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PRW - Petrowest Corporation


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Petrowest was a company mostly involved in site preparation for oil & gas drilling: pre-drilling pad preparation and post-completion "landscaping".

 

As you may imagine, this business has fallen on hard times. They also operate a landfill.

 

Everything changed last Fall with the award of a major contract for the construction of Site C or a large B.C. Hydro dam to Peace River Hydro Partners (PRW, Samsung and Acciona).

 

This contract brings a lot of earnings over an 8 year period with most upfront. Total EBITDA this year are forecasted at $45 million. This will allow the company to delever significantly and for earnings to go up a lot. In my estimates, it trades currently at around 10 times earnings but, this will change rapidly with debt repayments and more contracts.

 

This repositioning and dealing with large players has opened a host of opportunities in the infrastructure market in Western Canada on which they are already working or bidding: Fort St James Mine, Regina ring road, Calgary ring road, etc. As you may know, the Alberta NDP has made infrastructure one of its key economic development pillars.

 

Forestry demand is actually strong for them with the weak dollar and they are also looking at LNG opportunities if they come.

 

A key concern for the company was the dragging negotiation with its lender on its credit line. This was successfully addressed this morning with BMO offering quite a few concessions on existing covenants. PRW was not good at meeting prior EBITDA targets. Some of that could be due to the oil & gas pricing pressure. However, for the bank to go along this time around, there had to be hard facts being presented to give them confidence.

 

Finally, the fair market value of their equipment is $137 million which would add $48 million to book value. So that provides some margin of safety. Rock crushers, bulldozers and excavators can be sold anywhere in North America or in areas totally unrelated to oil & gas. Moreover, the decrease of the CAD vs the USD helps the equipment value priced by them on CAD.

 

I am not sure which analyst wrote this but, it gives you a flavour of the thesis and what I mentioned:

 

"PRW reported Q4 results that came in below estimates due to a challenging operating environment (read: margin compression from competition), delays on Hwy 28 and Site C, and early mobilization within the Civil division.

 

Sales of $40.3 million (down 36% y/y) generated EBITDA of $0.1 million (vs. $7.3mm). Both our estimates and street consensus were considerably higher. 2016 EBITDA guidance has a very high level of clarity from contracted work at Site C and the Civil division.

 

PRW’s fortunes dramatically changed on Dec 21 with Site C transforming the business model. PRW is now a player in the $100 billion of western Canadian infrastructure projects expected over the next 5 years. Significant upside to our 2016 and 2017 forecasts can come from various infrastructure projects that are to be awarded in H1/16. PRW ended Q4 with net debt of $81 million, including finance leases.

 

PRW is working with its lenders to find a solution to the covenant non-compliance that have been waived. A solution appears likely by the end of this month. We are re-initiating coverage of PRW with a BUY rating and a 12-month price target of $1.10 (both unchanged), due to the strong clarity to base EBITDA with significant upside to our forecast from potential infrastructure contract wins.

 

 

Where Do We Look To Understand PRW?

 

 

As this report is being issued following the release of Petrowest’s Q4 report, it seems natural to put a lot of emphasis on the results posted in the final quarter of 2015. While we will not contest that results were below street expectations (they were, and we review them in Appendix I), we strongly suggest investors to delve deeper into understanding how Petrowest is a different company now, as its fortunes changed on December 21st with the awarding of the Site C main civil works contract.

 

Transformation is NOT Totally Complete

 

We caution investors not to myopically look at the Site C contract as a oneoff situation that cannot / will not be replicated. While this single contract has transformed the company from largely an O&G service provider to mainly an infrastructure construction company (see Exhibit 1), the Site C contract changed PRW’s business in more ways than one:

 

1. Firstly, It underpins the company’s revenue and EBITDA generation for the next several years, with our estimate of $25 million in EBITDA for each of the next three years as a start. This represents over half of the company’s EBITDA guidance for 2016.

 

2. Secondly, as part of the Peace River Hydro Partners(PRHP), Petrowest has developed a relationship that will have potential positive repercussions for years. Petrowest is now getting invited to submit RFPs for projects it would not have prior to being recognized as a serious player in the infrastructure game as a member of PRHP. On its own, PRW was somewhat of a “big fish in a small pond” with respect to the projects it bid on and its typical completion (smaller “mom & pop companies”). With the experience and recognition of being in the PRHP, Petrowest is now competing with the large construction companies on multi-billion dollar infrastructure projects, including:

 

Calgary Ring road - $300 million potential to PRW

 

BC Hwy 29 realignment - $300 million potential to PRW The size of PRW’s pond got immeasurably larger on December 21st .

 

3. Additionally, Petrowest has also expanded its expertise to act as general contractor (GC) on larger projects. The expanded engineering skills in-house at PRW means the company can provide the role of GC on par with the larger construction companies it has provided sub-contract work to in the past. What this means is that Petrowest may grow beyond a northeast BC / northwest AB player into a western Canadian, diversified construction / civil company and perhaps into a national player on the back of its strong relationship with Acciona and Samsung. In other words, the transformation of Petrowest may take a few years to be fully understood."

 

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They did a bought deal financing this morning which was a rumour ever since the announcement of the obtention of the Site C deal:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aPRW-2361008&symbol=PRW&region=C

 

It is slightly dilutive on EPS and EBIT/EV but, positive on BVPS. While I never like these things especially when it looks like the company can make it without it, it does remove risk and will please BMO. Management and directors are also planning to buy 10% of the offering.

 

This cash infusion may also accelerate the obtention of new infrastructure contracts and possibly increase EBITDA this year. If it does then it might have been worthwhile in the end.

 

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