Sunday, November 16, 2014

Enterprise Group - Q3 Update

Three of my large positions -- Hawaiian Holdings, Future Bright, and Enterprise Group -- have reported quarterly results over the last month. 

Of these, the most attention grabbing has been the set of results posted by Enterprise, in large part because the company has now announced two consecutive quarters of rental volumes and margins that are below its own projections. The pace of delivery of new equipment has been slow, third party equipment has had to be employed, and the outcome hasn't flattered management's ability to deliver according to expectations. 

The discrepancy is, in the grand scheme of things, and over a sufficiently long time horizon, trivial and immaterial. Still, one has to scrap its previous guidance of $33.8 million in 2014 EBITDAS and one has to instead to use the available record to reconstruct one's own estimates for the 4th quarter and beyond.

This is how I see it now: 


Some notes:

Within the Utility and Construction segment, we know that the company started with 6 hydro-vac units at the start of the year, had taken delivery of 8 additional units at the end of May, and that it will own another 6 units by the end of the year for a total of 20. These units are apparently in order to satisfy demand under three consecutive multi-period contracts and each fully employed hydro-vac unit generates revenues of $750K per year. I assume that four hydro-vac units are newly empoyed in the 4th quarter at 30% EBITDA margins. 

The company says that it intends to purchase another 15 hydro-vac units units in 2015, for a total of 35 owned units. I assume that an average of 25 units are employed in the course of 2015.

Enterprise has taken delivery of one custom built "direct pipe" unit that it states can generate between $30 and $45 million in revenue per year at 40% EBITDA margins. This unit was immediately placed into service and will show $4.5 million in Q4 revenue. I assume that it generates $30 million in revenue during the course of 2015. 

Hart Oilfield Services has generated an annualized revenue run rate of $17 million at 50% EBITDA margins. I have left this as is. 

The newly acquired Westar Oilfield Rentals generates $8.7 million in revenue at 47% EBITDA margins. I have left this alone, too.

Other more or less comparable companies are trading at ~6x EBITDA. Other things being equal, Enterprise ought to trade at a premium based on its substantially higher margins, improving seasonality profile, and growth trajectory. But ceteris is not paribus and companies that promise one thing and deliver something less can expect to trade at a discount to the peer group.

At 4.5x what I think is a reasonably conservative estimate of EBITDA the warrants will expire worthless. (The $1.21 valuation at the low end uses a diluted share count that excludes these warrants that are presumed to have expired worthless).

Also, only 4% of Enterprise's current revenue base is directly exposed to the oil sands but a prolonged oil price slump will, of course, permanently impair the company's value anyway since much of the economic activity in Alberta and BC is predicated on long-term oil prices that are above, say, $60/barrel.

It's therefore important too insure against such a scenario by having a stake in a security that becomes more valuable when oil prices fall. In my case, it is Hawaiian: the recent fall in jet fuel prices from ~$3.10 to $2.36 ought to add about $10/share to its valuation when its hedges roll off.  

Disclosure: I am long Hawaiian Holdings, Enterprise group, and Future Bright.