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SDY.TO - Strad Energy Services Ltd.


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If you are looking for a low risk investment to capitalize on a resurgence of activity in Western Canada and U.S.: oil drilling, infrastructure, this may be it.

 

They mostly rent matting which are used in the field when conditions are too wet. It is a low moat, simple business but, you still need to acquire mats to compete and right now, there is not much interest for this.

 

Conditions have improved quite a bit with better utilization and pricing. They reported $29 million in funds from operations in 2017. There was $5 million of that which I consider non-recurring or from product sales. The company is now near debt free with only $9.5 million in net debt. Market cap is around $97 million.

 

Assuming that they produce $25 million in FFO in 2018 which is quite conservative IMO and with $8 million of maintenance capex as discussed on the call today, you are looking at a free cash flow yield of 16% on EV. Book value is around $2.25/share and no goodwill. With most of property and equipment being mats already depreciated by 50%, you have a pretty good margin of safety at a share price of $1.55.

 

There was a lawsuit between them and a large investor which has been settled in 2017. The investor is now fully aligned with the company and its direction. It was mentioned on the call that dividends are not being considered and that they have bought back some shares with over 100,000 in Q4. I am expecting more debt repayment, buybacks and they are looking for growth opportunities. Probably some troubled competitor with too much debt would be the best kind of buy.

 

Not the most exciting company but, the numbers look favourable IMO to provide a decent and safe return.

 

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This is a tough one, hard to see any value past book for a company renting rig mats. They're literally the simplest possible combination of wood and unskilled labor.

 

I'd be cautious on book as well. How are they depreciating the mats. If you've ever seen a rig mat after a winter drilling program, it's not always a pretty sight, and I wouldn't want to risk my money on an assumption they'd last very long.

 

Just a few thoughts, but I do agree the animal spirits where everyone with a yard and a saw was making mats have probably subsided for awhile.

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