MCR.V - Macro Enterprises

[sculpin]

Note from Acumen....

 

Macro Enterprises (MCR) management update

 

We met with MCR management for an update.  The company specializes in pipeline and facility construction and maintenance and has material exposure to the Kinder Morgan line and LNG Canada.  Key highlights are as follows:

 

MCR operates out of Fort St. John, BC and specializes in pipeline and facility construction and maintenance.

 

Services include – 1) Facilities Construction – civil work, fabrication and installation of piping and structural steel, coating, testing/commissioning, etc. 2) Pipeline Construction - executing large pipeline construction projects with pipes ranging from 2 to 60 inches in diameter (using side booms, trenching machines, rock saws, etc.) 3) Maintenance & Integrity – upgrades, repairs and maintenance on existing pipe systems and facilities. For maintenance, MCR executes MSA’s with major infrastructure companies.

Blue Chip Customers – MCR’s top customers include Enbridge, Pembina and TransCanada. Other customers include Kinder Morgan, Altagas, Shell, etc.

 

Over the past 3 years, MCR has invested a net $5 M on bidding significant projects that will likely proceed in FY 18/19.

Mgmt. noted that MCR is currently moving from being a small regional player (typical backlog of 90 days) to a much larger player.

MCR owns a large fleet of equipment - book value of the company’s PP&E is roughly $45 M ($20 M of which is property and plant).

The company noted that H1/18 revenue will be significantly lower Y/Y (mostly comprised of MSA work). However, with a number of major pipeline project announcements pending – H2/18 and 2019 should be quite strong.

 

Notably, MCR has partnered with a world leading pipeline expert – securing its competitive advantage for large scale Canadian pipeline and associated projects.

 

LNG Canada – The LNG Canada opportunity = $120 M in revenue per year net to MCR (starting in 2019 – over a 3 year period).

 

Kinder Morgan Pipeline – The Kinder Morgan opportunity = $100 M in revenue per year net to MCR (starting in 2019). Mgmt. noted this project has uncapped provisions.

 

The EBITDA margin on these larger projects is likely in the 15-20% range (our estimate).

 

Other potential opportunities for MCR include - 1) North Montney Mainline 2) Other small/medium sized projects.

Maintenance capex = depreciation

 

Balance Sheet – The company has minimal debt and $35 M in cash on the balance sheet. MCR has effectively managed its balance sheet through this most recent downturn.

 

Valuation – Based on a potential EBITDA run rate of ~$45 M in 2019 (assumes $80 M base MSA business + LNG Canada + Kinder Morgan with 15% margins), MCR is currently trading under 2.0x 2019F EV/EBITDA.

 

[JayGatsby]

Thanks for the update.

 

Mgmt. noted that MCR is currently moving from being a small regional player (typical backlog of 90 days) to a much larger player.

Is there anything they pointed to to substantiate this other than the hiring of the expert? Are they just picking up the projects that happen to be in front of them (currently large pipelines), or has something structurally changed in the industry or with them that allows them to do this? It's been a long dry spell up there and MCR was in the right financial position to ride through that, so I'm wondering if the competitive landscape has changed to their benefit?

[_JJ_]

http://prrd.bc.ca/board/agendas/2018/2018-21-434862083/pages/documents/06-D-2TransCanada.pdf

Prime Contractors

• Spread 1: Surerus Murphy

• Spread 2: Macro

• Spread 3: Banister

 

According to this presentation they seem to have secured a contract for the construction of the $1.4B North Montney Mainline, no press release on this (seemingly) material contract yet.

[TBW]

Good find!

 

This stock is far too cheap if that research report is accurate on their prediction of 15 to 20% ebitda margins.

[_JJ_]

North Montney Mainline contract finally confirmed and...construction has already started:

 

Macro Signs Construction Contract for North Montney Mainline Project

 

FORT ST. JOHN, British Columbia, Aug. 21, 2018 (GLOBE NEWSWIRE) -- Macro Enterprises Inc. (TSXV:MCR) (the “Company” or “Macro”) is pleased to announce that it has commenced construction of the Aitken Creek Section – Spread 2 of the North Montney Mainline Project.

 

The North Montney Mainline comprises 301 kilometres (187 miles) of 42-inch diameter pipeline, which will also include metering facilities, valve sites and compression facilities and will provide added capacity needed to ship natural gas southward. The pipeline will be owned and operated by NOVA Gas Transmission Ltd., a subsidiary of TransCanada Pipelines Limited.

 

The Aitken Creek Section – Spread 2 is approximately 67 km of NPS 42-inch pipeline and related facilities. Contract value is approximately CAD$200.0 million. The construction contract is a unit rate type contract with upfront milestone payments to fund initial working capital requirements.  Substantial completion is planned for Q1 2019.

 

Macro is working with Spiecapag Canada Corp. on this project.  Spiecapag is a subsidiary of Vinci S.A., a French based company with worldwide operations.  As part of its contribution to this project, it will provide certain personnel and equipment; however, its financial interest will be nominal.

 

Frank Miles, President and Chief Executive Officer of the Company, stated: “We are very pleased to be working again for TransCanada Pipelines Inc. and their subsidiary Nova Gas Transmission Ltd.  This award substantiates our growth plans.  This also positions the Company for future opportunities in this market”.

http://www.globenewswire.com/news-release/2018/08/21/1554846/0/en/Macro-Signs-Construction-Contract-for-North-Montney-Mainline-Project.html

[sculpin]

Macro

 

Momentum Drivers: A recent contract award worth ~$200 MM will see MCR construct the Aitken Creek Section (Spread 2) of the North Montney Mainline project. Construction has commenced and MCR’s JV partner (Spiecapag) will provide personnel and equipment for the project. We note, however, that the project sits outside Macro’s JV and our estimates imply the whole ~$200 MM contract value sitting on Macro’s P&L. With most of the project expected to be wrapped up in Q1/19, we are currently modeling EBITDA margin contribution in the 14% range, meaningfully boosting our 2H/18 EBITDA estimates to $23.6 MM from $3.5 MM previously and our 2019 FY EBITDA forecast to $39.6 MM from $30 MM.

 

Macro remains situated to benefit from a positive LNG decision having a $900 MM contract awarded to its JV with Spiecapag last month. The JV will complete work on a ~166 km section of the ~670 km Coastal GasLink Pipeline project. We value MCR’s portion of the recently awarded contract at roughly $0.80/share, using a 10% discount rate. A Final Investment Decision on the LNG Canada project is expected to occur in Q4/18.

 

On the heels of the decision by the Canadian government to purchase Kinder Morgan’s Trans Mountain Pipeline and related terminals, MCR still stands to gain as the odds of the TMX project moving forward remain favourable. While we are not factoring in imminent, material revenue contribution this year, we do expect the TMX project to contribute in 2019 and part of 2020.

Cormark Outlook: A strong net cash position of $32 MM (as of Q1/18), upside to LNG-related work with the GasLink contract and significant exposure in relation to the TMX project place MCR in a very attractive position. Our $5.00 target on MCR implies a 2.5x 2019E EBITDA multiple. We attribute a 4.5x multiple on the base business (2020 estimates) while also attributing $1.25/share of value to the TMX ($0.45/share) and GasLink ($0.80/share) projects.

[sculpin]

So let me get this straight. This is a company that has a market cap of ~$85mm, cash on hand, a fleet of equipment valued at ~$60mm and a backlog of business around $805mm! The CEO is aligned with shareholders given his ownership of ~31% of the company. What's the catch? Oh, Canadian pipelines represent the backlog and we all know Canada will never approve or build another pipeline. But wait!!! In the backlog Trans Mountain (arguably the pipeline that carries the greatest amount of risk to reach completion despite the press conference by a Prime Minister Justin Trudeau on Wednesday informing the country that O&G producers in Canada are in a far better place today than in the last 10 years) only accounts for ~$190mm. And ~$260mm of the backlog is projects that are already underway? And once these pipelines are facilities are built they represent future business for MCR in the form of increased maintenance and integrity work (a higher margin business)..... MCR trades at 1.9x 2019 consensus estimated EBITDA of $30mm. Buying MCR at these levels given the bright future and current valuation can almost be equated to stealing.

 

Facts:

 

·        MCR reported third quarter revenue of $42mm, EBITDA of $5.3mm and EPS of $0.05. This compares to our estimates of $65mm, $3.5mm and $0.12; respectively. The miss is due to a slower ramp up of work on the Northern Mainline project than we had forecast. During the quarter depreciation was higher than our estimate resulting in lower EPS. The company generated ~75% of its revenue during the quarter on work related to pipeline and facilities construction.

 

·        MCR has increased its revenue expectation for 2018 to $170mm, from $160mm previously. The company has also released 2019 revenue guidance of >$250mm. The 2019 guidance is based on work related to the North Montney Mainline project, the Groundbirch facilities and work related to the Coastal GasLink pipeline project. MCR is also expecting an increase in maintenance and integrity work moving into 2019.

 

·        A brief summary of the existing book of business:

 

1.    Coastal GasLink pipeline project is ~166kms of 48 inch pipeline, bid as a 40/60 JV with Speicapaq Canada for an estimated $900mm.

 

2.    Aitken Creek Section of the North Montney Mainline project - Spread 2 is 67kms of 42 inch pipeline and related facilities for an estimated $220mm.

 

3.    The Groundbirch Compressor Station is a two unit greenfield compressor station near Dawson Creek, B.C., with an initial contract value of $37mm.

 

4.    Spread 5B of the Trans Mountain Expansion Project is ~85kms of 36 inch pipeline, bid as a 50/50 JV with Speicapaq Canada for an initial estimated value of $375mm.

 

·        MCR exited the third quarter with a net cash position of $25mm. The company has PPE on the books of $59.3mm and a positive working capital balance of $34.8mm.

 

  Jason Tucker

  Partner, Research Analyst

 

 

  110 9th Avenue SW, Suite 500

  Calgary, Alberta, Canada  T2P 0T1

 

  Tel: 403.513.1031

  Fax: 403.265.8721

  jtucker@paradigmcap.com

[sculpin]

Cormark 2019 top idea...

 

Macro Industries Inc. (MCR-TSXv)  Brent Watson

 

Buy, $4.50

 

  Company Description:  Macro Industries is a pipeline and facility construction and maintenance company located in Fort St. John, British Columbia. The company offers investors exposure to a series of projects in Western Canada linked to LNG activity. With positive net cash and relatively modest future capital requirements to execute on these contracts, Macro’s financial position will improve markedly as 2019 progresses, while the resumption of the Trans Mountain pipeline expansion (TMX) project represents a key catalyst potentially in H1/19.

 

Cormark Outlook:

 

 Macro’s JV partnership with Spiecapag Canada, a subsidiary of a major global construction entity, has allowed Macro to win two large pipeline contracts in Western Canada. The Coastal GasLink pipeline contract ($900 MM gross, 40% MCR) will underpin the company’s growth next year, while a resumption of the TMX project could see the Macro/Spiecapag contract ($375 MM gross, 50% MCR) reactivated and potentially contributing to results in the latter part of the year or in 2020.

 

 Macro has guided to $250 MM of revenue next year, excluding any contribution from the TMX project. On this base-line for 2019, we estimate that Macro is trading at just 2.1x EV/EBITDA next year while a potential scope expansion on Coastal GasLink could offer some upside to our EBITDA forecast.

 

We have based our $4.50 target price on a NPV model of Macro’s secured contracts, with the TMX contract included and representing approximately $0.50/share of the total. With the market still suggestively somewhat skeptical about the Coastal GasLink project and TMX fully discounted (in our opinion), progression of these two projects could see MCR move meaningfully higher in H1/19

[JayGatsby]

Thanks for posting these. I realized nobody was responding. I am reading, just don't have much to comment!

[sculpin]

Quite the 4th quarter & outlook for a $3.25 stock with no debt and $1.50 of net cash...

 

Macro Enterprises Inc. has released its fourth quarter and year-end 2018 results.

 

 

Summary of financial results                           

                                                      (thousands of dollars except per share amounts)       

                                                      Three months ended December 31  Year ended December 31     

                                                        2018          2017              2018      2017       

                                                                                         

Revenues                                                $137,595        $26,897        $191,060  $103,980   

EBITDA1                                                  22,318        416            21,705    2,872     

Net income (loss)                                        14,054        (2,050)        8,965    (3,446)

Net income (loss) per share                              0.46          (0.07)          0.30      (0.11)

 

 

Highlights

 

The Company continues to materially exceed industry standard safety averages. As at December 31, 2018, Macro Enterprises has now exceeded 22 quarters and 4.2 million man hours worked without a single lost time injury.

 

The Company generated $39.2 million in positive cash flow from operations for the year compared to $4.6 million for the prior year.

 

The Company recorded EBITDA of $21.7 million based on improved margins and strong 4th quarter results.

 

Total working capital as at December 31, 2018 was $50.1 million of which the Company's cash position net of debt was $50.5 million. The Company continues to remain unleveraged and undrawn on its credit facilities.

 

The normal course issuer bid was renewed for another 12 months in December 2018.

 

The Company expects revenue to exceed $300.0 million in fiscal 2019.

 

The Company is reporting shareholders' equity of $88.5 million or $2.92 per share based on the weighted average common shares outstanding as at December 31, 2018.

 

 

[Patmo]

Once again, Macro goes through a downturn unscathed and debt free, and comes out of the hole bigger than the previous cycle. Where is the love? Where is the hype? Usually this board laps up hero management stories, Mr. Miles and his team continue to draw circles around everybody else but few notice... I'll take a suite of old scruffy men who know what the hell they're doing over silver tongued salesmen who play "the game", any day of the week.

 

Not sure what the rant was for, but it's some pleasant news we got, it really crystallizes the picture.

 

 

[TBW]

Totally agree. Book value of $2.92,$2 of which is cash, likely earn at least $1.20 next two years. Not that PE is best way to look at this, but this is at ~1.3x 2019 earning, if you strip out the cash. And that assigns no value to TM pipeline being built. Basically mkt is saying the company has no value beyond 2020.

 

The company is also buying $30mil of equipment. As you say management has been very disciplined capital spenders. Bullish that the are doing so.

[sculpin]

Cormark...

 

 

 

Macro (MCR-V, $4.08) –Last night Macro reported Q1/19 results. Top-line revenue of $121.6 MM essentially matched our forecast of $123 MM while EBITDA of $13.5 MM was modestly below our $17.2 MM forecast.

 

Macro had guided to some margin compression following a very strong result in Q4; however, with existing contracts rolling off and Coastal GasLink representing a minor amount of revenue in the first quarter, we don’t see Q1 as indicative of normalized results. As activity accelerates into 2020, the company expects to see margins stabilizing and improving as efficiencies are achieved later this year.

 

On the back of its recent Saturn compressor project award, revenue guidance for 2019 now stands at $350 MM+ (versus $300 MM+ previously), with the forecast for the year not including any provision for the Trans Mountain Pipeline expansion (TMX) project. We believe that a decision by the federal government to proceed with TMX, potentially announced on June 18, would represent a key catalyst for the stock as we (conservatively) have ~$0.90/sh in value for the project included in our target price.

 

With its exceptionally strong balance sheet and exposure to major pipeline contracts (that have a high probability of being upsized), we continue see Macro as a very compelling small cap services name. – Buy, $5.50 Target

 

 

[wisowis]

I saw this press release:

 

Macro Enterprises Inc. Announces Financing to Optionees

October 2, 2019

 

Fort St. John, British Columbia--(Newsfile Corp. - October 1, 2019) - Macro Enterprises Inc. (TSXV: MCR) (the "Company" or "Macro") has entered into loan agreements with nine employees, directors and officers of the Company to assist the borrowers with paying the exercise price and applicable taxes on the exercise of options granted under the Company's stock option plan. In aggregate, approximately $1.1 million was advanced. Interest will be charged at a rate based on the Company's cost of borrowing prime rate loans, beginning on the first anniversary of each loan.

 

Is it unusual that Macro Enterprises is loaning money to their employees so that they can exercise their options?

 

 

[Okta]

I also believe corporate governance is the reason for the low price. I do not see effective board oversight of management compensation. E.g. they adjusted strike prices retroactively in the past, if I remember correctly. How much cash did the CEO pay to get about 1/3 of the company? I have sold most of my position above $4, yet I think it is worth more. Maybe someone can explain how this is the new normal for Canadian companies and better enlight us why mgmt are heroes.

[wisowis]

They reported today. TTM EPS of $1.21, or 3.4x PE at current share price.

 

http://www.macroindustries.ca/images/documents/financials/2019/3Q19MDA.PDF

 

Highlights

 

• Macro Enterprises Inc. ("Macro" of the "Company") generated $50.8 million in positive cash flows from operations before taxes paid and changes for non-cash working capital items compared to $1.4 million used in prior year.
   
  
• Total working capital as at September 30, 2019 was $51.9 million after considering $11.5 million in current portions of long-term debt and right of use lease obligations. The Company remains undrawn on its $65 million revolving credit facility with $64.3 million available based on current borrowing margins.
  
• The Company is reporting shareholders' equity of $112.1 million or $3.69 per share based on weighted average common shares outstanding as at September 30, 2019.
   
  
• Trailing twelve month revenues, EBITDA and earnings per share were: $470.5 million, $72.4 million and $1.22 per common share respectively.
  
• The Company expects fiscal 2019 revenues to exceed $400 million with margins to be reflective of the past 12 month's operations.
  
• During the quarter ended September 30, 2019, the Company repurchased 244,400 common shares for cancellation under its Normal Course Issuer Bid at an average price of $4.14 per share.
  

 

[Okta]

Current operating numbers are good in relation to price and short-term outlook is also good.

Despite the buyback with shareholder money they have managed to increase the share count year-over-year due to the options for the management.

[JayGatsby]

Anyone have thoughts on what kind of multiple this company should trade at? Obviously they've won some big jobs that have made current results very strong, but I have no idea if those results are repeatable or not.

 

Said differently, if someone was to go through the effort of making a DCF of the company, you'd have $X of fairly forecastable cash flow from the projects they've won plus $X of terminal value based on future work.

[sculpin]

Macro Enterprises (TSX - MCR - $4.00)

 

Macro Enterprises is one of the top 5 most attractive stocks out of more than two thousand microcap stocks that we ranked using our quantitative screen.  Moreover, the mid case and high case intrinsic value estimates are far above the current stock price.  As a result, we are “trembling with greed” to buy this stock for the Boole Microcap Fund.

 

http://boolefund.com/macro-enterprises-mcr-v/

 

First we screen for cheapness based on five metrics.  Here are the numbers for Macro Enterprises:

 

EV/EBITDA = 1.37

P/E = 3.72

P/B = 1.08

P/CF = 3.51

P/S = 0.26

 

These figures—especially EV/EBITDA, P/E, and P/S—make Macro Enterprises one of the top ten cheapest companies out of over two thousand that we ranked.

Macro has built a record backlog of $870+ million in net revenue over the next few years.  That is more than 7x the company’s current market cap.  Presently the company has at least a 16% EBITDA margin.  This translates into a net profit margin of at least 11%.  That means the company will earn at least 80% of its current market cap over the next few years.  (Peak net profit margins were around 15%—at these levels, the company would earn more than 100% of its market cap over the next few years.)

 

Intrinsic value scenarios:

 

Low case: Macro is probably not worth less than book value, which is $3.61 per share.  That’s about 7% lower than today’s share price of $3.89.

 

Mid case: The company is probably worth at least EV/EBITDA of 5.0.  That translates into a share price of $10.39, which is 167% higher than today’s $3.89.

 

High case: Macro may easily be worth at least EV/EBITDA of 8.0.  That translates into a share price of $16.17, which is about 316% higher than today’s $3.89.

[sculpin]

https://moiglobal.com/wp-content/uploads/ideas20-highlights.pdf

 

 

Michael Melby

https://www.gatecitycap.com/

 

Macro Enterprises (Canada: MCR) constructs oil and natural gas pipelines, builds

energy-related infrastructure facilities, and provides maintenance and integrity work on existing

pipelines. Macro is headquartered in Fort St. John, British Columbia and conducts most

operations in Alberta and British Columbia.

 

Macro has a market capitalization of C$124 million

and an enterprise value of C$101 million.

 

Macro has established itself as one of the largest

pipeline construction companies in Western Canada and has built a strong reputation for safety

and reliability over the company’s 34 years of operations.

 

Macro has recently benefited from a sharp increase in pipeline construction activity in the area

and has built a record backlog of $870+ million. This backlog includes large contracts on both

the Coastal GasLink Pipeline and the Trans Mountain Pipeline Expansion. A large portion of

both projects is cost-plus in nature, dramatically reducing the company’s execution risk. Macro

continues to bid on additional projects, and Mike expects the company to continue to add

profitable work to its backlog. Additionally, Macro has four master service agreements with large

pipeline operators to provide maintenance and integrity work on existing pipelines.

 

Theseservice contracts provide Macro with a higher-margin, recurring revenue base.

The company’s recent valuation metrics are attractive, with Macro trading at a P/E ratio of

~3.5x, EV/EBITDA of ~1.5x, and price/book of ~1.2x. Macro has a clean balance sheet, with net

cash of C$23+ million and owned property, plant and equipment with a book value of C$75+

million. Management is aligned with shareholders, as founder and CEO Frank Miles owns 30+%

of shares outstanding.

 

[sculpin]

Macro Enterprises: My Top Idea For 2020

 

https://seekingalpha.com/article/4320928-macro-enterprises-top-idea-for-2020

 

Macro Enterprises: My Top Idea For 2020

 

Top Idea|Feb. 4, 2020 8:00 AM ET|13 comments  | About: Macro Enterprises Inc. (MCESF)

Nicholas Bodnar

Nicholas Bodnar

Nano-cap, micro-cap, Deep Value, contrarian

(3,285 followers)

 

Summary

 

Macro Enterprises has transformed itself from a small regional construction company to a major player capable of the largest and most complicated oil and gas construction projects in Western Canada.

 

Macro Enterprises showcased its capabilities in 2018 and 2019 through the successful completion of a major project for one of the largest pipeline companies in Canada, delivering record profitability.

 

Macro Enterprises has been awarded contracts with the Coastal GasLink Pipeline Project and the Trans Mountain Expansion, two of Canada’s high-profile projects, resulting in record backlog .

 

Macro Enterprises is undervalued, trading at a P/E ratio of 3.3x, EV/EBITDA of 1.3x, and P/B ratio of 1.2x.

 

Macro’s management team has skin in the game. The CEO, Frank Miles, owns over 30% of the equity and is an owner/operator.

 

About: I joined Gate City Capital Management as a research analyst three years ago after spending one and a half years writing full time on Seeking Alpha. I haven’t written for Seeking Alpha in over three years, since my last article titled Farewell Seeking Alpha. My time these days is spent researching deep value, micro-cap companies for Gate City Capital Management. For those who don’t know, Gate City Capital Management is an investment firm that runs a concentrated, micro-cap, deep value strategy. I have decided to return to Seeking Alpha to showcase my top idea for 2020. My top idea for 2020 is Macro Enterprises (OTC:MCESF) (MCR.V). I believe Macro is significantly undervalued and overlooked. Utilizing a DCF analysis, my price target for Macro is $7.19 per share, which equates to approximately 90% upside. My research process on Macro includes meeting with the management team, touring facilities in Northern Canada, attending the past two annual shareholder meetings, and speaking with industry experts. I hope the information I have gathered is informative and helpful to my former followers and supporters.

 

Mispricing: Macro trades at a significant discount to peers. I believe the discount is due to three reasons: the Canadian energy market has been in a multi-year downturn and Macro has been grouped with the broader energy market, Macro is an illiquid and thinly traded security, and Macro trades on the Toronto Venture Exchange ("TSX") as a micro-cap security. If Macro executes on the two large projects in their backlog, the Company will generate a significant amount of free cash flow over the next two years. Successful execution on these two projects should help close the current value discount and re-rate the security. An additional large project announcement would provide investors with added conviction in Macro’s long-term prospects.

 

Business Overview: Macro Enterprises Inc. constructs oil and gas pipelines for companies in Western Canada. In addition to oil and gas pipeline construction, Macro constructs compressor stations and other energy pipeline infrastructure and provides maintenance and integrity services on existing pipelines. Macro has completed construction projects for some of the biggest names in the business including TC Energy Corporation, Pembina Pipeline Corporation, Enbridge Inc., Seven Generations Energy Ltd., AltaGas, and Fortis Inc. In addition, Macro Enterprises has Master Service Agreements (“MSAs”) with TC Energy, Pembina Pipeline, Enbridge and NorthRiver Midstream. The Company’s headquarters in Fort St. John, British Columbia are strategically located within the Montney Formation which has large deposits of low-cost natural gas. Fort St. John is also situated between the oil sands of Alberta and the port cities of Western British Columbia. Macro’s shares are traded on the Toronto Venture Exchange and all figures in this presentation are in Canadian Dollars unless otherwise noted.

 

Map of Fort St. John, Canada

 

 

 

Source: Macro Enterprises

 

Macro’s Equipment at work

 

 

 

Source: Photo by Macro Enterprises

 

Construction Services: Macro constructs oil and natural gas pipelines and energy related infrastructure in Western Canada. The Company began operations focusing on small diameter pipelines but has since expanded its capabilities to build all sizes of pipeline. The Company does not provide any engineering services but rather focuses its operations on the actual construction process. The pipeline construction process consists of the following steps: clearing and grading a right-of-way, digging a ditch to lay the pipe, fabricating the pipeline together, bending the pipe to fit the terrain, testing the pipeline, burying the pipeline, and restoring the right-of-way. The process requires a large amount of construction equipment including pipelayers, excavators, bulldozers, and trenchers. The Company is compensated either on a time and materials or a fixed price basis and is generally not responsible for the purchase of the pipe. The cost to install a pipeline varies dramatically depending on the location of the pipeline and the terrain that must be navigated.

 

Oil and gas pipelines require a significant amount of infrastructure including compressor stations. Compressor stations are facilities located along a natural gas pipeline which compresses gas to a certain pressure allowing gas to be moved along the pipeline. Macro is typically compensated on a fixed price basis when constructing facilities projects. Over time, Macro has developed a strong reputation for delivering projects on-time and on-budget with an expertise in challenging areas such as mountainous terrain.

 

Maintenance and Integrity Services: Completed pipelines require regular maintenance work to ensure the integrity of the pipeline and make any necessary repairs. Many pipeline owners choose to enter into Master Service Agreements to provide a framework for expected future service work along with pre-negotiated pricing. Macro has MSAs with TC Energy, Enbridge, Pembina and NorthRiver Midstream. The TC Energy MSA is for the Nova Gas Transmission Line (“NGTL”). The Nova Gas Transmission Line is a system of pipelines that stretch across Alberta and British Columbia. The Enbridge MSA is for the B.C. Pipeline, consisting of 2,858 kilometers of pipeline, stretching from Fort Nelson in Northeast British Columbia to the Southern Canada-United States border. The Pembina MSA covers the Northeastern British Columbia Pipeline (“NEBC”), a pipeline system in British Columbia. The NorthRiver Midstream MSA is for 3,550 kilometers of natural gas pipeline across the Montney region of British Columbia and Alberta. Maintenance and integrity services work is completed on a time and materials basis with gross margins generally in the mid-twenties. Macro has historically generated between $40 and $50 million of revenue annually from its MSAs, providing Macro with a recurring base of high margin revenue. I have provided pictures of each of the MSA pipelines below to show the massive infrastructure Macro helps maintain.

 

NGTL Pipeline

 

 

 

Source: NGTL Pipeline

 

B.C. Pipeline

 

 

 

Source: B.C. Pipeline

 

NEBC Pipeline

 

 

 

Source: NEBC Pipeline

 

NorthRiver Midstream

 

 

 

Source: NorthRiver Midstream

 

Management and projects executed: Macro Enterprises is led by Frank Miles, the President, Chief Executive Officer and Chief Operating Officer. Mr. Miles worked in the pipeline industry his entire career before founding Macro in 1994. Mr. Miles owns over 30% of Macro through 9.1 million shares of common stock and 2,100 shares of preferred stock. During the market downturn of 2015-2017, Mr. Miles was selective when bidding on projects. Mr. Miles is fond of saying he “did not sweat his iron” for low margin work and choose to preserve Macro’s owned equipment base. Mr. Miles has also made sure the Company has had a strong balance sheet, giving Macro the ability to bid on economically attractive projects. The unlevered balance sheet (excluding equipment financing) speaks clearly of the conservative nature of Mr. Miles. I take comfort knowing the CEO owns over 30% of the Company and has his capital on the line with ours. Mr. Miles has acted as a true owner/operator focused on maximizing Macro’s free cash flow.

 

Under Mr. Miles’ leadership, Macro has a long history of completing projects on time and on budget. In 2018, Macro started work on the North Montney Mainline Expansion. The project was for the construction of 67 kilometer stretch of pipeline that connected the growing Montney natural gas production to North American markets. The project was originally $200 million but ended up being over $250 million by the time Macro finished the project. This was the largest project Macro has executed to date. There is a video of Macro building the North Montney Mainline Expansion project you can view here. Macro’s successful execution on the North Montney Mainline Expansion has already manifested in additional work for Macro. Macro was awarded two compressor stations on the North Montney Mainline Expansion. The Groundbirch Compressor Station was a $37 million project that was completed in the third quarter of 2019. The Saturn Compressor Station is a $30 million project expected to be complete in the second quarter of 2020. Successful execution on multiple projects shows pipeline companies that Macro can execute and perform on multiple large projects at the same time. Macro’s industry-leading safety record that includes 25 consecutive quarters and over five million manhours without a lost time incident is a positive factor for winning additional work. Past performance on construction projects will be helpful for Macro’s resume when bidding on future projects. I have provided a table below of past projects Macro has successfully completed.

 

 

Source: Macro Enterprises financials filings & company website

 

Current Backlog: Even with the success Macro achieved in 2018 and 2019, I believe the best is yet to come. Macro has a record project backlog that I expect them to execute through 2022. The two largest projects in Macro’s backlog are the Trans Mountain Pipeline Expansion and the Coastal GasLink Project. I have provided details of these two major projects below.

 

Trans Mountain Expansion: The Trans Mountain Expansion project (“TMX”) is a $9.3 billion proposed expansion or twinning, of the existing Trans Mountain pipeline system, running between Edmonton, Alberta and Burnaby, British Columbia. The original Trans Mountain Pipeline was constructed in 1953 and carries crude oil through 1,150 kilometers of pipeline. The Trans Mountain Expansion would increase the capacity from 300,000 barrels of oil per day to 890,000 barrels of oil per day. At full buildout, the project will add 980 kilometers of pipeline, 12 new pump stations, 19 new storage tank terminals and three new berths. In May of 2016, the NEB recommended to approve of the expansion. In November 2016, the Trans Mountain project was approved by the Canadian government.

 

The approval of the pipeline attracted protests from environmentalists and First Nation groups resulting in delays. On May 29, 2018, the Canadian Government purchased the pipeline from Kinder Morgan for $4.5 billion. In August 2018, the Trans Mountain Pipeline Expansion was temporarily delayed after officials concluded the pipeline was approved without fully consulting with First Nations. In June 2019, after completing additional consultation, the Canadian government approved the expansion project for the second time, promising to have shovels in the ground for the 2019 construction season. The total project size for the Trans Mountain Pipeline Expansion was upsized from $7.4 billion to $9.3 billion.

 

 

 

Source: Trans Mountain Route

 

Macro was awarded a 50% stake of a $375 million contract (along with JV partner Spiecapag) for the construction of Spread 5B of the Trans Mountain Pipeline Expansion. Spread 5B includes the construction of 85 kilometers of 36-inch pipeline along the Coquihalla-Hope corridor in British Columbia. This section of the pipeline is one of the most technical sections of the project, as such Spread 5B was structured as a cost-plus contract, greatly reducing the execution risk. Spread 5B was also structured where Macro would get upfront working capital payments. The recent increase in estimated project costs from $7.4 billion to $9.3 billion suggests that total size for the Macro Spiecapag Joint Venture could be over $500 million. I estimate project margins on the Trans Mountain Expansion to be 15%. Spread 5B of the Trans Mountain Expansion is estimated to begin in Q2 2020 and run through 2022. While I recognize the project has been delayed in the past, there are positive indicators the pipeline will be built. Work has already started on a portion of the Trans Mountain pipeline with an estimated 2,200 contractors working and pipeline in the ground. The pipeline is also now owned by the Canadian government. Following Prime Minster Trudeau’s election in 2019, Trudeau reiterated his support for the project.

 

Coastal GasLink: The Coastal GasLink pipeline project is a 670 kilometer pipeline that will deliver natural gas from Dawson Creek, Canada to a new LNG export facility in the port of Kitimat, Canada called LNG Canada. LNG Canada will be the first major LNG export facility in Canada with a total estimated cost of $40 billion. The Coastal GasLink project will be built and operated by TC Energy. The pipeline is expected to have an initial capacity of 2.1 billion cubic feet per day with a potential expansion of up to 5.0 billion cubic feet per day. Original estimated project costs for Coastal GasLink were $6.2 billion. In November 2019, the estimated costs of Coastal GasLink increased to $6.6 billion due to additional meter stations and increased costs for rock work and water crossings. On December 26th, 2019, KKR (a global investment firm) along with Alberta Investment Management Corporation (“AIMCo”) announced an agreement to buy a 65% equity interest in the Coastal GasLink Pipeline project from TC Energy. On October 1st, 2018, the final investment decision was approved by the project’s partners (Shell, PETRONAS, PetroChina, Mitsubishi Corporation, and KOGAS) of LNG Canada.

 

On June 19th, 2018, TC Energy awarded Macro Enterprises a 40% share in a $900 million contract to construct Spread 5 and Spread 8 of the Coastal GasLink Pipeline. Spiecapag Canada Corp. shares the other 60% of the contract. Civil work (clearing, logging, managing camps and setting up equipment) will be performed under a reimbursable contract model, while the mechanical scope (trenching and welding) will be performed under unit rates. There are upfront working capital mechanisms that will reduce working capital requirements for Macro and Spiecapag.

 

 

 

Source: Coastal GasLink Construction Update

 

Macro began work on Spread 5 and 8 of Coastal GasLink in the first quarter of 2019, with work expected to run through the fourth quarter of 2021. Macro and Spiecapag have already completed a meaningful portion of the preconstruction and clearing. Readers can find updates on the Coastal GasLink project website for each of the spreads. As of January 16th, 2020, 28% of Spread 5 has been cleared. Pipeline is expected to arrive at the storage site in the beginning of April. Spread 8 has 52% of its 84 kilometer route cleared and 11,000 meters of pipe have been stockpiled at storage sites.

 

I estimate in fiscal years 2020 and 2021 Macro will realize $150 million in annual revenues from the Coastal GasLink Project. My estimated project margins are 15%. It is likely there will be scope changes to the project, potentially increasing the entire contract size well above the $900 million project estimate. Similar to the North Montney Mainline pipeline project Macro completed in 2019, Macro has potential to win additional facility contracts. Only one compressor station out of eight has been awarded so far, with each compression station costing $30-40 million. One of the seven remaining compressor stations is located within Spread 5 of the pipeline route. I find Macro’s successful history of working with TC Energy a positive datapoint for the potential award of an additional compressor station.

 

Spiecapag Joint Venture: Macro’s joint venture partner for both the Trans Mountain Expansion and Coastal GasLink is French-based, Spiecapag, a subsidiary of VINCI. Spiecapag is one of the world’s leading oil and gas pipeline system companies with over 90 years of experience and has completed pipeline projects around the world. VINCI is a billion-dollar, global infrastructure company employing over 200,000 people in over 10 countries. Having Spiecapag as a partner has enabled Macro to take its operations to the next level. With Spiecapag as a joint venture partner, Macro can now utilize a billion-dollar company to bid and execute on future projects that would have previously been considered too large. The joint venture has been successful so far allowing Macro to punch above its weight class, landing impressively sized contracts with the backing of a global infrastructure company. Macro provides Spiecapag with local expertise, a large base of owned equipment, and the right zip code for winning Canadian pipeline construction projects. I am optimistic that Macro will continue to utilize Spiecapag to bid and potentially win additional large-scale projects.

 

Potential Future Projects: Having Trans Mountain and Coastal GasLink in the current backlog is exciting, but there is a substantial amount of additional work for Macro to win. I have gone through the recent investor presentations for TC Energy, Pembina and Enbridge, Macro’s MSA partners. Macro’s MSA partners plan to spend over $16.9 billion in Western Canada over the next three years. While Macro will not win all this work, Macro has established itself as a reliable partner in the industry. I am confident Macro will win their fair amount of project work. Potential projects Macro could win are depicted below.

 

 

Source: TC Energy, Pembina and Enbridge Investor Presentations

 

Competition: Macro operates in a competitive industry. Companies in the pipeline industry compete on reputation, safety record, geographic location, and price. Competitive advantages for Macro include, a pristine safety record, a strong balance sheet, a history of successful execution on projects, and a strategic geographic location. Competitors consist of Surerus Pipeline, Quanta Services, Ledcor Group, Midwest Pipelines, Waschuk Pipeline Construction Company, Robert B. Sommerville Co., and Michels Canada. From my research pipeline construction companies in this environment are exceptionally busy. If demand for contractors continues to increase there is potential for project margins to increase. This type of environment should be favorable for Macro given their large base of owned assets, geographic location, and reputation in the industry. The partnership with Spiecapag is another feather in the cap which should give Macro the ability and opportunity to bid on projects in the future. Given the major capital investments Macro’s three Master Service Agreement partners have announced, Macro has the potential to compete effectively for work. Finally, Macro has a clean balance sheet and equipment base of owned assets that will allow Macro to selectively bid on profitable contracts.

 

Balance Sheet and owned assets: Macro’s balance sheet is strong, with $50.9 million in cash and $27.5 million of equipment financing debt. Macro has net working capital of $51.9 million and nearly $75 million in property, plant, and equipment. Macro has valuable real estate holdings in Fort St. John including the Company’s corporate headquarters on 4.3 acres of land, a 23,000 square foot mechanics shop, a 10,800 square foot truck stop on 3.72 acres, and three other parcels of land in Fort St. John, Canada on 20 acres. Book value of the land and buildings is $17.9 million. Macro has made the strategic decision to own most of its equipment. As of the December 2018 Annual Information Form, Macro reported owning 96 light duty trucks, 31 heavy duty trucks, 51 trailers, 4 trenchers, 33 dozers, 49 excavators and 101 pipelayers. In the past three years Macro has spent over $50 million upgrading its fleet of equipment. Gross value of the Company’s construction equipment as of the last quarter was $96 million. Furthermore, the gross value of the Company’s automotive equipment as of the last quarter was $22 million. Net book value of the equipment ($56 million) is likely understated given the recent high grading of the equipment base. I visited Macro’s yard in 2017 and saw firsthand the massive equipment base Macro owns. My contacts in Fort St. John say the yard is now empty as equipment has been deployed.

 

Macro’s Corporate Headquarters

 

Pipe-Layers and Excavators

 

Macro Pipe-Layer

 

 

 

 

 

 

 

Source: Equipment pictures taken by Nick, and headquarter picture sourced from Pipeline News North

 

In addition to its large cash balance, Macro has several other sources of liquidity. Macro has a large credit facility, including an undrawn $65 million revolver and a $80 million secured letter of credit facility. Macro also has two standby letters of credit for $40.7 million in value which is guaranteed by Export Development of Canada (“EDC”). The large credit facilities and letters of credit are advantageous to Macro Enterprises for contract bidding. In addition to 30.2 million shares of common stock, Macro’s capital structure includes 2,564 shares of preferred stock convertible at a rate of 666.67 for each preferred share, for a total diluted share count of 31.9 million. Frank Miles owns 2,100 shares of the preferred stock. The preferred stock pays an annual dividend of $65 per share.

 

Income Statement: Macro has guided for revenues in excess of $400 million for 2019. Macro forecasted 2020 project revenues to exceed $300 million which does not include potential MSA revenues. I expect project work of $300 million in 2020 and $330 million in 2021. I am forecasting maintenance work of $45 million annually for 2020 and 2021 as maintenance spending continues across Canada. I estimate construction projects to have gross margins of 15% and maintenance revenues to generate gross margins of 25% as these cost-plus contracts typically have higher margins. With annual SG&A costs of $8-8.5 million, I forecast Macro to generate $58.5 million in EBITDA for 2020 and $66.8 million in EBITDA for 2021. I have assumed the Company pays the full corporate tax rate of 26% for companies in British Columbia.

 

Cash Flow: I expect Macro to generate a significant amount of free cash flow in 2020 and 2021. Macro increased capital expenditures spending for 2019 to an estimated $35 million in preparation for the Coastal GasLink and the Trans Mountain Expansion. Unless Macro wins another significant project, capital expenditure spending will fall to maintenance levels, which match depreciation and amortization of $20 million for 2020 and 2021. Historically, Macro has estimated that the Company will need to invest $25 million in working capital for every $100 million in project revenue. Trans Mountain and Coastal Gaslink have upfront working capital mechanisms that will reduce Macro’s working capital needs for the next two years. I estimate minimal working capital needs given the scope of these two large projects. In my DCF analysis, I expect Macro to generate $22 million and $32 million in free cash flow for 2020 and 2021. Macro has $23 million of net cash, has a history of repurchasing shares and does not pay a common stock dividend. The Company repurchased 244,000 shares at $4.14/share in the third quarter of 2019 and recently announced a renewal of their normal course issuer bid to repurchase up to 1,500,000 shares of common stock. I expect Macro will continue to repurchase shares while also preserving their cash balance for working capital and capital expenditure purposes.

 

Valuation: I utilized a DCF analysis to obtain a price target of $7.19 per share. The DCF utilizes a 12.5% discount rate and 3.0% terminal growth rate. This represents approximately 90% upside. I am forecasting Macro to generate over $50 million in free cash flow over the next two years. If Macro does not win any additional projects, which I would find unlikely, Macro will have a significant amount of cash on its balance sheet from the successful execution of Trans Mountain and Coastal GasLink. The downside is limited due to the net cash position, the large base of owned assets and current “deep value” valuation. Macro’s valuation is also attractive on a relative basis. Macro is trading at a P/E ratio of 3.3x, and EV/EBITDA ratio of 1.3x. Macro’s peers trade at an average P/E of 14.1x and EV/EBITDA of 7.3x.

 

 

Source: Yahoo Finance. Macro in CAD and other comparable companies in USD. Figures in millions.

 

Floor Value Analysis: I utilized a floor value analysis to understand Macro's margin of safety under an extreme tail event. I utilized book value of Macro's assets and liabilities and then haircut these by certain percentages for additional conservatism. Based on this analysis I obtained a floor value for Macro of $87 million or $2.70 per share. This floor value analysis represents a -28% downside to Macro's current market capitalization. Macro’s net cash value of $23 million and $75 million of net property, plant, and equipment support our floor value analysis.

 

Risks: There are several notable risks to the Company’s business that should be highlighted:

 

Pipeline projects are complicated, and Macro may be responsible for execution risk and potential cost overruns.

Pipeline projects are subject to significant regulations and may be delayed or cancelled by government entities.

Canadian pipeline projects may be subject to protests by environmental groups or First Nations groups.

Demand for the Company’s services is indirectly driven by energy prices which are volatile in nature.

Macro operates in Canada and U.S. investors are subject to currency risks should the Canadian dollar depreciate.

Conclusion: I am excited to return to Seeking Alpha and share my top idea for 2020 with my followers. My price target is $7.19 per share, representing an upside of approximately +90%. Macro stands to benefit from a significant backlog of planned Canadian pipeline construction projects. The company’s large cash balance and asset base helps to provide a margin of safety should expectations not be met. Thanks for reading my write-up on Macro Enterprises. Please feel free to comment below or reach out if you have any questions.

[JayGatsby]

Back down to basically NWC. Oil prices shouldn't impact their existing contracts I don't think. Transmountain is a Canadian government project at this point.

[wisowis]

Trading was halted for 5 days (!) after which they announced their joint Transmountain contract has been terminated.

 

Cormark holds out hope they'll sign a new contract:

 

After an extended trading halt, yesterday Macro announced that the Macro/Spiecapag JV received a notice from Trans Mountain Pipeline LP to terminate the construction contract for Spread 5B. Despite the abrupt-sounding headline, Macro is likely to remain meaningfully exposed to the Trans Mountain project. However, until a new agreement is struck in the coming weeks, some uncertainty will prevail. While we had hoped that the completion of the working interest swap with Spiecapag would go smoothly (presuming the decision was well-socialized with customers and would not precipitate the need to leave 5B temporarily uncontracted), we can also appreciate the complexities of dealing with a government-backed project proponent. Assuming that Macro will be able to recontract a 100% interest in an upsized TMX contract, we are sticking with our $5.00 target, though we are shifting our recommendation to Speculative Buy (from Buy) until a new contract is announced.

[JayGatsby]

So they swapped their interest in Coastal Gaslink for full interest in Trans Mountain, which was then immediately terminated?

[doc75]

So they swapped their interest in Coastal Gaslink for full interest in Trans Mountain, which was then immediately terminated?

 

That's how it appears but it doesn't make much sense. The length of the halt was also very strange.  I think there's a lot more to this story.

 

Post-news trading suggests the market agrees with Cormark.