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

TER: How can a service company best increase its margin?

RS: We like private companies that are running flat out. Their fleets are extended. They are renting third-party equipment to support customer demand. They have great customer relationships. When they have trouble renting to meet increasing demand for services, they inject capital to expand the fleet. It is better to buy the equipment necessary to meet demand; renting equipment from a third-party reduces margin.

A good example of a company using these tactics is Enterprise Group Inc. (E:TSX.V). Enterprise is involved in oil field construction and equipment rentals, as well as in serving the local utilities and transportation markets in western Canada. It is currently injecting capital to displace the use of third-party equipment to drive margin improvement.

TER: The charts show that Enterprise enjoyed a four-fold increase in share value during the past year. What do you attribute that to?

RS: We attribute Enterprise's performance to its strong M&A strategy. Enterprise recently announced an LNG acquisition in the Fort St. John area of British Columbia. Its last significant acquisition was Hart Oilfield Rentals in early 2014. It acquired a couple of companies in 2013. The companies Enterprise acquired sold at very attractive prices, usually 3x trailing EBITDA. Most are operating in niche markets, offering a service or a line of equipment that is in high demand. Because Enterprise is a public company, it has excellent access to the capital markets. It can support the growth of the acquired companies on a post-strength action basis.

TER: Are Great Prairie and Enterprise mainly acquirers, or are they targets for acquisition?

RS: They have both been acquiring smaller firms. Once they reach critical mass, they will be attractive candidates to a larger player looking to establish a foothold in western Canada.

TER: What financial metrics do you look at in an M&A candidate?

RS: The most popular target from an acquirer's standpoint is a private company that has grown organically and needs capital support to make it to the next level. Trailing EBITDA is the metric that acquiring companies look at in determining the worth of an acquisition target. Most transactions are getting done between 3x and 4x trailing EBITDA on a normalized basis, excluding exceptions consistent with the operation of a private company. Usually the buyers want a mix of cash and stock, and a provision that ensures the continuity of management.

TER: What other names are you following in this M&A and execution space?

RS: We have just launched coverage of CERF Inc. (CFL:TSX.V). CERF recently completed a combination with Winalta Inc. We have a $5/share target and CERF's stock's is currently trading at about $3.50/share. CERF provides equipment rentals to both the oil field and construction markets in western Canada. The Winalta transaction was a $70M equity and debt deal, which added exposure to the well site accommodation space, which means providing shacks that allow staff to live and work in close proximity to rigs operating in extreme weather conditions. Well site accommodation is a high margin business. CERF's existing rental business was doing gross margins in the neighborhood of 35–40%. The well site accommodation business has gross margins of over 60%. On top of that, CERF is paying a dividend yield of 6.7%. It is a relatively high yielding stock with a very attractive earnings growth profile.

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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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