presidents club today Polaris Infrastructure (PIF) reported a good quarter last week as well, although for some reason the stock sold off at first before bouncing back and it’s up sharply now. EBITDA was $9.8 million on revenues of $12.1 million, both slightly lower than last year but ahead of what most analysts expected. The results were lower than last year because of planned maintenance on the plant, which took trimmed production levels. You have to love the margins on this business, though.
We spoke to CEO Marc Murnaghan and got an upbeat assessment. The drill program is complete and seems to have delivered one decent well, one dud (which found heat but then caved in) and one very good well. We would guess that we’ll see an incremental 8 MW of new power, representing $8 million of cash flow (US dollars). So the dividend story is unfolding nicely and we figure an increase to the dividend could come before year-end. We’ve received our first dividend (which is paid in US dollars) and there is another coming this month (they are quarterly.)
In other news, the dud well isn’t lost - it’s being used as a re-injection well. And one of the older re-injection wells may become a production well.
Plus there is the binary unit which the company is contemplating buying. Although expensive, the equipment (essentially a heat exchanger) could add 10 MW of power, meaning another $10 million US of free cash flow, but at very little risk compared to drilling. The return on the binary unit is about 40% so we figure it will happen. The new wells give the company the data it needs to more forward on the investment.
PIF seems cheap at about 5.5 times EBITDA while comparable companies are at 10x. This suggests significant upside if everything works out. It will always trade at a discount for its higher risk but the disparity should narrow.
We started buying at $10, bought a lot more at $7, and continue to add on weakness for yield and capital gain.
(Note that while Polaris always loses money on an accounting basis, this is because depreciation expense (which isn’t cash) is very high. The company’s auditors won’t allow management to write down the value of its plant to a reasonable economic level. Yet the company pays a dividend! It clearly generates free cash.)