TORONTO, ON / ACCESSWIRE / August 5, 2014 / Increasing oil sands and conventional oil production continues to strengthen Canada’s position as a preferred supplier to North American and global energy markets, according to the Canadian Association of Petroleum Producers. By 2030, the organization projects that Canadian crude oil production will more than double to 6.7 million bbl/d with oil sands production jumping to 5.3 million bbl/d.
In this report, we’ll take a look at Enterprise Group Inc.’s (OTC: ETOLF) (TSX: E) plans to capitalize on the country’s growing energy industry.
Diversified Services
Enterprise Group Inc. (OTC: ETOLF) (TSX: E) aims to capitalize on the growth in Canada’s energy industry by providing underground construction and maintenance, as well as specialty equipment rental services. While the energy sector accounts for a healthy portion of its revenue, the company’s customers also include the country’s largest rail, telecommunications, and cable television services.
The company’s utility and infrastructure construction services provide directional drilling and installation of underground power, telecommunications, and natural gas lines. In June, the company also entered the highly specialized trenchless solutions business through its acquisition of Calgary Tunneling & Horizontal Auguring Ltd., which further diversified the segment’s customer mix.
In 2012, the company began building its presence with the energy industry with the acquisition of Artic Therm Inc., a leader in efficient flameless heat and green air technologies using portable equipment. These solutions are ideally suited for extreme climate challenges in remote locations, including many areas of Northern Canada where oil and gas operations face challenging weather.
In 2014, the company further expanded its energy industry exposure through the acquisition of Hart Oilfield Rentals Ltd., a full service oilfield site service infrastructure company serving the Western Canadian Sedimentary Basin. With a rental fleet of patent-pending highly efficient modular designs, the division provides oil and gas customers with a significant competitive cost advantage.
Profitable & Growing
Enterprise Group reported revenue that grew 88% to $34,849,000 and net income that grew 132% to $5,782,000 year over year during the fiscal year ended December 31, 2013. Gross margins also improved 3% to 44% over the same timeframe, driven by high-margin acquisitions and ongoing organic growth across all of its major divisions throughout the coarse of the year (see Figure 1).
Figure 1 – Financial Overview – Source: SEDAR MD&A
In the utilities and infrastructure division, FY 2013 revenue growth was driven by an increase in activity, projects from major customers, the acquisition of CTHA, and the expansion of its service equipment fleet. EBITDA margins have remained stable at approximately 39%, in line with management’s expectations, while a 24-month $5.5 million contract disclosed in Q4 2013 should move revenue higher.
In the equipment rental division, FY 2013 revenue growth was driven by an increase in activity and a full year of operations for its ATI acquisition. EBTIDA margins were in the 46% range, consistent with management expectations, with heavy equipment rental fleets at 70% capacity, which is within its historical 60% to 95% utilization levels and leaves some upside potential.
Management expects to spend approximately $20 million in 2014 in terms of its capital expenditures, including $6 million towards the expansion of its utility hydro-vac fleet, $10 million towards acquiring additional oilfield service rental equipment, and $4 million towards acquiring additional Artic Therm flameless heaters to take advantage of the unique solution’s large market opportunity.
Valuation
With its $140 million market capitalization and an 11.4x price-earnings multiple, Enterprise Group appears to be trading at a discount to its peers, the S&P 500, and its own 5-year historical average (see Figure 2). Management’s largely successful acquisition program has leveraged its growth and earnings potential, suggesting these multiples could expand if the team continues to execute.
Figure 2 – Valuation Comparison – Source: Morningstar.com
In particular, some of these competitors include Total Energy Services Inc. (OTC: TOTZF) (TSX: TOT) and Essential Energy Services Inc. (OTC: EEYUF) (TSX: ESN), which are trading with P/E multiples of 17.12x and 19.7x, respectively. It’s important to note, however, that Enterprise Group’s revenues are diversified beyond simply oilfield services, which suggests less customer concentration risk.
Looking Ahead
Western Canada’s economy has picked up momentum in 2014 with several economists predicting that the region will lead the nation in economic growth. Many energy companies also have increased access to capital, which has translated to an increase in the demand for heavy and specialized equipment. At the same time, the demand for quality work and services exceeds the supply in most areas.
With its utilities/infrastructure construction division operating at or near capacity, Enterprise Group expects the acquisition of Calgary Tunneling & Horizontal Auguring Ltd. and the expansion of the division’s service and equipment fleets to double the size of the division in 2014. Management also anticipates that Hart will significantly contribute to growth in 2014 by providing additional synergies.
In the end, the company’s diversified customer base, growing revenue, comparatively discounted valuation, and its upcoming catalysts make it worth a second look for investors willing to assume the risks associated with investing in micro-cap securities and the sometimes-volatile oil and gas sector.
More Information
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Source: Emerging Growth LLC