Friday, June 27, 2014



You may remember that E's business model is to: acquire mom-and-pop energy/infrastructure/utility businesses in Western Canada at <3x EBITDA; build them out through investments in additional equipment; maximize synergies between them through shared costs and cross-selling of services; and sell the entire package at >6x EBITDA in a market that sees an LNG construction boom stretching far into the future.

Things are thus far working out better than I expected. The company is undertaking heavy investment in specialized and, in some cases, unique assets, some of them protected by patents or exclusivity agreements, and all of which have payback periods of six to twenty four months, in order to satisfy pre-identified and contracted demand. And none of this demand is, as yet, directly tied to the LNG construction boom that is surely coming.

Happily, acquisitions, massive internal capex, etc makes E hard to screen for and moderately tricky to value. A reader has kindly sent me the transcript of a conference call conducted in March and I'll quote from that.

Calgary Tunneling & Horizontal Auguring (acquired in June 2013):
“The catalyst for growth here is this is a company that traditionally services all 3 of the segments I mentioned before: utility, infrastructure and energy . . . In the energy business they are exposed heavily to the long distance, large diameter pipeline construction world. What they do there is they put in all the crossings in a pipeline construction design . . . This is an aspect of the business and for the next 5 to 7 years this segment has never seen a construction roster as deep as we’re seeing right now for long distance large diameter pipeline construction projects. Even eliminating what is in front of us with LNG it’s a very long roster.

. . . The main thrust and catalyst for growth with this particular operation is a new micro tunneling technology. We made an investment into the first machine in Canada and negotiated a bit of an exclusive on this piece of equipment . . . So this new technology we acquired is a technology that eliminates all those under water way crossing environmental issues because it doesn’t have a fracking out problem with that type of drilling. So we expect this new technology will be the new mandated crossing technology going forward. Both Enbridge and Trans-Canada have been over to Germany to the manufacturer of this particular technology and they bought in. Of course, we’ll be the only player in Western Canada with this drilling technology . . .So we’re going to see a tremendous amount of growth in 2014, 2015 and onwards with this particular business unit . . . what we’ll see as a result is the equipment and, by the way, that piece of equipment is a $6.5 million investment in one piece of equipment. That piece of equipment the type of projects it will be exposed to will be between $4 and $15 million crossing projects each one . . .The piece of equipment is due to hit our yard late in July and right now we’re working with this world renowned engineering firm, this EPCM firm, to be doing several projects inside of 2014. They have yet to be solidified but we expect that piece of equipment will generate significant revenue inside 2014. It’s too early to know and to get proper vision of what that piece of equipment will do in 2014. We won’t know that until probably midsummer… We order the equipment because of the demand on this particular piece. We’re comfortable at Enterprise that that piece of equipment will be employed. We’re not worried about it at all.”

. . . If you don’t mind I wouldn’t mind adding that Calgary Tunneling is a very specialized tunneling company. It only has one other major competitor in Western Canada that can compete at its level and right now both companies are booked solid. You’ll see expansion in both of these divisions going forward.”

TC Backhoe (acquired in 2007):
 “Historically, I think I mentioned in my talk earlier that TC, our division, had a fleet of 6 or 7 hydro trucks and most of the activity those trucks would do were in our basket of services. In other words it was a service we provided with a technician. We’d make a hole in the ground and our technician would go down and make the repair or termination and we’d clean up the job . . . What we did in late 2013 is we hired a hydrovac expert, a long time guy in the business and at one time was with Badger (Badger Daylighting, ed.) in his history. What comes with him is not only his expertise but he has a great deal of relationships in and around the industry. He was able to bring basically hydrovac services only without any technicians.

So, in other words, providing hydrovac services to open up pipeline integrity inspections and this kind of thing was a business we never did before at TC but with this gentleman’s expertise and relationships we’ve been able to advance ourselves into that business. Now that’s the business that Badger is in and there is an extreme demand for the service that outstrips the capacity for the actual units in industry at the moment.

. . . It’s a good opportunity to take our fleet from 6 to 20. . .This is an extremely profitable division for DC. . . .We’ve ordered and taken delivery of 8 of 14 and have 6 more being delivered over the next 3 ½ months. These machines cost just under a half million to build and they bill out over that in just over 8 months. It is an extremely profitable division and we’ll expand that hydrovac division as long as we have long term commitments. We’ve got a 30 month commitment with Trans-Canada Pipelines and a 24 month commitment with Kinder Morgan and a 2 year commitment with Somerville and so we don’t mind making those investments knowing we have our money back in less than a year and great upside going forward  . . . Basically the demand is there for the product and we’ll supply it as long as we can see getting our money back and turning it into a long term investment.”

Hart Oilfield Services (acquired January 2014):
"There are other competitors in the site infrastructure rental business. The difference with Hart is they (sic, "they" should be “we” throughout, ed.) have designs on their units or what have you that create a tremendous amount of transportation efficiencies as well as the design of the equipment is very innovative . . . Basically they provide the Shells and Encanas of the world equipment that is much more in demand than any of their peers. They are operating over 2000 pieces of equipment and if they had 4000 it would be in demand. So there is a great deal of our cap-ex going to this particular operation because the demand is there . . . What they do is just acres and acres above what their peers provide. It’s a very exclusive offering that we will spend a great deal of our resources building the fleet on that particular business."

Artic Therm (acquired 2012):
Artic Therm is one of our more exclusive businesses . . . In 2000, the company was successfully heating pipelines in the field and been doing it for well over a decade. It is a business that’s growing. They only had 4 clients in the first decade out of choice. They operated the business without wanting to make it any bigger and since we bought it we tripled the client base and extremely grown the revenues in a big way of almost double the first year we took it over. We’ve increased the fleet by billing weight well over 2 times.

So it is an opportunity that has more demand than we have equipment. We’re going to be spending more cap-ex again this year on more units and the catalyst for growth for this company is quite astonishing.

The smaller units are something you’ll see all over Canada and North America, but the big trucks that technology is very exclusive and new to the industry. And right now the opportunity right in our backyard is huge for us to fulfill with all the new clients we’ve been bringing on . . . (And) what you may see this fall is us looking at licensing that technology into some of the areas of North America like the Balkan and down into Texas and Louisiana and up the Eastern seaboard. It is something that we’ll look at and kind of following the same track that Badger did with their hydrovac truck operations.

When we made the acquisition of Artic Therm the proprietor and management of the business built that business working basically from September/October and right until May and bring all the equipment home and actually not work during the summer season for two reasons: it fit the lifestyle they wanted to provide themselves and at the other side they worked so hard during the premium heating season that the break was welcome . . . We as Enterprise since the acquisition we’re of course implementing a program to make this a 12 month revenue stream rather than just 7 or 8 months. . . the tank storage shut down application for the big units is a 12 month business that the previous management didn’t pursue . . . Enterprise is pursuing it and we’ve done a great deal of marketing and have for the first time since Enterprise has owned ATI we have now booked work for this summer. So the applications for the large units for 12 months of the year will happen in earnest this year. Again, it’s a market we’re developing and shareholders should understand that it will take time to develop ATI’s business to 12 months. This year will be a very good start at it. I will definitely say last summer there was very little revenue from ATI during summer months but that will change starting in 2014 and I expect a dramatic increase in 2015 for summer work.

Full transcipt here 

Business fundamentals are only half of a roll up story and the financing/capital structure story is also discussed in that transcript.  

1. E's custom built hydrovac trucks cost $500K and bill $1.1m in revenue at 35% margin
2. E started the year with 8 hydrovac trucks and will end it with 20
3. 20/27 million of 2014 capex is to build out Hart. Hart turns its fixed assets over 1x at 37.5% EBITDA margin.
4. In the above transcript, management indicates a $33.5m EBITDA target for 2014 

Warrants or stock? A reasonable argument argument could be made for either. The smart play may be to have an equity anchor and to supplement it with trades in (~$0.20) and out (~$0.40) of the warrants.

Lots of sell-side coverage for a microcap and the latest initiation is  here.  

Edited June 29 to correct spreadsheet stupidity.


  1. thanks for writing it up. That dropbox link is very interesting. it looks like this is by far the best way to profit of the whole north america gas boom. They are selling the picks and shovels that are actually ahead of the curve here protected by patents.

    It seems that this could be a nice buy and hold one? You put a 2.5$ price target on it, but this thing could easily be worth double or triple that 4 years from now?

    Just curious what ways or tricks you usually use to find information? For example the supply glut with Emeco outside australia, I didnt pick up on that. You also seem to be able to find more detailed analyst reports then I do.

  2. It could be worth more than $2.50, sure, and that will depend on how pipeline approval timelines play our and on how volatile energy prices/differentials are.

    If it's a seller's market in 2015/6 or mgmt levers up by the appropriate amount it could well be a triple or 4x.

    But I'm okay with $2.50 for now and evaluating later whether there's even more upside.


    Once I'm interested in a company, I try to find out as much as I can about it, the micro-industry, its competitors etc. Usual methods google search & search term rss, youtube videos, twitter accounts etc. Nothing unusual, really. That report found me because I follow "$" on twitter and it popped up in my stream a few days ago.

    Some readers/correspondents are very kind, also, and send me materials on stocks they know I'm interested in or on stocks that fit my style that I hadn't known I would be interested in. That's gratifying and the best thing about authoring a blog.

    The most useful information, though, is pretty much always from the company's filings -- IPO prospectus, annuals and quarterlies, and debt prospectuses 9which regularly have different/more detailed information).

    Picking the numbers apart and using all of them to try to make make sense of the story -- how does this thing work? -- is something I don't mind doing esp since I find out pretty quickly if I'm ever going to get to the bottom of it. That's what I rely on.

    Analyst reports, write ups etc are useful as a check against the questions I hadn't thought to ask myself.

  3. Red,

    I´ve always calculated the EV as follows:

    EV= FCFx15 + Net debt.

    Could you please explain me why you use 6 times EBITDA, instead of the FCF.

    I use 15 times FCF because is the companies average value in wall street since it starts to quote.

    Thanks in advance.

  4. Hi Red
    Thx for your update on Enterprise. I had a quick look at the CapIQ Consensus estimates for Entprise which tracks 4 analysts. The average forecasts are:
    2014: C$ 81m revenues and C$27m EBITDA
    2015: C$ 101m revenues and C$ 38m EBITDA

    You're 16% and 40% higher for 2014 and 23% and 60% for 2015 which means that you expect faster Revenue growth at much higher margins (your EBITDA margin expectation for 2015 is close to 50%).

    What is driving your much more optimistic assumptions?

  5. Just one related remark to my question above.
    You expect TC Backhoe's EBITDA margin to explode from 35% in 2014 to 76% in 2015. What is driving this massive margin Expansion?

  6. kiskosky,

    Don't know what in the world I was thinking of when I was attempting to put together that streamlined spreadsheet. I've fixed it. Thanks for bringing the problem to my attention.


    Is there a wide dispersal in the forward EBITDA numbers on CapIQ.It wouldn't surprise me if there were. Fluid business with acquisitions, capex commitments and so on changing every couple of months.

    I think the run rate is already >$26m which places the fully diluted shares at >$1.30.

    On top of that, we know that they're investing in Artic Therm Units, doubling Hart's rental assets, and buying hydrovac trucks as fast as their supplier can make them. I think $38m is conservative for 2014 EBITDA.

  7. David,

    Good question. I'll have more time to answer tomorrow.

  8. Hey I saw you just started building a position in future bright. I covered the stock for a while in 2013 before it reached new heights and would be interested in exchanging ideas here. Will you be writing a writeup?

  9. Andre,

    Yes. I'm on vacation so I'll write it up after I get back, check/respond to emails, etc.

    Basically, though, I think it's what it says on the tin:
    1. %5.50 for current F&B
    2. $2.75 for footprint in new casinos
    3. $0.65 for food souvenirs
    3. $0.70 for property leasing
    = ~$9.50
    Minorities = ~(1.60)
    Subtotal = $7.90

    4. ~$0.90 for catering to casino staff; and
    5. ~%5.50 for Hengqin project
    Subtotal = $6.35

    So somewhere between $8 and $14 with the options decided in this calendar year.

    -Dividend policy is weak;
    -China/Japan conflict would be problematic

    the bright side:
    -Limited opportunities for growth
    -super turnover/margins baked into the business model

    My expectation:
    Hengqin decision in 2H 2014 and share price doubles

  10. Thanks for your reply.
    The CapIQ EBITDA range is 25-31 for 2014 and 31-44 for 2015, so yes there is quite a wide dispersal, but all are substantially below your 38/61 estimates.

  11. Well, it's just a matter of adding up the segments and translating capex into EBITDA, so I doubt that I'm more than 10% off. And, as I say, mgmt appears to be indicating $33.5 in the transcript above.

  12. what would you say is future bright's moat ? (love the name btw) Locations of their food plaza's?

  13. (1) these are casino eateries:
    casinos don't want punters to leave the premises, punters don't want to leave the premises, so favorable rent and favorable margins. Operate 24/7 and you get Chipotle-like sales/sq ft at twice the margin.

    (2) Owner-manager is a legislator in the Macau assembly

    (3) company represents ~9% of all commercial catering expenditure in Macau. If you build a new casino, you'll need restaurants & you'd approach FB first.

  14. FB?? What´s the meaning?

  15. FB = Future Bright

    re: your question about my use of EBITDA

    1) this is a build-to-sell operation (the managers are building a business that they hope to sell to a private entity) and the currency in these kinds of transactions is usually EBITDA multiples.

    2) these things are usually transacted in terms of EBITDA multiples because the acquirer (a private equity firm or an operating business) has its own depreciation schedules, leverage preferences, and tax schedules.

    3) Of course, we secondary investors should translate EBITDA into Earnings by estimating maintenance capital expenditure and so on. In this case, if a machine costs %500K to build and runs for 7 years then the annual reserve for maintenance capex is goingto be just short of $500/7 for that piece of equipment.

  16. Thanks a lot Red, very kind.

  17. Red,

    I can´t see the per share value in Enterprise Group:

    6 times trailing EBITDA=38x6=228. Total shares=145.3 m.
    Per share value= 228/145.3=1,57

    Neither in 2015.

    I don´t know if I´m wrong with the total share´s number used.

  18. David,

    EBITDA multiples are for Enterprise Value

    EV + net cash = equity value

    Net cash =
    net cash now +
    fcf between now and then +
    proceeds from exercise of warrants

  19. Red,

    So you obtain the 1.91 per share value in 2014 using the net debt and the FCF from now to then. Not just multiplying 6times EBITDA and dividing it by total number of shares.?


  20. Hi Red,
    About your 2014 estimations:
    1)Why did you decide to use 34% EBITDA?
    it says in Q1 report: Utilities/Infrastructure division’s EBITDAS margin of 28% and Equipment Rental division’s EBITDAS margin of 47%. Managment says Both expected to improve and another thing is that the Rental is the bigger division so should have a bigger weight. What am i missing?
    2)Net debt you used 17.
    I see at Q1 :
    30M cash and 42M debt.
    My estimated is FCF should be positive so it should help take debt lower. Again what am i missing?
    3)I wonder how did you reach your 2015 estimations?


  21. David: Yes


    Are you counting the ~7.6 million in head office expenses? EBITDA is lower than the sum of segment EBITDAs by that amount.

    My net debt figure is for the end of 2014 after cash flows in and capex out, so it is bound to be different from the Q1 snapshot value.

    2015 estimates are based on ~15m of capex distributed between Artic Therm, hydrovacs and Hart in a way that I think reflects the relative promise of each of these units. Take it with a pinch of salt: capex could be a lot higher than I've indicated and could be distributed differently than I've guessed.

  22. Thanks for the replay.
    1)I guess i've missed it. Is 7.6 your estimation or you took it from the report?
    2) So if at the end of Q1 net debt was 12 i understand you expect to see a negative FCF of 5M. Is that it?


  23. red,
    your portfolio is 1/3 invested in chinese stocks.
    are you aware of the situation in china with huge real estate bubble?
    the whole economy in china can suffer from that so is it something u take in your considiration?

  24. Noam,

    If I'm doing it right each pick should look like a really terrible idea at first sight.

    I'm aware that lots of people believe that Chinese real estate is overvalued but I'm not sure that I lose money whether it is or isn't.

    My most direct exposure to the temperature of Chinese real estate is, I suppose, Emeco which is Australian and listed on the ASX.

    Thanks for the comment and let me know if you see anything specific in my portfolio that strikes you as particularly risky.

  25. Ben,

    1) TTM Admin costs from E's filings
    2) That's it,yes

  26. Red,
    I am new to your site and very much enjoy reading your entries. Will you be providing some insight into Rain Industries? It's a little off the beaten track (hence interesting) but there isn't much information out there on the company or industry.
    Thanks for the site and the sharing. Been a great find for me to get a sense of how to look at things and develop a thesis to support an investment.

  27. Hi

    Thanks for reading. Here's a good write upon Rain

  28. Red,

    Sorry but I still can´t see it:

    If EV=38x6=228, net debt is 17. We have the equity value= 228-17=211, and the per share value=211/145.5=1,45 it doesn´t match with your 1,91. What I´m missing?

  29. "Thanks for the comment and let me know if you see anything specific in my portfolio that strikes you as particularly risky."

    Not risky but I think your 3 weak links are Epicentre BFC and rain.

    Epicentre looks like a crap bussiness that is in decline with declining margins each year for the last 5 or so years. I would just take your loss and get it in something better.

    BFC looks like it is run by a shady management and v recession sensitive? And also pretty hard to really understand. I mean you could probably find something better with the same upside and less risk right?

    And Im not sure about Rain, Revenue fell of a cliff last year, and it does not look cheap on a PE basis? Also find their business hard to understand, but could be very wrong about this. I did read the write up. I supose you think it will pick up again.

    Besides that I really like your portfolio. And it seems most picks are situations where public information already says earnings will change v likely in the near future due to new capacity, increased utilization or hidden assets being monetized.

    I guess that is the way to make the highest return in a mostly rational market :).

  30. "Not risky but I think your 3 weak links are Epicentre BFC and rain."

    I wish I could get out of Epicentre but there's literally no volume. I've been wanting out for months, now.

    BFC - run by shady management, yes; recession-sensitive, yes;not so hard to understand, actually; and, yes, I could probably find something else at a similar discount to putative value. What I like about it is that it is not open ended: ne finds out quite quickly and definitively if it's valuable or a lemon. Still, I take your point.

    Rain -- this is a cheap stock but there's a long fuse attached to the fireworks. 5% is a placeholder and I plan to upsize at the eve of Guy Fawkes day.

    Thanks for the thoughtful feedback. I should ask you to do my semiannual updates.

    What do you own that you like better than mine?

  31. David - I was using shares outstanding. You're using diluted shares & I'd stick with what you have.

  32. You´re right.

    I was taking the number of shares that I read in googlefinance. They are wrong.


  33. How do you get 145.5M of fully diluted shares? I could only find 11.8M of warrants which combines with 110.1M of outstanding shares to give 121.9M shares. Where do the remaining 23.6M shares come from?


  35. On Future Bright:
    Thank you for the detailed comments here. I am not as optimistic on the valuation front as you are, especially the Hengqin project will take time to realize and be factored into the stock price.

    Max 20% of the stores will be run by FB, they still need to find a partner, and this will likely be much lower margin than FB's casino restaurants.

    Could you explain on what assumptions you're making for 2.75 for footprint on new casinos? I have about 0.8/share here.

    All these are just details though. I think, given the growth prospects, FB is undervalued, and I also see a lot of upside here.

    - Andre

  36. Andre,

    Thanks for sharing your insight.

    Keep in mind that these are (literally) back of the envelope estimates, but my thoughts are these:

    I. Hengqin:

    My understanding is that FB will pay HK $1.5 bn in auction and development costs to own property that will, at market prices of $8500/sq ft, be worth ~$9 bn. That gets me to $7500/695 = ~$11 per share and, applying the traditional 50% discount to NAV, to $5.50 per share. More or less, rough and ready.

    I expect that to be at least partly reflected in the share price at the time of the announcement and it is the premise of my investment in the stock: it's material and it's near term.

    We could maybe build it up via net rental income, 40 to 70 years, discount back and come close to that. How many restaurants FB will itself operate and what the margins will be is not (or rather, was not, perhaps it should be) an important part of my thinking.

    II. Casino/Hotel/Resort footprint:

    Let me try to present it this way:

    Last year saw $675m in restaurant/counter revenue at ~37% blended gross operating margin and $5500 in sales/sq ft.

    The footprint at end 2014 suggests an incremental (145K sq ft x $4000/sq ft)= $585m in run rate revenue at, say, 37% blended margin = ~$220m in incremental operating margin to the business. I value that at 10x ==> ~$3.10 per share.

    30,000 new hotel rooms between 2015 & 2018, ~ half of which are in casino/resorts. So roughly double today's total room count.

    I don't see any reason why either the restaurant sq ft to hotel room ratio or FB's market share should fall. So I assume that a doubling of rooms means a doubling (from 2013 levels) of Macao restaurant/counter revenue and at similar margins. That's where the $2.75/share value comes from.

    Now the investment case doesn't depend on either this or Henqin happening, so these are, if not free, then cheap options -- as is the possibility of industrial catering for casino staff, selling packages food into China and so on, all the opportunities that you are familiar with.

    And finally, I like the possibility of FB acting as a franchisee of major global and/or HK QSR chains in Macau. Hengqin may help that along.

    The downside is that none of these things happen and the share price flatlines as FB grows into its run rate earnings indicated in IIA above.

    Make sense?

  37. Thanks for the breakdown red. This makes sense to me at the moment. I will respond again longer once I've done some further research.
    - Andre

  38. Red,

    Seeing your portfolio it seems that you are not very confident in the US and Europa stocks. Do you think that the bull cycle is going to turn back?

    Here I let you a link with the auditors report of a fraud in a stock in Spain. The enterprise is GOWEX, a internet telecom company. They offered free wifi.

    The detection of the fraud was made by GOTHAM RESEARCH. Here in Spain there was a lot of investors caught in the stock.

    Hope you´ll find it interesting.

  39. Hey red,

    I saw u added Outerwall to your portfolio - what is the thesis there?


  40. Thanks, David.

    In my experience there are always some cheap stocks in every market but some markets are less effort than others at particular times. So it's laziness and path-dependence (once you look, you find) that has led me away from NA/EUR equities.


    anon - I'll write about OUTR after Q2

  41. Red,

    I would like to ask you for recommmending me a financial book. I read the Intelligent Investor,Common stocks uncommon profits and One up on Wall Street but I found them very general books.

    I´m looking for a book more specific about valuing companies. I guess you recomend once Tim koller.

    So If you know a good book about valuing companies please let me know.


  42. Books are tricky: what's good depends on what you already know and most investment books are terribly cynical and wrong.

    The hard part is not price (which, while not always self-evident, is most of the time plain to see)but value.

    Value is (setting aside capital structure for a second) about the business' future cash flow & cash return profile. That, in turn, means evaluating the raison d'etre and competitive position of the business you're looking at. And, for that, it is best to read lots and lots of trade magazines, industry primers, write ups etc.

    The "CS Investing" blog has (i think) a library of industry primers, and sites like VIC & Sumzero have lots of write ups that go into greater or lesser detail about how particular industries work.

    The "Risk Factors" sections of annual reports are also quite under-rated in this regard.

    Most learning,however,comes from doing.

    (Obviously, though,if you're a statistical investor a la Graham, Schloss, Piotroski, or later editions of Greenblatt, all of that's a waste of time and the idea is to drive by looking in the rear-view mirror. The important thing is to not confuse statistical/mechanical investing for stock picking.)

    And the charming thing about Buffett's letters is that the more experience you have the more more meaningful they become.

  43. Red what do you think of the 2016 outerwall options? It seems very unlikely this stock trades below 70-80$ 1.5 years from now. 55$ calls are 10$ with decent liquidity.

  44. I see it that way, too. But Q2 box office doesn't look good and so we might see a miss and a meaningful sell-off at Q2. I'm going to wait for that before getting into the LEAPs. (And I'd probably be more interested in the calls nearer the money than the $65s)

  45. There is a several month delay though. Since DVD's are usually rented a few months after movie theater releases. Arent you afraid this is the sell off already? It already looks very cheap now. Wait a bit and you might risk it will just spike up on the news.

  46. Thanks Red,

    I discovered your blog few weeks ago and I´m learning more from you than from the books I read. Also your comments are always very sensible and generous.

    I have to learn more about Reading anual reports to calculate the real net income in the present and in future.

    These days I´m fighting with the operating and capital leasing wich it seems to me a Little dificult.

    Thanks for sharing all your knowledge.

  47. anon - I've usually got more ideas than spaces on my dance card so, for better or worse, I generally don't mind missing out on individual names.

    I do see your point about the impact delay and I'll think about it some more over the next couple of weeks.



    Richard Beddard has written about operating leases here

  48. oh btw one more thing red, Outerwall has a very large short interest. There is a danger that shorts starting to cover from this price will drive the price up again. I think short interest is like 30-40% or something.

  49. Red do you have any good reading material on what is exactly happening with the whole gas thing in north america? How likely it is that these terminals will all be built. How much gas there possibly is etc.

    What is holding off the building of terminals. Is is chemical companies lobbying to keep the gas cheap?

    Looking at the spread, gas is more then 3x as expensive in Asia, and costs of transportation is only a few $ at most commpared to the 12$ price spread or so.

  50. Here you go:

  51. thanks, much appreciated

  52. Hi, GEA looks interesting...didn't see any updated financials on their you have access to anything more recent?


  53. 2013 AR & H1 2014 available in French. Blogged about -- and linked to -- here:

  54. Red, how do you account for the cash on their balance sheet? If they pay it out in dividends, you pay 30% right? And it doesn't look like European firms buy back much shares. A large buy back would be nice at those prices.

  55. The cash is really not much more than a buffer (and the stock is just an option with positive carry). This thing trades at 1.5x trailing EBIT, pays out, and is attached to a pretty good company. i don't think it'll make the GS Conviction Buy List but it's neither is it a terrible idea.

    The company could buy back up to 10% of its shares, yes, but liquidity would suffer and the discount to value wouldn't narrow all that much.

    On the other hand, there really isn't much point to the company accumulating even more cash, so one can envision a more generous dividend policy going forward.

    I'd expect this thing to trade on a dividend yield of ~5% so if the dividend goes up the share price goes up proportionately.

    Hard to think up reasons why it could earn less than, say, 9 million year, and a payout of 3/4 of that minimum would yield 9%.

    And that would be unsustainable (and even if it weren't it would be a pretty good way to park cash until one has the next bright idea).

    There's also the possibility of a special dividend, of course.

    p.s. Worth looking up French dividend withholding tax rates etc.

  56. Red

    Talking about dividends. I'm from Spain and the problem of investing abroad is the doble tax suffered. I always have to pay a minimun of 15% abroad and also in spain another 21%. So I've to bear very high taxes in the dividend.

    I suppose that investing outside of Europe has similar dividend taxes. Do you know any way of avoiding those frustraiting taxes?


  57. Hi Red,

    One thing I'm amazed by is how you time your sells.

    For both Dolan & Unitek, you got out just in the nick of time, but before the crowd.

    Is it because you saw something that others didn't...or that you're much more risk averse than the other investors?


    Also for your Mayur bet (which I know you exited much earlier), it's had a phenomenal run...up 300% gain not including dividends...any thoughts on that?

  58. Dolan & Unitek were high risk picks that were contingent on one simple & clear-cut factor: their ability to refinance debt at materially lower interest rates.

    Dolan: on November 9 it filed this 8-K

    That's lenders playing hardball. And that's not consistent with an ability to refinance, so I exited pronto. It got crushed a week or two later.

    Unitek: 10-Q came and they hadn't refinanced when that should have been their top priority. If they had'nt done it already it was likely that it was because they couldn't. Lot of liquidity that day and I exited without any regrets.

    Pretty simple though I was fortunate in that there was a pause between the signal and the bloodbath.

    I should never have gotten into those names when there was easy value littering the markets. I thought it would be fun/diverting but it was a bit sordid and a lot boring.

  59. why not the 2015 options for demand? Seems like a heavy catalyst driven stock right?

  60. OUTR Q2 post ? :)

  61. What a disastrous Q3 2014 Report. Substantial top-line miss cobined with massive margin compression as demand has exceeded operating capacity necessitating the use of third-party equipment.
    $14m EBITDA after 9 months vs. earlier management expectations of $33m (?) for the full year.

    It will have to be seen to what degree margins "normalize" when more self-owned equipment is used vs. subcontractors.

    It is unlikely that the market will put much faith in management's comments/forecasts going forward.

  62. None of the reasons they have proffered make sense and I no longer believe anything they say. Both their Q3 margin guidance and their after the fact excuses feel like a deliberate lies. That is the worst thing about it.

  63. Red - your earlier remark that this management team is not one Bradley Jacobs rings in my ear. In a roll up management is everything and with it the kind of detailed, deliberate, patient, low key, discipline like the one that characterises Judges. In hindsight, when these guys went on a conference call earlier in the year talking about "making 3m a month"they definitively identified themselves as cowboys for those willing to listen to anything other than what they wanted to hear. Likewise, upsizing the Q1 offering and then promptly spending all the cash.

  64. Well, that's surely at the heart of my mistake. In a roll up, one's stock price is currency and the focus should be on protecting it: under-promise and over-deliver or just plain old do what you say you will. Trade at a premium, issue stock to do bigger and bigger deals and pretty soon you have a real business.

    Raising institutional money at $1 and driving the stock to $0.55 six months later is the opposite of all that.

    So, yes, I should have held out for a better price especially since I also knew that the shareholder base was mostly retail and therefore inherently unstable. This company tweets its own share price, for goodness sake :)

    What's done is done, I suppose, and since no profitable and viable business should trade at 2x run rate EBITDA. I'll probably still make out okay in the end. It's just going to be a more scenic route than it needed to be. (The warrants, though, seem to me quite probably permanently impaired).

    I had a similar issue with the management of Lombard Risk Management: nice business but CEO could'nt help telling anyone who'd listen that it is worth 3x its current market valuation.

  65. There is a much deeper psychology to the CEO trait identified by Thorndike of not paying any attention to the market.

    Frank Miles might just have something.

    Doesn't one have to buy management's line to be able to assume margins are recoverable?

    Meanwhile the macro is brewing (Keystone back on the table, possible Petronas FID). And if you look at Paramount Resources (itself an excellent study in Outsider management), they alone can spend $30bn in the Montney at terrific IRR's.

  66. Arent we a bit too pessimistic here. It could easily be because they signed some long term contracts and leased the equipment. It could be that they underestimated impact. This could be so they can quickly rent out the equipment they bought and it does not sit idle?

    I don't think the 26m$ was a complete waste just because of this?

    Seems like the CEO owns 3 million warrants. Not a huge number compared to his salary, but still enough to not be careless I guess.

    Im kind of hesistant to think that the capex is just pisssed away in the wind.

  67. I don't think anyone anywhere is suggesting that the business is impaired or that the cap ex was wasted. It will do $45 to $50 in EBITDA in 2015.

    I'm kvetching about the multiple that it will command over the next 12 months. It is not going to be as generous as it could have been and that has implications for my warrants.


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