Pason Systems Inc T.PSI

drilling systems/earnings

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Received From Canaccord eom Pason Systems Inc. (PSI : TSE : $4.90) Sara Elford, CFA [phone] 12-18 month target price: $8.00 52-week price range: $7.15-2.25 Shares O/S: basic 16.2M shares fully diluted 17.5M shares Major shareholders: J. Hill, 33%, R. Chaney & Partners, 11% Book value per share: $1.46 Return on average equity: 20.1% Net interest bearing debt: $2.5M Weekly trading volume: 93,400 Market capitalization: $79M We are initiating coverage of Pason Systems Inc. with a BUY rating. Highlights from a soon-to-be-released report follow below: Innovative oilfield technologies designed to increase drilling efficiency and reduce drilling costs continue to emerge. However, to perform effectively, these technologies require more reliable data, at a faster rate and in greater quantity than has traditionally been available. This is fueling a transformation in the way drilling data is monitored, gathered, transmitted, and shared at the wellsite. Pason commands a leading 69% share of the North American electronic drilling recorder market. First introduced in 1994-95, Pason's EDR is analogous to a black box flight recorder and an office local area network. It is a system of proprietary computers, networked around a drilling rig to log and store data over the course of the drilling process. The EDR has the capability for multiple users simultaneously, both on-site and by remote access. Over f1994-98, Pason delivered above average, highly profitable growth. The Company achieved compound annual growth rates of 98.5% in revenue, 107.5% in EBITDA, 125.5% in pre-tax earnings, and 112.3% in net earnings. Its return on equity averaged 36.9% over the period. Even at the trough of the cycle, Pason is still very profitable and its balance sheet is healthy. The EDR market continues to have excellent growth potential. 30% of land-based drilling rigs in North America employ EDRs (70% in Canada and 20% in the US). This compares to 14% in the latter part of 1997 34% and 3%, respectively). We believe all land-based drilling rigs will eventually switch to EDRs. The transmission of real-time drilling data to the corporate offices via an Internet data hub should hasten the pace of change. Prospects for much higher drilling activity in 2000 have improved significantly with the recovery in oil prices and with continued strong gas prices. Higher activity levels, improved site penetration particularly in the US),and the introduction of complementary products that tie directly into the EDR platform are expected to propel Pason's f2000 revenue, earnings, and EPS to new heights. We are initiating coverage of PSI shares with a BUY rating. Despite Pason's superior profitability and dominant market position in the niche EDR industry, PSI shares trade at a discount to a group of comparable oilfield technology companies. Based on our f2000 EPS estimate of $0.45 and a P/E multiple of 18X, we have a 12-18 month target price of $8.00.