Friday, November 13, 2015

Macro Enterprises Inc - Update

14 months on and one finds Macro decidedly out of favor. One can evaluate the pricing of the stock as follows:

 

These are low expectations -- i.e., that the company will do approximately $30 million in annual work at 20% gross margins -- and, in light of what should be the steady nature of its bread and butter pipeline integrity work, I am not convinced that these expectations are realistic. 

Second, one could attach some significance to the company's recently secured $115 million credit facility from TD Bank. This facility is intended to enable the company to post bid and performance bonds for possible LNG pipeline construction projects in the near future.  

Surety bonds for this type of work usually amount to 10% of a project's value and Macro would be bidding as one, small member in a consortium of contractors.  That, I think, gives a fair indication of the scale of the upside potential beyond (1) multiple expansion to some realistic, non-zero number and (2) a return to O&G prices in the US$60+/$2.75+ ranges seen in recent years. 

In other words, even if Macro's legacy work is worth zero, it seems to me unlikely that the option that it may win some LNG pipeline work  is also worth zero.

Macro is to be sure a "cigar butt" but, like Dawson, it is not a bad one and may yet turn out to be an excellent one.

 
 
Disclosure: I own some shares in Macro Enterprises


7 comments:

  1. How do you assess the risk of a take-private by Frank Miles? Big increase in cash in last quarter + big drop in share price makes such a move much easier for the guy to find finance for if he needs it. It may be a significant crimp to the upside in a valuation; in the positive scenarios in one's hypothetical decision tree, he might just take it from you.

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    1. Good question. We are maybe 3 or 4 quarters away from $0 enterprise value and the longer this carries on the more reasonable the scenario that you have described becomes.

      Several of my holdings carry that risk because they are that cheap but it is particularly acute here both because Frank Miles does not appear to enjoy the ceremonies of public status and because the low market valuation of the company's equity doesn not help in accessing the capital markets for growth purposes -- if there is growth to be had.

      On the other hand, he/they have gone to some lengths to soothe investors' nerves -- "we have a strong balance sheet", acquisition/consolidation talk etc -- so perhaps that risk is not imminent.

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  2. Was there an allegation that the the company sued one of its customer regarding a dispute about account receivable? Whatever happened to that?

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  3. The dispute was settled for $3.3 million

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  4. Hello Red! Would it be unreasonable to believe that MCR's integrity work should recover after the last two quarters, since regulatory bodies require to keep pipelines in good shape? Thanks in advance for your opinion.

    "Should companies fail to live up to their commitments around safety and environmental protection, the NEB does not hesitate to take strong enforcement action." [https://www.neb-one.gc.ca/bts/nws/fs/pplnntgrt-eng.html]

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    1. Hi Igor, I think it's reasonable to suppose that forward integrity work closely approximates its historical levels of integrity work. Much of the margin of safety in the above thesis was built on that assumption and I don't think anything has happened to shift the demand curve down. There may be some price competition for that work but I think Macro is sufficiently local that it should be well placed to do well enough in its catchment area.

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  5. This is not bad news
    http://www.platts.com/latest-news/petrochemicals/calgary/canadas-altagas-takes-fid-for-north-pine-ngl-21848265

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