Welcome to the Universe

By David Dittman • July 6, 2012 • Canadian Edge Weekly

Poseidon Concepts Corp (TSX: PSN, OTC: POOSF) listed on the Toronto Stock Exchange (TSX) on Nov. 4, 2011, following its spinoff from Open Range Energy Corp (TSX: ONR, OTC: ONRRF), exploration and production company with operations in the Deep Basin of West Central Alberta focused on light oil and liquids-rich natural gas.

Open Range, which this week announced it had agreed to be acquired by Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF), was experiencing rising well-completions costs and endured delays at its major projects due to the lack of availability of  key services.

The company’s frac jobs were also expanding as it started to drill horizontal wells completed with multi-stage fracturing, which meant that its fluid needs were rising as well. Rather than 10 or 20 steel tanks to store fracturing and flowback fluids, Open Range had to source up to 80. It tried using open pits but was dissuaded by environmental concerns.

Into this breach stepped Cliff Wiebe, Open Range’s well completions manager who also had decades of experience on the services side of the industry. Mr. Wiebe designed the prototype of what became the 18,000-barrel capacity Poseidon frac liquids storage tank.

Mr. Wiebe’s design incorporates a fastening system that makes it fast and easy to set up–“without a single bolt”–and was so unique that the company’s patent application, submitted in June 2010, was approved in July 2011.

By the end of 2010 what became Poseidon Concepts had dozens of tanks manufactured and deployed. In January 2011 Poseidon secured its first customer in the Bakken play in North Dakota. Later that year Poseidon introduced two new “fluid handling systems,” built around the 41,000-barrel Atlantis and the 9,000-barrel Triton, to complement the original Poseidon model.

According to the company’s first-quarter report, Poseidon is now working at a “large majority” of North American unconventional oil and liquids-rich natural gas plays. Growth in the US, based on the “shale revolution,” has been remarkable, based on increased penetration in existing plays and entry into adjoining plays as well as new regions.

Poseidon is now working in 17 US states, with recent growth in the southern part of the country particularly strong. Western Canada remains a source of stable growth, with operations focused in the Deep Basin and British Columbia’s Montney Shale.

An estimated 80 percent of Poseidon’s work is in oil plays, reflecting the energy sector’s commodity price-driven focus. This also reveals the mobility advantage as well as the suitability of its products to any type of well where significant fracturing operations are required. The company recently introduced two new tanks, including the 4,500-barrel Neptune.

The Neptune also indicates Poseidon’s flexibility, as this smallest tank in the line services market niches including oil plays with smaller fracturing requirements as well as a “buffer” tank to stage fluids between larger tanks and as a holding vessel on treatment and recycling projects.

Subsequent to the first quarter Poseidon introduced the 26,500-barrel Odyssey, many of which have already been deployed in various unconventional plays. This fifth model, the “upper mid-sized” version, “reflects Poseidon’s practice of listening to our customers’ needs and broadening our service offering accordingly.”

And even though natural gas prices have been in steady decline toward a decade low, Poseidon is seeing demand growth from various projects focused on the commodity. This demonstrates that its products and services are a viable alternative to existing requirements and represent opportunities to reduce costs and improve efficiencies as well as position it to benefit from an eventual rebound in natural gas prices.

At that time of its initial public offering the company provided tank fleet guidance of 240. By Jan. 11, 2012, management forecast 400 tanks by Jun. 30, 2012. When it announced first-quarter earnings on May 9, 2012, management revealed plans to boost its fleet to 500 by Sept. 30, 2012. This rapid growth in the tank fleet–“based on continued robust spot-market demand and a steady pipeline of long-term contracts”–has been matched with solid financial results.

The company posted first-quarter 2012 earnings before interest, taxation, depreciation and amortization (EBITDA) of CAD43.7 million (CAD0.55 per share), up 394 percent from the first quarter of 2011 and 54 percent from the fourth quarter of 2011. Net income was CAD29.6 million (CAD0.37 per share), up 372 percent year over year and 50 percent on a sequential basis.

Funds from operations for the first quarter was CAD38.9 million (CAD0.49 per share), up 163 percent from CAD14.8 million a year ago.

Revenue for the first three months of 2012 was CAD52.1 million, an increase of 360 percent from the first three months and 54 percent from the last three months of 2011. The company also ended the first quarter with zero net debt and a working capital surplus of CAD54.6 million, key for a company where flexible innovation and the ability to respond to highly varied customer needs is the key to long-term growth.

This latter will also prove to be the key as Poseidon pursues its longer-term goal to be a “dividend-growth company.” Poseidon paid monthly dividends for January, February and March at a rate of CAD0.09 per share, the same level it distributed upon first declaring a payout in November 2011.

Funds from operations covered total dividend payments in the first quarter of CAD20.7 million (CAD0.27 per share) by 1.8 times; the payout ratio for the period was 55 percent.

Management issued updated guidance for 2012 based on solid demand for its tanks, boosting its full-year EBITDA forecast to CAD210 million from a previous estimate of CAD170 million and an original prediction of CAD130 million. Poseidon plans to spend CAD60 million on capital development for the year.

We’re adding Poseidon Concepts to the Canadian Edge How They Rate coverage universe under Energy Services as of the August issue. The stock is well off its mid-February 2012 closing high of CAD16.80 on the TSX and currently yields 8.3 percent. The company will report second-quarter results on or about Aug. 9.

Also as of the August issue we’ll now include coffee-and-donuts icon Tim Hortons Inc (TSX: THI, NYSE: THI) and pipeline services specialist ShawCor Ltd (TSX: SCL/A, OTC: SAWLF) in the CE coverage universe.

Tim Hortons, which is Canada’s largest fast-food restaurant with 3,315 locations, also has 721 outlets in the US. It’s been described as “McDonald’s, Dunkin’ Donuts, Starbucks and Panera all wrapped up into one.” There are twice as many   Tim Hortons per capita in Canada as there are Starbucks per capita in the US. And each Tim Hortons does about CAD2 million a year in sales versus roughly USD1 million for a Starbucks in the US.

The company–what management describes as a “48-year overnight success story”–is drawing attention because of its strong financial performance. In the first quarter Tim Hortons’ comparable sales in Canada grew by 5.2 percent, while US same-store sales expanded by 8 percent. Operating income was up 9 percent, while net income grew by 10 percent and earnings per share surged 17 percent.

The company will pay CAD0.84 per share in dividends 2012 (CAD0.21 per share per quarter), up from CAD0.68 per share in 2011 (CAD0.17 per share per quarter) and CAD0.52 per share in 2010 (CAD0.13 per share per quarter). The yield at current levels is 1.5 percent, but it’s hard–if not impossible–to find consistent 20 percent dividend growth rates in this environment. And Tim Hortons has never cut its payout since it first declared a dividend in mid-2006.

ShawCor, for its part, announced a 25 percent dividend increase along with its first-quarter 2012 results, boosting its rate for the payout to shareholders made May 31 to CAD0.10 per share from the CAD0.08 distributed in respect of fourth-quarter 2011 results.

This move marks the seventh consecutive year ShawCor has increased its dividend.

Management reported 12 percent revenue growth to USD312 million and earnings per share growth of 14 percent to USD0.33. Most important, ShawCor’s backlog of projects reached a company-record USD672 million, more than double the level reported in May 2011. This backlog represents work ShawCor has “scheduled to complete and build over the next 12 months,” and it includes the Ichthys Gas Export Pipeline, which at over USD400 million is the largest contract in the company’s history. ShawCor’s Bredero Shaw division will provide pipeline coatings and related products and services for the 889-kilometer gas export pipeline on the Ichthys LNG Project 200 kilometers offshore in Browse Basin of Western Australian.

Work on Ichthys as well as the Wheatsone LNG project in Australia, in addition to new business in Latin America and strong demand in North America, bodes well for margins and earnings during the second half of 2012.

ShawCor has an additional USD203 million in new contracts awarded since the end of the third quarter of 2011 that won’t be completed within 12 months. And it’s also seeing solid demand for jobs of less than USD20 million, which are often booked and billed within a quarter and don’t make it into backlog accounting. Bidding activity is also strong, with more than USD1 billion out on offer as of mid-May.

ShawCor’s string of dividend increases looks set to continue as it adds business all over the world.

The Roundup

Here’s where to find analysis of recent earnings reports issued by Canadian Edge Portfolio Holdings along with dates (estimated in most cases, confirmed in some) for the next release of quarterly numbers.

Conservative Holdings

Aggressive Holdings

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