The Future? A great set of results from PSN showing strong and accelerating growth. As an investor I am not worried about the success of the company in the near-term – their products are proven, innovative, and best in class offering clients significant benefits (cost, convenience, deployment, environmental & regulatory) over the existing traditional fluid handling systems of lined pits or modular fluid storage tanks.
It is heartening to hear that management are forward-thinking as regards product development, new industry applications, vertical integration, and geographical market penetration, as I believe that it is these key areas which will provide sustainability and drive medium & longer-term growth.
In my opinion, the lowly multiple at which the market currently values PSN can perhaps in part be attributed to the perception that the current growth trajectory is unsustainable. I would tend to agree if I thought that PSN management were willing to ‘rest on their laurels’, as invariably the competition eventually catches up in this sort of industry, and margins tend to contract.
Let’s face it – a company with the sort of growth rate that PSN is experiencing would ordinarily demand a multiple of the current multiple! Clearly there is a lot of negative sentiment towards the oil & gas industry as a whole, and in particular the unconventional segment. Fears that hydraulic fracturing practices are environmentally unsafe, and may incur increased government and regulatory restrictions, are certainly weighing on the PSN share price. Although PSN is committed to environmental responsibility, there is still a risk that the industry which they service suffers as a result of regulation, and PSN would suffer as a direct result of this. If PSN can achieve industry diversification, then this would certainly mitigate this risk.
I am also encouraged by management’s somewhat secretive allusion to their strategy of vertical integration. I for one would be happy to see PSN make a small acquisition, or form some sort of partnership, within the water-treatment space, as I see this as central to the challenges faced by operators in this industry. The reasons I think it makes sense to do a deal in this space are twofold; firstly to preserve their first-mover advantage, and also to prevent the need for costly and time-consuming R&D of their own. This sort of integrated end-to-end fluid management and water treatment solution offering would undoubtedly attract interest among PSN’s clients, and the industry as a whole. I feel that this sort of acquisition would benefit PSN as it would fit well into their rental business model, help to preserve margins and product differentiation, make PSN an even more attractive proposition from an environmental perspective, and raise the bar and barriers to entry for any prospective competitor.
Here is a link to a small UK-listed company which has developed a range of successful products, some of which have existing water-treatment applications in the oil & gas industry (see industrial catalogue). I’m sure that there are many similar such companies to choose from, which for an EV consideration of $125m, would be almost immediately earnings accretive to PSN, not to mention the other benefits.
https://www.amiad.com/industrial.asp
https://amiad.com/IndustrialCatalog/Ind_catalog_v3.html
Here are some links to some interesting reading material, which in my view support the thesis that PSN still has a long way to go as regards existing market penetration in an area regarded as extremely crucial and sensitive by both the industry and the regulators. It is clear to me that they have already successfully addressed a great many of the challenges that were facing this industry.
https://fracfocus.org/hydraulic-fracturing-how-it-works/drilling-risks-safeguards
https://www.encana.com/environment/water/fracturing/fluid-storage.html
https://www.shalegas.energy.gov/resources/HF2_e1.pdf
Hopefully the market will begin to realise and appreciate the massive long-term potential of this company.
[Disclosure – I am long PSN]