RE:RE:RE:RE:$.04 annualized earnings; strong outlook; insider buyingI absolutely agree with Munger's summation of EBITDA, especially when dealing with organizations whose assets are predominantly working equipment. Equipment wears down, depreciation IS REAL. At some point the item needs to be replaced, so depreciation is, like I just said, real.
If you look across all the sectors in the broad markets almost all are trading at valuations that are what you may call, expensive. The energy and energy services sectors are not in this expensive class. In my mind, catalysts are forming that may put these two segments into better play. So, I'm looking for some deeply discounted opportunities that have the ability to move as the sector improves. What I am analyzing in the services sector is who has survived well, and who is returning to profitability.
At the beginning of the downturn, nearly 3 years ago Canadian services companies had to discount rates to their E&P clients so that development could take place in a low commodity price environment. It was essentially impossible for these service companies to deliver (IFRS treated) positive earnings with the discounts and sustained low activity levels. Some may have been producing positive cash flow, but surpassing the depreciation on equipment and achieving retained earnings during this downturn was rare. What I have seen lately with only a few players, is a return to profitability. This is an inflection point. The indicating metrics I am interested in are improved activity levels (rising revenues), increasing margins, and continued cost reductions or at least cost control.
With respect to TSX:E I am seeing many or all of these indicators improving. Many of the small cap peers of TSX:E such as Petrowest (PRW), CERF (now ZDC), Macro (MCR), and a few others have had mixed results after 3 years of depressed activity. PRW is in receivership. ZDC is a fraction of its prior self and I don't believe it can service its high rate debt going forward, it is at serious risk of total failure as well. MCR is somewhat healthy, has cash but isn't trading at what I call deep discount. TSX:E is trading at a third of its disposal value, returned to profitability, has aggressively paid down debt to very reasonable levels, meaningfully reduced its costs and seems to be well positioned for what we may see, is an improving oil & gas industry going forward. Also, since the downturn management has tripled their share ownership of the company. All of these are good signs, so I’m paying attention.