CALGARY, Alberta, April 25, 2014 (GLOBE NEWSWIRE) -- According to Rich Coleman, BC's Minister of Natural Gas Development and Responsible for Housing, there seems little to stop the surging LNG train in Northern BC from leaving the station and continuing to gain speed, pretty much forever:
"The scope and size and scale is staggering," said Coleman in the Prince George Citizen, "even if only some of the proposals come to fruition. It is not impossible," he said, "for all 11 of the front-running projects to pump significant investment into northern economies, even if they don't all build their entire blueprint. He said, "the gas industry currently contributes about $600 million per year to provincial coffers and that would multiply by about five times, should the thrust of the expected industry come to pass."
Now it just has to all get built. And while the constituents hash out the details, the infrastructure is beginning and will be built and built and built, whether drilling services, camps, pipelines or ports. Infrastructure waits for no one.
"The issue for exploration and production companies is identifying a top quality infrastructure supplier that is able to coordinate all services with one phone call," stated Desmond O'Kell, SVP and Director of conglomerate Enterprise Group (TSX:E), a diversified construction, utilities and oilfield services company. O'Kell continues: "Global companies such as Shell and Encana demand the kind of established and experienced operation that not only knows the space, but can deliver a cost-effective end to end solution rather than bolting infrastructure assets together using disparate sources."
When just about every company on the planet is scrambling to secure even modest financing, Enterprise recently closed a $27.6 million bought deal. While that is impressive enough, the backstory should be of even more interest to investors. Originally, the deal was floated at around $12 million. It was over subscribed by a factor of five, to $63 million. The company settled on a close of $27.6 million: Couple that with the fact that the Company reported FY 2013 revenues of $34.8 million, 88% higher than full year 2012, and the story becomes extremely compelling. That figure resulted in a doubling of eps over 2012 to $0.08 cents a share.
Since the 1970's Horizontal Directional Drilling (HDD) has been the standard for steerable drilling under bodies of water for the installation of pipelines. The process takes multiple passes back and forth with increasingly large bores to get to the say 42-inch pipe width. The issue has arisen of the resultant mud that is an obvious byproduct of the process. It tends to lose the mud into the fracture and the obvious environmental issues are coming under increased government scrutiny. The multiple passes tends to throw off an exceptional amount of mud, hence the concern.
Enterprise is looking into a new type of drilling which is not yet prevalent in Canada. The process is a thruster type that drives the ultimate sized pipe under a body of water, is steerable as HDD and is built so that the mud returns by feeding into the cutting tool (the boring pipe) to the surface, alleviating the errant and lost mud and the environmental concern. Since there is only one pass, the containment of the mud is extremely manageable. Currently there are none of these machines in Canada, and only one in the US. The process has been used in 50-60 global projects to date with 100% success, meaning that there were no frac outs.
Frac out occurs during normal drilling operations, drilling fluid travels up the borehole into a pit. When the borehole becomes obstructed or the pressure becomes too great inside the borehole, the ground fractures and fluid escapes to the surface. This new drilling technology negates that very non-environmentally friendly eventuality.
Needless to say, this technology will become de rigueur with the big producers. For projects such as Enbridge's Line 3 pipeline, which the company wishes to increase the pipe size, there are approximately seven water crossings. Cost wise, each of these crossings cost between $4-$10 million to retrofit.
Kam Mangat CFA, Industrials Analyst at Salman Partners in Toronto initiated coverage of Enterprise on April 8 2014 with a 12-month target of $1.45, roughly a 40% return against a current $1.00 share price. The reasons should be of keen interest to investors;
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Strong growth prospects within existing markets. At current demand levels, operations are operating close to full capacity in most segments and a strong return is expected on an aggressive capital-spending program over the next two years.
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Several opportunities exist to further grow revenues, which are not fully captured in our valuation. These opportunities include the potential LNG build out in N.E. B.C., expansion into new regions and development of pipelines in Western Canada.
- Management's focus on accretive acquisitions. Management is targeting revenues of ~$150 million by 2015accounting for an additional acquisition. Given its focus on growing complementary service offerings and track record to date, we believe Enterprise Group will continue to strengthen its competitive positioning within Western Canada. We do not include future acquisitions in our estimates and our revenue expectation for 2015 is $106 million. Including an additional acquisition to bring revenues to management's target and assuming margins will be in line with current operations, our valuation per share increases to $2.07 (excl. costs related to acquisition).
Salman forecasts that eps will increase to $0.10 a share in 2014 and $0.16 in 2015.
In February 2014, Toronto analyst Jennings Capital released a 12-month $1.50 price target
While the majority of Enterprise's revenues (90%) come from Alberta that will diversify quickly as the LNG buildout ramps up.
"Our business is infrastructure, utilities and energy, the latter primarily in the pipeline and drilling sectors," stated O'Kell. "As well, in addition to the exceptional business potential of LNG and the Oil Sands, there is a massive influx of people into Alberta, the only Province with measurable net population inflows. This surge is driving 53 transmission projects worth $13.6 billion. These are simply the result of the need for increased loads or new generation connections to service new and existing subdivisions. Alberta and northern BC will define the regional provincial economies for decades to come."
Investors can mark the government support box with a very large X. The BC Liberals have also floated a trial balloon tax regime—1.5% initially rising to 7% in the future. Predictably, because that's what they do, the big energy guns committing to the area are pushing back as they know the Libs want this as badly as another election win. They will likely succeed in getting it reduced or at least some more favourable concessions.
Enterprise's market cap at $147 million is modest compared to larger peers such as Trimac, Canadian Energy Services and ENTREC. When forward price earnings (p/e) are compared to FY 2015 estimates, Enterprise, at 6.2 times is well below the 11.8% average of 16 peers.
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