Tuscany International Drilling: The Most Undervalued Company In The Oil Services Sector?

| About: Tuscany International (TIDZQ)
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Tuscany International Drilling (TIDZF.PK) is a diversified energy services company from Canada that provides oilfield services to its customers operating in South America and Africa. This international oilfield services company also trades at the main Toronto board with the ticker TID. The experienced officers who run it have spent many years working in executive management positions in companies like Helmerich & Payne (NYSE:HP), Nabors (NYSE:NBR), Ensign Energy Services (OTCPK:ESVIF) and Enterra Energy (which is Equal Energy (NYSE:EQU) currently) so they obviously do know the sector very well.

It is also worth noting that both the Chairman and the CEO have grown and sold several companies in the past according to their resumes as shown at the corporate presentation. So I believe that Tuscany which is currently at a very strong growth phase after the two acquisitions in 2011, it will also be sold at a good premium. As the growing stockholder equity stands at 1,20 $ as of Q2 2012, this price can be a good base level for us to estimate how much higher from there the premium can be in case Tuscany is sold.

Tuscany has a very modern rig fleet, with half of them being brand new and the other half being less than five years old.

Although I believe most investors do not know Tuscany, I will not become too analytical on this company as the article will end up being too long and tiring. In addition, Q2 2012 report has already been released and all the potential investors can and must check it by themselves.

Tuscany has taken the strategic decision to expand worldwide for several reasons. On the one hand, the company can mitigate the business risk as working only within one country is like a company which makes all its revenue from one customer. If the customer goes broke and/or face problems then this specific company will face serious problems too. On the other hand, Tuscany want to exploit the vast opportunities in the new hot oil spots worldwide following the major drillers like Weatherford (NYSE:WFT), Superior Energy Services (NYSE:SPN), Calfrac (OTCPK:CFWFF), Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), Key Energy Services (NYSE:KEG) and Nabors Industries.

For example, which company can ignore the growing importance of Colombia in the oil map as this country has been identified lately by major foreign players such as Shell Oil (NYSE:RDS.A), Ecopetrol (NYSE:EC), Petrobras (NYSE:PBR), Chevron (NYSE:CVX), Lewis Energy, and others due to its huge, unconventional shale oil potential? Recently Exxon Mobil (NYSE:XOM), the world`s largest oil and gas company, acquired interests in Colombia too. Even intermediate 100% oil producers which operate in Colombia like C&C Energia (OTC:CNCEF) has great drilling results and strong production growth yoy. C&C Energia trade at the main Toronto board with a very low current valuation versus the other 100% oil producers but I will analyze it in another article.

According to the corporate presentation, Tuscany has a well balanced mix of revenue coming from 6 different countries/regions worldwide. Once a customer decided to quit its activity in Trinidad recently, the company decided to leave Trinidad market as well and move to Brazil where Tuscany already own 29% of the drilling activity and obviously has higher potential than Trinidad. It is also worth noting that Tuscany owns almost 100% of the working drilling market in Congo, Tanzania and Gabon. Tuscany works for giants in South America, like Ecopetrol, ENI SpA (NYSE:E), Shell, Pacific Rubiales (PEGFF.PK), Petrobras to name a few.

Most Canadian oilfield services companies suffer from a seasonality of their operations as they have zero or limited exposure internationally. Oilfield service work in Canada is subject to significant fluctuations in activity levels as a result of seasonal weather patterns affecting the accessibility of work sites. Historically, oilfield service activities are higher in the first and fourth quarters of the year, resulting in higher revenues in those periods. Due to spring break up, most Canadian-focused oilfield Companies lose money in Q2 like Trican (OTCPK:TOLWF) and Calfrac. So Tuscany has the significant strategic advantage versus its peers that its operations are not impacted by seasonality at all. This increases the number of its operating days throughout the year eventually.

Checking the fundamentals of Tuscany we can confirm that it is probably the most undervalued, profitable, publicly traded company with the lowest PEG ratio of the energy services sector. The growth yoy both in EBITDA, in Revenue, in Funds from Operations is unique in the oilfield sector. I believe there is not another profitable company from the oilfield sector with the same amazing growth YOY as Tuscany.

According to the recent Q2 2012 report, the Revenue growth yoy is close to 300% and the EBITDA growth yoy is almost 350%! The Funds from Operations growth yoy hit a whopping 1600%! If this overall growth yoy is not unique, I do not know what it is. This Growth yoy is even higher than the amazing one of Calmena Energy Services (OTC:BLKWF) which is another growth driven Oilfield company run by the founders/former executives of Precision Drilling (NYSE:PDS) and Weatherford . Calmena Energy Services also trade at the main Toronto board like Tuscany.

The Annual Revenue for 2012 are estimated to be about $400 million so the company currently trade just one fourth its annual revenue. As 4 more rigs which are currently in major refurbishment phase will be marketed by the end of Q3, EBITDA for 2012 is estimated to be $85-90M and the Funds from Operations for 2012 are estimated to be $55-$60M.

The long term debt is $161M as of Q2 2012 so the long term debt/stockholder equity ratio is in a safe territory and well below 0,50. Taking also into account the growing Funds from Operations, the company will not face any debt issues and it can cover its debt obligations as scheduled. The Gross Margin is quite healthy and it is above 30% which is another healthy indicator of its business.

Despite all these metrics above, Tuscany trade currently less than 2 times its funds from operations annualized ! In addition, Tuscany trade with an EV/EBITDA ratio equal to 3, and its market cap is well below its book value with a PBV of 0.25 currently!

In terms of the recent sell off, I decided to contact the company. After contacting the company, the company implied that most likely cause for the sell off was that few holders assumed that Tuscany may experience reduced FFO in Q3 due to HRT cancellations (2 rigs). In other words, this reaction was the typical "Sell first, ask questions later" case.

However, IR was very clear and confident. Firstly, they have found homes for three rigs - one of the Parex rigs from Trinidad, a refurbished one and one other (not one of the HRT ones). They emphasized on the fact that these three rigs will more than make up for the temporary loss of the two HRT rigs. They have also expressions of interest on both HRT rigs but no commitments yet. The Funds from Operations also keep growing to cover their debt obligations, so I find the recent sell-off to be a strong buying opportunity.

Not to forget that the insiders have their skin in the game and they own 10% of Tuscany. In addition, the French giant Maurel and Prom (OTC:MRELF) own another 29% of Tuscany, so almost 40% of Tuscany is in strong hands.

Disclaimer: Tuscany Intl Drilling belongs to the penny stock category as its price is below 1 C$. Any potential investor should consider all the risks associated with the penny stocks before investing in Tuscany Intl Drilling. Investing in micro-cap securities carries a high degree of risk. It is possible that an investor's entire investment may be lost or impaired due to the speculative nature of the companies profiled. Investors should not rely solely on the information presented. Rather, investors should use the information provided as a starting point for doing additional independent research on the profiled companies in order to allow the investor to form his or her own opinion regarding investing in the profiled companies.

Disclosure: I am long TIDZF.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.