High Arctic Energy Services Inc T.HWO

HWO Reorg update - Petty Cash - Substack

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HWO Reorg Update

A quick and dirty analysis

Dean

May 14, 2024

 

 

 

I tried to get this out earlier today, but I couldn’t finish. So, I’m buttoning it up after my kids are in bed. They release Q1 2024 results this Thursday so we should get some additional detail.

HWO put out a news release on Friday last week giving us an update on the reorg. On the surface everything looked to be in place. Monday morning they released the circular with much more detail on what each entity will be like post split.

I was honestly expecting a better reaction from the market at the open on Monday. I’m not sure what to think about the muted reaction. I believe that given the delays in PNG the market doesn’t really care about HWO at this point.

Some details of the proposed transaction

• Meeting June 17 in Calgary.

• We vote on the arrangement and return of capital (among other things).

• Requires 2/3 of votes cast to be approved.

• They would do a distribution of up to 38.2 million or about $0.76 maximum on today’s HWO.

  • If passed they would execute this as quick as possible. They say July 24-27 in the circular.

• The arrangement would then close on July 31, 2024. This is the two businesses being split.

• Each HWO share gets you 0.25 shares in the new North America business and the SpinCo (PNG business). They are essentially doing a 4:1 consolidation at this point.

  • Your proportional ownership stays the same.

• HWO North American would keep the current HWO ticker.

• PNG/SpinCo would get a new ticker and list on either the TSX or TSX venture exchange.

• The Q4 statements are in CAD and the circular is in USD.

Some notable items for PNG business

 

• They mentioned rig competition in PNG. Originally HWO was pretty much the only game in town. It’s different this time lol. Here is from the circular:

  • Certain areas with sufficient road infrastructure may be developed to support traditional land-based rigs. To HAES Cyprus’ knowledge, there are currently two land-based rigs located in PNG capable of drilling wells typically completed in PNG. Due to higher mobilization costs associated with heli-portable drilling operations, HAES Cyprus’ heli-portable rigs are typically utilized for remote access operations and as such do not compete in areas where traditional land-based rigs are more cost effective to utilize. To HAES Cyprus’ knowledge, during late 2022 one large land-based drilling rig commenced preparation for work in the primary PNG-LNG production field and is currently drilling. This is the first time land-based rigs other than heli-portable rigs have operated in PNG since 2015.

  • So I think we may need to temper expectations relative to prior cycles.

• It looks like the PNG business will get about 10 million in cash. They only have 12 million in stated PPE after the write-down this year. That’s way too low in my opinion.

• The resulting equity is valued at about 33 million. This is also the stated tangible equity. There is about 20 million in working capital. The majority of the liabilities are in the payables. Other notable assets are receivables at 11 million, and inventories at 7 million.

• PNG did 10.8 million in EBITDA in 2023 and 1.9 million in 2022. 2022 only had partial deployment for rig 115. 2023 had rig 103 under contract the entire time.

• This looks to translate to around 2 million in FCF in 2022 and over 7 million in 2023.

Some other notable items for North America

 

• There are still over 130 million in tax losses staying with the business.

• They state that the post transaction North America business will be under-leveraged and should have enough cash so sustain the business and deliver on growth objectives.

• They expect to be able to raise debt financing is required.

• They don’t give pro forma for the North America business so I had to take the pro forma for the PNG and remove it from the previously files consolidated statements.

• Add on top of this the more recent purchase of their share of Team Snubbing and the acquisition of Delta Rental Services in December 2023 and we really have to make some assumptions to get the true earning power of what’s left in North America.

• I would like to get some more color on the performance of Delta and Team Snubbing.

• The Annual Financial had them earn 3.4 million in revenue in 2023. This includes 1.3 million of discontinued operations. Since then they acquired Delta which would be included in Canadian operations. We will have to see how Q1 looks for Canada to get a better sense of the size of Canadian operations.

  • Essentially half of the purchase price was upfront cash and half was in earnouts. “The consideration includes $3.43 million in cash paid at closing with the remaining $3.57 million payable as 75% in cash and 25% in High Arctic common shares to the selling shareholders as an earn-out over three years, subject to achieving certain financial performance targets.”

  • This is from the news release in December 2023: “The total consideration represents a 3 – 3.5x multiple of the Corporation’s estimated annual after-tax cash flow contribution from Delta.”

Total Enterprise Value

The shares are trading at $1.33 or about a 65 million market cap. If the transaction goes through (which I really think it will), there is some potential additional dilution as they accelerate the DSUs. So maybe call it 68 million market cap. This gets you:

1. The 38.2 million distribution.

2. The North America Business that I value at a conservative 20-30 million. This gives little to no value for the NOLs. And the low end assumes a low multiple for their share of Team Snubbing.

3. The PNG business that I am have at 15-25 million which in my opinion assumes that the activity levels for HWO are very low and remain low. Keep in mind with only 1 rig under contract they did 10 million in EBITDA.

Summing all this up you get over the 68 million market cap with very low expectations in my opinion. If there is any news on PNG in the meantime then I think this could perform way better than my assumptions. One could paint a picture where HWO is worth more than $3 based on prior cycle earnings in PNG. Time will tell.

I’ll do another post after Q1 results.

Thanks for reading.

Dean

*long HWO.to