Macro Enterprises (OTC:MCESF), headquartered in Fort St. John of Northeastern British Columbia, is a business specializing in pipeline construction, related facilities installation and maintenance, along with compressor station service. Macro Industries, the founding company, has been in operation since 1994 and has completed projects in the surrounding area and in Northern Alberta. It has a large inventory of earth moving equipment, including light and heavy duty transportation trucks, dozers, excavators, side booms, sandblasting, coating units and trenchers. These assets along with a mostly subcontracted workforce, working on demand, have completed projects for Cenovus (NYSE:CVE), Talisman Energy (NYSE:TLM), Kinder Morgan Canada, Spectra Energy (NYSE:SE) and Aux Sable Canada.
The completed projects are relatively small with none of the pipeline construction segments longer than 100 km. However, all are in Macro's strategic area of focus of Northern BC and Alberta and all for established industry players. The company generated $192 million in revenue for FY2013 of which 74% came from the top four customers. It also finished the year with $16.4 million in cash and $18.2 million in debt with $7.3 million due this year. We believe that with a growing fleet of equipment and projects under its belt Macro Enterprises is establishing itself as a dominant competitor with the ability to secure larger contracts down the road.
Investment Thesis And Valuation:
Macro Enterprises operates in a favorable industry environment which has a distinct need for pipelines and in a favorable location as pipelines to feed LNG facilities are in its backyard. Being a small player with a $143.6 million market cap Macro is highly leveraged to an uptick in regional activity. We believe the fair value for the stock is $7.75 representing a 60% return potential from the recent trading price of $4.83.
Development of the Montney Shale Gas Basin, Northeastern BC, where Macro operates, began in 2005. With the advancement of unconventional resource extraction the play has come to be one of the most vast and economical in North America. This has attracted many major and super major producers to the area who are now looking to use the Montney as feedstock for LNG facilities. As of March 2014 eight facilities, located on the west coast, have export permits. Another need is for pipeline infrastructure to connect the LNG terminals to the producers through proposed projects like the Pacific Trail Pipeline, a 487 km stretch from Summit Lake to Kitimat, Coastal GasLink Pipeline, 650 km, Price Rupert Pipeline, 900 km, and many others. Moving forward this amount of activity will be the wind in Macro's sails.
Up to this point Macro Enterprises has been able to capitalize on smaller projects translating into a strong financial position and a compelling valuation. As of FYE 2013 the cash balance and accrued revenue totaled $34.6 million. Management chose to invest the excess cash into working capital to take advantage of upcoming revenue generating activities. Another positive sign is the growing workforce of which only 65 is full time, but by year-end the total workforce, full time and subcontracted labor, was 200 and at the start of 2014 reached 500. Optimism is supported by management's outlook, expressed in the year-end earnings call, that Q1 revenue this year is expected to beat an already healthy number from the year past.
The fair value price of $7.75 is calculated using an 11.1% WACC and low to mid double-digit revenue growth throughout the explicit forecast horizon. We believe the cost of capital is reflective of the inherent risks in the cash flows of a small firm servicing the oil and gas industry. Our revenue targets are on the conservative end as the firm has been able to generate a 28% compounded annual growth rate in its top line since 2008. We have also modeled lower gross margins compared to 2013 and 2012 as Macro will look to take on more projects at lower prices to get established with new customers. Management has estimated that the current assets are under 50% utilized and can provide for $45.6-63.9 million in additional revenue from the 2013 levels, thus we have taken into account moderate capital spending in the near term.
We believe MCR offers value to investors who want exposure to the oil related services industry at this point in the cycle. The major risk to our outlook is Macro's inability to successfully bid for larger projects and a loss of major customers. The company currently has 12 principal customers and is currently bidding on an undisclosed LNG project. An industry-wide risk would be the level of producer activity, mostly dictated by commodity prices, and the ultimate fate of all the proposed LNG terminals. We have a positive outlook on both.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MCESF over the next 72 hours.
Business relationship disclosure: The article has been written by Turtle Street Capital; the author is the founder of the firm. Turtle Street Capital is not receiving any compensation for it. Turtle Street Capital has no business relationship with any company whose stock is mentioned in this article.