Sum-of-the-parts Valuation - revisitedThe following is an excerpt of a technical note I wrote. I thought I would share it with you for informational purposes only.
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Sum-of-the-parts Valuation The following endeavors to provide a piece-by-piece valuation of HAES’ business. In this case, the sum of the parts might be greater than the whole.
PNG Business Drilling Services Historically, the drilling business has been cyclic. The industry is currently entering a bull market cycle. Based on revenues from 2018 where the company had 2+ rigs deployed during the year and enjoyed 20%+ operating margins, we’re looking at:
$12.5MM/q/rig = $50MM annual revenue per rig in service (when drilling).
With three rigs drilling we get $150MM in annual revenues. Applying a 20% net margin yields a Free Cash Flow of $30MM for the Drilling Services Business.
Valuing this business at 4x FCF yields approximately $120MM.
It should be noted that with only one rig drilling, as is currently the case (the existing contract expires in Aug 2025), the company is profitable on a cash flow basis.
PNG Industry Manpower Solutions PIMS was started in 2009 and used to train local PNG personnel in the oil and gas field. High Artic Energy Services’ marketing of this business to other companies and supplying them with trained manpower is relatively new. The upcoming need for manpower (within the next couple of years) is estimated to be within 5,000-6,000 employees
3.
At the present, there are no real numbers regarding this business; consequently, it’s difficult to put a value on this aspect of the PNG business. Therefore, for the purposes of this report, a value of $0 will be attributed.
Canadian Business Team Snubbing In mid-2022 the company sold off its snubbing business to Team Snubbing, Inc. As part of the sale, HAES acquired a 42% equity stake in Team Snubbing, valued at $8.112MM and a $3.25MM note (payable within 5 years and accruing interest at 4.5%). For the purposes of this report, a value of $11.362MM (cost) will be assigned.
Ancillary Services Business The Ancillary Services business consists of HAES’ oilfield rental equipment in Canada and PNG, its heli-portable workover rig in PNG and its Canadian nitrogen services. Subsequent to recent divestments, the rental equipment remaining in Canada is primarily made up of oilfield pressure-control equipment.
Revenues for the business in Q12023 were $3.249MM with a 57.9% operating margin. Extrapolating their quarterly revenues, we get around $13MM in annual revenues for this business. Assuming a 50% operating margin going forward, we’re looking at approximately $6.5MM in FCF on an annual basis. If we value this business at 4x FCF, we’re looking at a valuation of $26MM.
Other Assets Cash In mid-2022, the company sold off its Canadian Well Servicing business for $38.2MM in cash ($10MM to be received at the time of closing, and the remainder to be received in January 2023). Cash on hand as of March 31, 2023, is $46.745MM. Accounting for long-term debt (consisting primarily of a mortgage), net cash stands at $42.6MM.
Land Assets The buildings and land owned by HAES are valued at approximately $6MM (given a 75% debt/equity ratio).
Colorado Assets In 2018, during their expansion years, HAES bought snubbing assets in Colorado and North Dakota for $9.2MM. Since then, the company has exited the US market; currently, it is trying to divest its remaining snubbing assets in Colorado. The value of these assets is subjective and are opined to be worth approximately $3MM.
Net Operating Loss Carryforwards The company currently has approximately $130MM in Net Operating Loss Carryforwards (NOLs) which they can carry forward indefinitely to reduce the tax burden in future years. Considering a 20% effective tax rate and 50% utilization yields a $26MM x 50% = $13MM valuation estimate.
Capital Loss Carryforwards The company has approximately $40MM in Capital Loss Carryforwards (CLs). At a 15% tax rate, this equates to $6MM. Considering a 20% probability that these carryforwards will be used, they are valued at $1.2MM.
Summary Adding the parts together, we get:
PNG + Team Snubbing + ASB + Net Cash + Land + Colorado Assets + NOLs + CLs
- $120MM + $11.362MM + $26MM + $42.6MM + $6MM + $3MM + $13MM + $1.2MM = $223.162MM
- $223.162MM/48,673,568 (shares outstanding) = $4.58/sh ($3.45 USD/sh).
Disclaimers - I am not a professional investment advisor
- I hold shares in High Arctic Energy Services
- This is the author’s opinion for informational purposes only, and does not express, nor imply, advice to buy or sell said security
- Invest at your own risk; there are no guarantees
- I have not received any income from this note
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Cheers,
JJ