I just had the chance to review the Q3 2009 transcript and the 8-K for TGE. I am still waiting for the 10-Q to be filed.
In essence, all hell broke loose and the company took it right on the chin. TGE saw its revenue decline by 25.4% vs. Q3 2008 and EBITDA decreased 86.3% vs. Q3 2008 ouch L
In my wildest dreams I would have not expected EBITDA to decrease so significantly.
The table below highlights the quarter:
Ugly results. Think about that for a moment - the company’s EBITDA decreased by 86.3%. I will say it one more time, EBITDA decreased by 86.3%. Wow, that’s ugly. The stock subsequently took a bath. However, let’s briefly discuss the key highlights of the quarter.
- The poor results in the top-line led to the company operating with four crews for the entire third quarter which kept utilization high. Revenue per a crew was roughly $4.0 million, which is good.
- The company was able to produce $5.8 million in cash flow from operations. The 10-Q is not available, but I assume that most of the cash flow came from collecting on A/R since the A/R number is down significantly from the prior quarter.
- The company was able to reduce long-term debt to $7.6 million from $8.4 million in June. Debt reduction is always good. We can learn a lesson here folks with our own credit cards.
- The company is very excited about the Eagle Canada Inc. acquisition. The company believes this acquisition improved their overall strategic position within the seismic industry, and furthermore gave them entry into the Canadian market. More so, this makes the company more leveraged to oil markets vs. natural gas. More on this later.
- The acquisition gives the company exposure to 3C data acquisition technology, which is useful for the Canadian oil sands.
- Exposure to a new client base of Potash Mining Companies,
- The company believes the acquisition should start contributing to earnings in 2010. We think so too, but we want to wait and see.
Management has demonstrated the ability to manage working capital. Cash on the balance sheet sits at $34 million. The fact that they were able to reduce debt is impressive given they were operating in a very difficult market.
The company had a tough quarter. This is due to a number of factors. The most glaring is that the company is levered to the wrong commodity - natural gas and not oil. Also, a full blown price war is taking place and the company’s margins have taken a hit. It’s funny how companies start acting irrational in difficult markets. This is actually a good thing because competitors of TGE do not have as strong of a capital position as TGE does, and this impacts them even more. This should allow TGE to easily capitalize on any upcoming opportunities.
Management stated that commodity prices have impacted the company quite significantly, and we believe this to be true. The price of natural gas is currently at $3.29 (Wellhead price). A year ago this commodity was priced at $8.74.
The price of oil is starting to recover and is starting to enter into the sweet zone in terms of price stability.
In the long-term, the government sees higher oil and natural gas prices. I agree that this will occur. A number of alternative energy projects were abandoned during the current economic crisis and I am confident that emerging counties such as China and India will require more energy which will result in supply shortages and higher energy prices.
This leads us back to the Eagle Canada acquisition. I really feel that this acquisition makes a lot of sense. During the earnings call, management indicated that the company has the ability to operate five crews but is only currently operating 2 in Canada. Each crew does roughly $4 million in business. The Eagle Canada acquisition gives the company additional leverage to oil prices which I like. More so this gives the company international exposure. In essence, I think the acquisition was smart and I see very little downside.
So where does this put TGE as in terms of an investment?
Here is the breakdown of the first nine months of operations vs. our 2009 Projections.
The company will most likely hit the top-line number but remain doubtful about the bottom line especially given the latest results.
Therefore, the base case projections were significantly adjusted to ensure a strong margin of safety.
Projected expenses were raised and I expect no EBIT and EBITDA contribution for Q4. The likely hood of this occurring is minimal though but I wanted to be in the safe side. Furthermore, the required expected return was raised to 15%.
The result is a new price target of $7.25. This is a reduction of 16.2% from the original price target. This represents an upside of 58.3% from our buy in price of $4.58. The stock is currently trading at $4.13 (11.04.09) which represents an upside of 75.5%. For those who have not opened a position, today’s stock price looks very attractive. We are currently thinking about adding up additional shares at today’s price.
Oil prices have steadily increased in 2009 and trade at roughly $78 to $80 a barrel as of 11.4.09.
The company has performed better for the first 9 months of 2009 vs. 2008. Also, the first half of 2009 was simply unbelievable.
Don’t panic. One bad quarter means nothing in the long run. The key is to focus on the business and not the stock price. TGE operates in a very important industry. We own the best pure player in the seismic industry. The only reason we were able to gain such an attractive entry price is due to uncertainty, and the fact that the market is focusing on the short-term and not long-term outlook. Real money is made when one is able to disconnect themselves from all the noise and focus on the future outlook.
If you are interested in these type of ideas please visit www.CRInvestor.net or e-mail me at firstname.lastname@example.org