?.tsrc=applewf

[Liberty]

A good addition to the board.

 

https://finance.yahoo.com/news/computer-modelling-group-announces-director-203005851.html?.tsrc=applewf

 

Mark Leonard has been complimentary about this company in the past.

[Foreign Tuffett]

A good addition to the board.

 

https://finance.yahoo.com/news/computer-modelling-group-announces-director-203005851.html?.tsrc=applewf

 

Mark Leonard has been complimentary about this company in the past.

 

Do you have a source for that? I've seen this mentioned before, but what was the context?

[Jurgis]

Would/could Constellation buy CMG?

 

 

I relooked at this again, but my perception did not change from the May 2019 discussion on this thread. In short: might be a big winner if/when cycle turns, and it has OKish FCF in meantime, but who knows when/if cycle will turn. Might be a buy if you're fine with ~6% FCF while waiting...

[bizaro86]

Would/could Constellation buy CMG?

 

 

I relooked at this again, but my perception did not change from the May 2019 discussion on this thread. In short: might be a big winner if/when cycle turns, and it has OKish FCF in meantime, but who knows when/if cycle will turn. Might be a buy if you're fine with ~6% FCF while waiting...

 

I doubt they would put someone on the board if they were even considering buying CMG. CMG is probably too expensive and too "growthy" for constellation.

[Liberty]

Do you have a source for that? I've seen this mentioned before, but what was the context?

 

I don't remember. Maybe it was a comment at the AGM? ¯\_(ツ)_/¯

[Liberty]

Would/could Constellation buy CMG?

 

 

I relooked at this again, but my perception did not change from the May 2019 discussion on this thread. In short: might be a big winner if/when cycle turns, and it has OKish FCF in meantime, but who knows when/if cycle will turn. Might be a buy if you're fine with ~6% FCF while waiting...

 

If the price got low enough, they might try. Maybe buy some stock if the company isn't open to a sale of the whole thing.

 

But the price would have to be right... Best chance is if it gets really distressed, scaring away most other bidders. But that's a long shot.

[Jurgis]

Would/could Constellation buy CMG?

 

 

I relooked at this again, but my perception did not change from the May 2019 discussion on this thread. In short: might be a big winner if/when cycle turns, and it has OKish FCF in meantime, but who knows when/if cycle will turn. Might be a buy if you're fine with ~6% FCF while waiting...

 

If the price got low enough, they might try. Maybe buy some stock if the company isn't open to a sale of the whole thing.

 

But the price would have to be right... Best chance is if it gets really distressed, scaring away most other bidders. But that's a long shot.

 

If I had to guess, it's not very likely to get way more distressed unless the business becomes broken. Or Canadian market has a meltdown.

 

It's not cheap enough for me maybe, but if you look at 6% FCF with stable revenues during a downcycle, there's likely enough investors to buy it and hold just for that plus eventual upcycle.

 

But who knows, everything's possible.  8)

[tenyearsout]

https://finance.yahoo.com/news/computer-modelling-group-announces-second-120000356.html

[Jurgis]

So ~7M FCF x 4 / 606M Market cap ~= 4.6% FCF yield. Assuming I did not mix up US$ with CAD$ somewhere.  ::)

[Foreign Tuffett]

Back in this today

 

Strongest balance sheet and highest quality business of the oilfield services names I am familiar with. CanadianInsider.com shows that multiple insiders have been buying this month. They will probably have to cut the dividend, but that's a risk I am willing to take at this price.

[frommi]

Thanks for all the information in this thread, annual report for 2019 is out. Around a 8% fcf yield at current prices if my math is correct, looks like good value to me now. Oh and they finally cut the dividend by half.

[Mark Jr.]

I started researching this about a week or two ago, it popped up on a screen although I can't remember which one. Maybe smashed down dividend payers with positive earnings.

 

They just cut the dividend in half to 0.05 / quarter and sales and earnings are down on COVID-19 weakness (although they had growth in the Eastern Hemisphere with addition of a new client there.)

 

I've been thinking of oil again lately after I listened to Superinvestors podcast #35 with Leigh Goehring talking about how oil is at the moment "uninvestable" which, of course, bodes well for value.

 

Oil companies are tricky for me, because, quite frankly, a lot of the lingo and metrics are gibberish to me. But software and SaaS is my main business and what I like about this is that they've managed to keep up a dividend through this very difficult commodities cycle, and then getting hit with COVID-19 on top.  The revenues and the earnings are not bad, all things considered. Still profitable. Nearly 60 million in cash, no debt. Most of the liabilities are deferred revenue. Management and board have cut their compensation.

 

As previous posters have pointed out, they returned capital via dividends, not share buybacks at ATH like their competitors did.

 

This just strikes me as a plain ole fashioned decent business with a good product and competent management that held up through the worst. They will probably do well in the next commodity super-cycle, which is likely nigh.

 

Also I noticed that Edgepoint Investing Group has been buying up shares all summer, they own roughly 10M shares now, ~ 13.26% of the company.

 

[Foreign Tuffett]

I don't have much to add other than to reiterate what I posted back in April of last year.

 

CMG resembles more of a university-affiliated research institute (which is what the company originally was) than it does a typical publicly traded company.

 

As you mention, capital allocation is dividends first and dividends last.

 

Yeah, the balance sheet is very clean.

 

I don't have an opinion on the next commodity super cycle. Oil prices will likely start to recover as the world starts to emerge from the pandemic, but I have yet to encounter anyone who can reliably forecast future oil prices.

 

I think this is much better than a "decent" business. I think it is a very high quality business that has suffered from the depressed oil price.

 

One correction: Based on the filing from a few days ago, Edgepoint now owns nearly 19% of the company. Burgundy Asset Management owns just under 20%

 

 

[Foreign Tuffett]

Worth noting that CMG has traded strongly while its peers (and I use the term loosely) and the oil price are still in a painful purgatory. Just something to be aware of; wouldn't surprise me whatsoever if we saw a significant pullback here before this is all said and done.

[bizaro86]

Worth noting that CMG has traded strongly while its peers (and I use the term loosely) and the oil price are still in a painful purgatory. Just something to be aware of; wouldn't surprise me whatsoever if we saw a significant pullback here before this is all said and done.

 

It depends if its peers are strong vertical market software businesses or oil and gas suppliers. Its sort of both of those things, so it makes sense that it has traded between them.

[Foreign Tuffett]

Worth noting that CMG has traded strongly while its peers (and I use the term loosely) and the oil price are still in a painful purgatory. Just something to be aware of; wouldn't surprise me whatsoever if we saw a significant pullback here before this is all said and done.

 

It depends if its peers are strong vertical market software businesses or oil and gas suppliers. Its sort of both of those things, so it makes sense that it has traded between them.

 

Nearly all of CMG's customers are oil and gas companies, right? At the end of the day if oil and gas prices aren't healthy then CMG isn't going to thrive either. The best house in a bad neighborhood is still in a bad neighborhood.

 

[bizaro86]

Worth noting that CMG has traded strongly while its peers (and I use the term loosely) and the oil price are still in a painful purgatory. Just something to be aware of; wouldn't surprise me whatsoever if we saw a significant pullback here before this is all said and done.

 

It depends if its peers are strong vertical market software businesses or oil and gas suppliers. Its sort of both of those things, so it makes sense that it has traded between them.

 

Nearly all of CMG's customers are oil and gas companies, right? At the end of the day if oil and gas prices aren't healthy then CMG isn't going to thrive either. The best house in a bad neighborhood is still in a bad neighborhood.

 

True. But the best house in a bad neighborhood can be a good investment if you pay the right price for it.