News Release CALGARY, Alberta, Feb. 27, 2014 (GLOBE NEWSWIRE) -- If you build it, they will explore. Then drill. Then transport by pipeline. But first, you have to build it.
The 'it' is the infrastructure necessary to support the anticipated $55 billion spend in Northern BC to facilitate Liquid Natural Gas extraction and transport over the next 7 years.
Before and after the LNG flows however, those same global companies will likely spend another $55 billion on infrastructure, including site construction, pipelines, drilling equipment and platforms. Between the Oil Sands and LNG, this area could see substantial investment and spending for at least the next quarter century. Ignoring exposure to the infrastructure space would likely produce a large and significant dry hole in your portfolio.
In a January 30th research note, Dundee Capital Markets states: "We estimate the capex spend over the next 20 years when accounting for incremental drilling, gas processing and gathering pipelines could hit the $88bn-$219bn range (lower end of range assumes one large project goes ahead, while the higher end assumes three projects get sanctioned); this figure does not include capex related to the construction of exporting LNG terminals and sales pipelines which could add another $16bn to $43bn."
"The issue for exploration and production companies is identifying a top quality infrastructure supplier to coordinate all services with one phone call," stated Desmond O'Kell, SVP and Director of conglomerate Enterprise Group (TSX:E), a diversified construction, utilities and oilfield services company. O'Kell continues: "Global companies such as Shell and Encana demand the kind of established and experienced operation that not only knows the space, but can deliver a cost-effective end to end solution rather than bolting infrastructure assets together using disparate sources."
Even though the LNG build-out and particularly the more mature Alberta Oil Sands are well known mega projects, infrastructure growth so far has just scratched the surface. There are, for example, $22.5 billion worth of Alberta pipeline construction primarily Oil Sands related, of which 75% will likely get built over the next several years.
In a case of lead by example, Enterprise fully integrated its $22.6 million acquisition of Hart Oilfields Rentals—an Alberta-based private oilfield service provider-- a mere 10 days after the January 3rd 2014 closing. The acquisition adds state of the art construction and specialized equipment rental assets to coordinate with Enterprise's other divisions, Artic Therm, a leader in flameless heat technology and construction technology with Calgary Tunnelling and Horizontal Augering, a leader in underground infrastructure, which closed in June of 2013.
The FY 2014 revenue forecast for the Hart division leads Enterprise's other components at $29.9 million. MPartner's analyst pegs Hart to deliver $0.05 earnings for FY2014 with consolidated earnings coming in at $0.20. E did $0.04 consolidated earnings for FY2012.
The British Columbia Provincial government notes the projected demand for LNG in the Asia Pacific region is set to increase 250% by 2020 and likely for many years beyond. The BC Liberals will unveil the tax regime for LNG this month, an event of critical interest to the industry. One expects it to be favourable or at least reasonable given the amount of support given by the Government as well as the potential tax windfall for the Province.
Given its forward planning and experience, Enterprise is in excellent position to garner major facilities and pipeline related business as the large LNG projects unfold over the next several years.
Tom Varesh, analyst at MPartners in Toronto, forecasts Enterprise's revenues for FY2014 to reach $90 million, with EBITDA (earnings before interest, taxes, depreciation and amortization) at $35.7 million. Those figures are up significantly from 2012 actuals at $18.5 million and $4.4 million respectively. Varesh has a 12-month target for the shares of $2.25, up more than two fold from the current 30 day trading range of $0.75- $1.01. Market cap is roughly $108 million and there are 108 million shares outstanding.
"Our business is infrastructure, utilities and energy, the latter primarily in the pipeline and drilling sectors," stated O'Kell. "As well, in addition to the exceptional business potential of LNG and the Oil Sands, there is a massive influx of people into Alberta, the only Province with measurable net population inflows. This surge is driving 53 transmission projects worth $13.6 billion. These are simply the result of the need for increased loads or new generation connections to service new and existing subdivisions. Alberta and northern BC will define the regional provincial economies for decades to come."
Enterprise's market cap at $108 million is modest compared to larger peers such as Trimac, Canadian Energy Services and ENTEREC. When forward price earnings (p/e) are compared to FY 2014 estimates, TMA and ENT come in at around 10 times while CES is forecast to 23 times.
According to MPartner's Varesh, E's forward P/E comes in at a compelling 4.3 times for FY2014. In his January 14th note he states: "Our confidence in our 2014 estimates is derived from the visibility we already have with respect to each business segment."
There's little debate as to whether investors should have exposure to the LNG/Oil Sands infrastructure sector. The real question is the quality of the company and the potential for growth. Things will move fast in the LNG build out and only those prepared and having the right business and services mix will deliver consistent shareholder value.
Enterprise has a history of technological advances that save clients time and significant amounts of money. The Company holds 14 design patents including site infrastructure modules that 'fit like Lego' according to SVP O'Kell. Given the design and construction challenges in these remote areas, not to mention the critical need for the least possible impact on the environment, ease of transport to site and fast, seamless construction is paramount.
While not the largest player in the infrastructure space—yet—Enterprise is exactly the type of aggressive, savvy constituent that has already and will undoubtedly realize substantially more investment interest. The metrics are compelling, the management world class and the business mix on target. With the revenue growth forecast over the next couple of years, it deserves serious consideration for portfolio inclusion.
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