Aveda Transportaion and Energy Services Inc. (AVE-V)

Transcription

1 Aveda Transportaion and Energy Services Inc. (AVE-V) Revenue Growth Leads to Target Price Increase; New Bank Line Requires Equity January 16, 2017 Kirk Wilson, CFA (403) Event: Aveda issued an update providing a high-level overview of Q4/16 as well as a review of its credit facilities. Aveda achieved $30 million of revenue in Q4/16, well ahead of our $23 million estimate and the prior quarter of $21 million. Revenue increased each successive month in Q4 and is at its highest point since Q1/15. While a rising U.S. rig count in key operating areas (read: TX, OK and ND) drove Q4 growth, AVE should maintain that momentum with the opening of 3 new locations over the past few months. Specifically, Aveda expanded its Permian basin presence with a terminal at Pecos, TX and has re-opened a branch at Williamsport, PA to access Marcellus and Utica activity. A new branch at Casper, WY will be operational this quarter. These new locations are all in areas of rising rig counts. New $92.5 MM Bank Line Although a reduction from the previous facility, the due date is extended to May 31, A key point is that Aveda must raise at least $10 MM of new equity in Q1/17 to avoid default; David Werklund (Chairman) has committed to backstop up to $5 MM of equity, which is a strong indicator of his support. EBITDA Up, Debt Down in Revised 2017 Forecasts With a higher degree of confidence that AVE s revamped management team will positively impact cost-effective revenue, we have increased our 2017 revenue forecast to $125 MM (up 12%). This growth requires a larger cost base, especially with new locations being opened. Thus, our direct opex and SG&A estimates rise 14% and 7%, respectively, resulting in a 4% increase to EBITDA. With the equity requirement in Q1/17 under the new bank facility, our long term debt forecast falls by $10 MM to $69 MM at YE 17. Operations & Bank Line Update BUY (unch) $1.35 (was $1.25) Previous Close 12-month Target Price Potential Return $1.08 $ % 52 Week Price Range $ $1.13 FYE Dec 31 Active Rigs 2015A 2016E 2017E U.S Canada Estimates Revenue $101.3 $71.9 $125.0 Capex $1.0 $2.5 $5.0 YE LT Debt $71.7 $84.8 $68.9 LT Debt/EBITDA n.a. n.a. 4.2x Adj. EBITDA ($MM) ($10.7) ($6.4) $16.3 EPS - Fully Diluted ($1.38) ($1.60) ($0.21) TBV per share $2.81 $1.34 Valuation EV/Revenue 1.5x 0.8x EV/EBITDA -16.4x 5.2x P/E -0.7x -5.2x Stock Data Shares Outstanding, Basic (MM) 19.1 Shares Outstanding, Diluted (MM) 20.5 Insider Holdings, Basic 40% Market Capitalization (MM) $20.6 Enterprise value (MM) $105.4 About the Company Aveda is an oilfield services company meeting customers' rig moving, hot shot services and oilfield rentals requirements across North America. Head office is in Calgary, AB. All prices in C$ unless otherwise stated Stock Performance Valuation and Recommendation Confirmation that AVE s revenue is rising with rig counts give us rationale to increase our target EV/EBITA multiple to 6.5x (from 6.2x), which drives our target price of $1.35. We maintain our Buy rating. Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H

2 Q2/16 Q3/16 Q4/16 Q2/16 Q3/16 Q4/16 Leverage To Rising Rig Counts Continues The fact that Aveda s monthly revenue has consistently increased from a low of $1.5 million in April 2017 to over $11 million in December underscores the Company s leverage to rising rig activity, mainly in the U.S. Preliminary revenue results for Q4/16 are: October = $9.1 million November = $10.7 million December = $11.2 million In Exhibit 1 we show the relationship between active rig counts in Texas, Oklahoma and North Dakota and Aveda s U.S. revenue over the past three quarters. While rig counts are up 45% from what was a low point in Q2/16, the Company s U.S. revenue has increased 243%. This dramatic increase in AVE s revenue underscores the leverage that the Company has to rig counts in the U.S., which accounts for over 90% of Aveda s total revenue. Exhibit 1. H1/16 Cost Structure Comparison ($/boe) 450 TX, OK, ND active rigs U.S. Revenue $mm Up 45% Up 243% Source; Company reports, Beacon Securities Limited January 16, 2017 Page 2 A more granular look at the rig counts on a weekly basis for Texas, Oklahoma and North Dakota is shown in Exhibit 2. Over the past 35 weeks since the active rig count in these three states combined reached a low in May, the rig count has increased or stayed flat in all but three of the weeks, including this past week ended January 13, With both oil and natural gas prices at relatively high levels

3 WTI Oil Price (US$/bbl) U.S. Drilling Rigs 01-Apr 15-Apr 29-Apr 13-May 27-May 10-Jun 24-Jun 08-Jul 22-Jul 05-Aug 19-Aug 02-Sep 16-Sep 30-Sep 14-Oct 28-Oct 11-Nov 25-Nov 09-Dec 23-Dec 06-Jan compared to most of last year, it is likely that this trend of rising active rig counts will continue for the near term at least. Exhibit 2. Drilling Rig Counts in Select U.S. States 500 TX, OK & ND Rigs - Q2/16 to current Source; Baker Hughes, Beacon Securities Limited As we have pointed out previously, there is a close relationship between movements in the WTI oil price and the number of active rigs in the U.S. on a 3-month lag basis. We show this relationship graphically in Exhibit 3. Exhibit 3. WTI Oil Price vs. U.S. Drilling Rigs 3-month Lag $ $ $80 $60 $40 $20 WTI Total Rigs $ Weeks Source; Baker Hughes, EIA, Beacon Securities Limited January 16, 2017 Page 3

4 Based on the direction of WTI over the last three months, we forecast the number of active rigs in the U.S. to continue to rise to over the next couple of months. 3 New Locations in U.S. As industry fundamentals continue to improve, Aveda has identified opportunities to expand / introduce its presence in some of the growth basins in the U.S. A key reason why the Company is confident in these expansion initiatives is due to the long standing relationships of AVE s senior management with E&P companies. Pecos, Texas: this 2 nd terminal expands Aveda s footprint in the Permian Basin and should generate positive EBITDA in Q4/16. Casper, Wyoming: this terminal will be supported by an informal sponsorship of a major drilling contractor and will serve the DJ, Unita, Pinedale and Wamsutter basins. The terminal should be fully operational this month. Williamsport, Pennsylvania: Aveda had closed this branch in Q2/16, but has re-opened it due to the support of a major customer. This branch had over $2 million of revenue in Q4/16 and will allow AVE to serve the growing market of the Marcellus and Utica basins (see Exhibit 4). Exhibit 4. Active Rigs in the Marcellus/Utica Basins Marcellus/Utica Active Rigs 5-yr range Source: Baker Hughes, Beacon Securities Limited January 16, 2017 Page 4

5 New Borrowing Facility Aveda announced that it has entered into a new $92.5 million asset based banking facility that is due May 31, This facility consists of: a $77.5 million committed facility a $15.0 million accordion acquisition line an interest rate based on LIBOR There are a few key components of this new bank line that investors need to be aware of: Required appraisals have been reduced from 3 to 2 the leverage covenant has been removed Covenant tests are to be waived under the following conditions: o o o if undrawn availability is in excess of $20.0 million this will be subsequently reduced to $14.0 million should the Company raise $10.0 million in new equity in the first quarter of If Aveda fails to raise $10 million in new equity in Q1/17, an Event of Default would be triggered. Werklund Capital Corporation and Werklund Ventures Ltd. (collectively "WCC") has committed to subscribe for up to $5 million of the planned Q1/17 equity raise on the same terms and conditions as the public. Senior executives of Aveda are also anticipated to participate in the equity raise. In addition to the support on the equity side of the equation, it is important to note that WCC has agreed to provide Aveda's banking syndicate with a $5.0 million standby debt facility, subject to TSXV and minority shareholder approval, that can be called in the event of a default. Fees for this standby facility are as follows: an upfront arrangement fee of 1%, payable in AVE common shares (or units) using the same valuation basis as Aveda uses on its Q1/17 equity raise. a quarterly standby fee of 0.375% of the undrawn availability as at the end of each fiscal quarter and January 16, 2017 Page 5

6 a quarterly administrative fee of 0.249% on the drawn portion at the end of each fiscal quarter. the drawn amount will bear interest at 15% per annum If minority shareholder approval is not received, fees for the standby facility will be materially higher Forecasts When we launched coverage of Aveda in November, we said we believed the Company was on the cusp of an inflection based on recent trends and its cost-cutting measures. The preliminary revenue results for Q4/16 appear to justify that optimism. For 2017, we have raised our revenue forecasts to $125 million from $112 million, although that may still prove conservative if rig counts continue to rise and if Aveda can deliver additional revenue from the three new locations. Perhaps a more difficult task is determining the incremental direct operating costs and SG&A required to generate the revenue gains. To that end, we have increased our direct operating costs by 14% to $92.3 million and our SG&A forecasts to $16.6 million (up 7%). Additionally, we have assumed that Aveda raises $10 million of new equity in Q1/17 at a price of $1.00 per share. The result of this is a decrease in both long term debt (to $68.9 million by year-end 2017) and EBITDA per share and EPS. These revisions are summarized in Exhibit 5. Exhibit 5. Forecast Revisions 2016E 2017E Previous New % chg Previous New % chg Revenue % % Direct opex % % Gross margin % % SG&A % % EBITDA % % Cash flow % % Net income % % Capital expenditures % % Long term debt % % EBITDA per share (FD) ($0.34) ($0.34) n.m. $0.82 $ % EPS (FD) ($1.60) ($1.60) n.m. ($0.32) ($0.21) n.m. Source; Company reports, Beacon Securities Limited January 16, 2017 Page 6

7 Recommendation & Valuation With a second straight quarter of very strong and better-thanexpected revenue for Aveda, we are more confident that management can deliver continued revenue growth as rig counts in North America (and especially Texas) trend higher. As such, we maintain our Buy recommendation for Aveda Transportation and Energy Services. However, the risk for the Company has increased in the short term as a condition of the new bank facility is that AVE must raise at least $10 million in Q1/7. That said, the fact that its chairman (and largest shareholder) has committed to backstop that raise for up to $5 million underscores his support and lowers the amount needed to be raised from other investors. To determine our 12-month target price of $1.35 per share, we apply an EV/EBITDA multiple of 6.5x to our 2017 forecasts. This multiple is in inline with the average for its peer group, but does not price AVE for perfection. If the rig count rises more (or faster) than expected, our target EV/EBITDA multiple for Aveda would suggest a significantly higher share price. January 16, 2017 Page 7

8 Company Summary AVEDA TRANSPORTATION and ENERGY SERVICES INC. (AVE-V) Recommendation: BUY Target price: $1.35 SHARE INFORMATION MANAGEMENT Price $1.08 David Werklund Executive Chairman Shares O/S basic (MM) 19.1 Ronnie Witherspoon President & CEO Shares O/S float (MM) 11.4 Bharat Mahajan VP, Finance & CFO Shares O/S f.d. (MM) 20.5 Tom Halliday VP, U.S. Operations Market cap ($MM) $21 Les Ovelson VP,Canada Operations Enterprise value ($MM) $ week range $ $0.44 David Werklund Director Total projected return 25% Doug McCartney Director Stefan Eramus Director TOP HOLDERS # Held % Basic Paul Shelley Director Werkland Capital Corporation % Invesco Canada Ltd % 2016 QUARTERLY FOREASTS Q1 Q2 Q3 Q4E Brookfield Soundvest Capital Management % Revenue ($MM) $12.0 $8.9 $21.0 $30.0 Mgmt & Directors % EBITDA ($MM) -$3.9 -$3.7 $0.1 $1.1 FD EPS -$0.54 -$0.51 -$0.30 -$0.25 ACTIVE RIGS 2015A 2016E 2017E U.S REVENUE BREAKDOWN by BASIN WCSB FINANCIAL SUMMARY ($MM) 2015A 2016E 2017E Revenue Direct Operating Costs (93.0) (63.8) (92.3) SG&A (19.5) (14.6) (16.6) Adj. EBITDA (10.7) (6.4) 16.3 Net Income ($26.5) ($30.4) ($5.8) Gross Margin (%) 8.2% 11.2% 26.2% EBITDA Margin (%) -10.6% -8.9% 13.0% Long Term Debt $71.7 $84.8 $68.9 LTD to TTM EBITDA NA NA 4.2x VALUATION 2016E 2017E EV/Revenue 1.5x 0.8x EV/EBITDA -16.4x 5.2x P/E -0.7x -5.2x Company reports Source: Company reports, Beacon Securities Limited January 16, 2017 Page 8

9 Risks Oil & Gas Industry Dynamics The Company s revenue and EBITDA generation is highly correlated to the general health of the oil and gas industry in North America, specifically the number of active drilling rigs. Competitive Pressures The Company faces competition, from large and small firms, for contracts. Safety, reputation, and pricing are key components to success. There can also be competition for skilled labor. Weather and Seasonal Factors Poor weather conditions (extreme cold & wet conditions) and the timing of spring break-up will influence results. Interest Rates Aveda is exposed to rising interest rates on its credit facility as interest is based on variable Prime rates. Foreign Exchange A movement in the U.S./CAD exchange rate has the potential to adversely affect the Company s financial performance as a very high percentage of corporate revenues come from U.S. operations. Customer Contracts this is generally a contract based business, typically booked on short time frames (e.g.: a few days to a few weeks). Financing As per the new banking facility, Aveda must raise $10 million of new equity in Q1/17. There is no certainty that the Company can raise equity capital, which would result in a default of its new bank facility. Also, there is no certainty that its bank lines will remain static or increase beyond the due date of May 31, January 16, 2017 Page 9

10 Disclosure Requirements Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No Does the analyst who prepared this research report have a position, either long or short, in any of the issuer s securities? Yes No Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for any services provided to the securities issuer during the preceding 12 months? Yes No Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for this issuer in the past 12 months? Yes No Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking Department? Yes No Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No Is Beacon Securities a market maker in the equity of the issuer? Yes No Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No (Calgary Office) Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of the Investment Industry Regulatory Organization of Canada (IIROC). All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete. All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries. As at December 31, 2016 #Stocks Distribution Buy 67 77% Buy Total 12-month return expected to be > 15% Speculative Buy 12 14% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss Hold 3 3% Hold Total 12-month return is expected to be between 0% and 15% Sell 0 0% Sell Total 12-month return is expected to be negative Under Review 5 6% Tender 0 0% Tender Clients are advised to tender their shares to a takeover bid or similar offer Total % Dissemination Beacon Securities distributes its research products simultaneously, via , to its authorized client base. All research is then available on via login and password. Analyst Certification The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst s personal views about the company and securities that are the subject of the report; or any other companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H