Keep Truckin': Russell Stanley On How To Snap Up Growing Energy Services Companies

TER: Do you advise investing in small, growing energy service firms, or in buying shares in companies in the business of acquiring the small firms?

RS: Investing in smaller companies can offer short-term advantages to investors. The speed of execution of a business plan is a simple metric to understand. And investing in a quality startup that is following its business plan is always a good bet. Of course, many of these firms are privately held.

But on a mid- to long-term basis, we are seeing more and more merger-and-acquisition (M&A) activity for a combination of reasons. The larger, more liquid companies have easier access to capital. Smaller companies can run into challenges raising the money they need to pursue immediate growth opportunities. That provides an opportunity for a larger player to acquire the small firm. We are also seeing an increased level of centralized procurement by the end customer. The E&P companies prefer to make one phone call to a service provider. From the customer's perspective, it is more efficient to deal with a large service company that can offer a fuller suite of products and services.

TER: Are acquirers proving to be good managers after the acquisitions close?

RS: The challenge on a post-acquisition basis is preserving the customer base of the company acquired. Small, private companies have often been in operation for 20–30 years. They often have excellent brand value on a local basis. They have longstanding customer relationships. The acquirer does not want to erode that goodwill. The challenge is to optimize the synergies while maximizing overhead savings and cross-selling opportunities.

"The challenge in M&A is to optimize the synergies while maximizing overhead savings and cross-selling opportunities."

The companies we cover do a good job in that arena, and it is a skill we applaud. A key factor in maintaining a smooth transition in M&A is that all the involved parties understand that the buyer's intent is to continue with current management. We like to see the former owner/operators of acquired private companies incentivized to stay on board with earn-out provisions and blocks of stock in the business.

TER: What oil and gas service firms do you favor in western Canada?

RS: One of the companies that we have launched coverage on is Great Prairie Energy Services Inc. (GPE:TSX.V). We have a $0.75 target on Great Prairie. It is involved in oil field equipment rentals, frack fluid management and equipment hauling. About 60% of the company's revenue is from Saskatchewan, which is an overlooked market relative to Alberta. The CEO of Great Prairie, Sid Dutchak, is the former minister of justice for Saskatchewan. The board of directors is strong. By virtue of its position in Saskatchewan, Great Prairie is competing for customers and potential acquisitions in a less intensely competitive environment than other regions of western Canada. The company came off Q2/14 stronger than we expected. It is trading at about 3.6 times (3.6x) our estimate for next year's earnings before interest, taxes, depreciation and amortization (EBITDA).

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DISCLOSURE:

1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and ...

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