Scotia lowers again to $5 and here is how....

Poseidon Concepts Corp. (PSN-T C$3.98)
Lowering Our Forecast Post Competitor Review
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
[email protected]
Sam Devlin - (403) 213-7332
(Scotia Capital Inc. - Canada)
[email protected]
Div. (NTM) $1.08
Div. (Curr.) $1.08
Yield (Curr.) 27.1%
Rating: 2-Sector Perform Target 1-Yr: C$5.00 ROR 1-Yr: 52.8%
Risk Ranking: High
Valuation: 4.6x our 2013 EV/EBITDA estimate.
Key Risks to Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX.
Event
¦ We spoke to PSN competitors to better understand current tank market.
Implications
¦ Pricing could be lower than our previous expectations. Pinning
down a day rate across different tank sizes, quality, geographies, lease
durations, and product offerings (i.e., single tank vs. an integrated well
site solution) was and will likely continue to be a humbling experience.
We have reduced our 2013 consolidated day rate to $1,400 (from
$1,817) but acknowledge actual rates may vary significantly due to
lower competitor pricing or superior integrated service (higher pricing).
¦ Using our revised day rate assumption our 2013 EBITDA reduced
to $93M (down 27%). A sensitivity analysis is provided in Exhibit 2.
¦ Dividend sustainability also hinges on collection of A/Rs. Besides
CFFO uncertainty (given pricing uncertainty), collectability of existing
and future receivables is essential to maintaining PSN's dividend. Under
our revised assumptions, we are of the view that the current cash
dividend (not including DRIP) might not be sustainable. Further writedowns
of A/Rs would strengthen our view.
Recommendation
¦ Our PT reduces to $5 (from $11) on lower estimates but also on
compression of our target multiple (given our more cautious stance on
A/Rs and potentially saturated tank markets). We upgrade PSN to 2-SP
as we expect the stock to be range-bound through 2012FY results. Of
note, our 1-year ROR of 53% is based on PSN`s current dividend.
Pertinent Revisions
New Old
Rating: 2-SP 3-SU
Target:
1-Yr $5.00 $11.00
EBITDA12E $139 $143
EBITDA13E $93 $127
New Valuation:
4.6x our 2013 EV/EBITDA estimate.
Old Valuation:
7.2x our 2013 EV/EBITDA estimate.
Qtly EBITDA (M) Q1 Q2 Q3 Q4 Year EV /
EBITDA
2010A
2011A $9 A $7 A $20 A $28 A $65 16.1x
2012E $44 A $46 A $27 A $23 $139 2.2x
2013E $27 $22 $22 $22 $93 3.6x
(FY-Dec.) 2009A 2010A 2011A 2012E 2013E
Cash Flow/Share $1.24 $1.53 $1.03
Gross Margin 87.8% 86.4% 76.8%
IBES CFPS 2012E: $1.39 Curr. BVPS $1.22
IBES CFPS 2013E: $1.30 ROE12E 167.05%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
Capitalization
Shares O/S (M) 88.3
Market Cap (M) $351.4
Float O/S (M) 88.3
Float Value (M) $351.4
TSX Weight 0.02%
ScotiaView Analyst Link
55
Exhibit 1 - Snapshot Summary
Poseidon Concepts Corp. (TSX: PSN) Rating: 2-Sector Perform
Financial Statistics Valuation Analysis 2011 2012E 2013E
Share Price $3.98 EV/EBITDA 16.1x 2.2x 3.6x
1-Yr Target Price $5.00 P/CF 10.1x 2.6x 3.9x
Implied Return 53% P/E NMF 3.2x 4.9x
Dividend $1.08 P/BV 54.1x 3.4x 4.3x
Yield 27.1% P/TBV 54.1x 3.4x 4.3x
FD Share Count 88 M ROE (adjusted) NMF 167% 73%
Market Capitalization $351 M ROA (adjusted) NMF 66% 31%
Net Debt (Net Cash)1 ($47 M)
Enterprise Value $304 M Corporate Margins 2011 2012E 2013E
Gross 87.8% 86.4% 76.8%
EBITDA 82.0% 75.4% 63.2%
Debt Summary as of Q3/12 Earnings Summary ($M) 2011 2012E 2013E
Net Debt (Net Cash)1 ($47 M) Total Revenue $79 $184 $147
Facility Size $100 M EBITDA $65 $139 $93
Draw on Facility $56 M EBIT $61 $116 $85
Facility Remaining $44 M EBT $61 $113 $82
% 44% Reported Earnings $45 $84 $63
Facility Remaining - W.C. Adj. $147 M Adjusted Earnings ($11) $101 $67
% 147% Per FD Share (Adjusted) ($0.19) $1.24 $0.82
Segmented Revenue Cash Flow Summary ($M) 2011 2012E 2013E
CFPS FD $1.24 $1.53 $1.03
Funds From Operations $76 $125 $85
Capex2 $105 $35 $20
Free Cash Flow ($29) $91 $65
Dividends $13 $87 $88
Per FD Share $0.18 $1.07 $1.08
Payout From FCF -23% 95% 135%
Capex2/Cash Flow 139% 28% 24%
Net Debt (Cash)/Cash Flow 0.3x -0.3x -0.2x
Net Debt/Equity 1.4x -0.4x -0.2x
Company Profile Operational Summary 2011 2012E 2013E
Tank Fleet (Exit)
Canada 65 60 60
United States 175 380 380
Consolidated 240 440 440
Utilization Rates
Canada 54% 59% 56%
United States 71% 56% 52%
Consolidated 64% 57% 52%
Analyst Contact Info Average Day Rates
Vladislav C. Vlad, MBA, P.Eng. Canada $2,363 $1,974 $1,127
(403) 213-7759 United States $2,427 $2,250 $1,447
[email protected] Consolidated $2,404 $2,205 $1,400
Poseidon Concepts Corp. is a Canadian-based
oilfield services rental business which offers
proprietary above-ground modular fluid-handling
systems and ancillary product rental services.
Poseidon's operations are heavily leveraged to
the United States, with potential for expansion
into international markets in the near future.
0%
25%
50%
75%
100%
2011
2012E
2013E
Canada United States Non-Tank Rentals
Notes: (1) Working capital adjusted. (2) Cash capex may vary from corporate capital program due to timing differences.
Historical utilization, operating time, and day rates are estimated.
Source: Company reports; Reuters; Scotiabank GBM estimates.
56
Exhibit 2 – 2013E EBITDA ($M) Sensitivity
2013 Operating Days
+20% +10% Current -10% -20%
$2,000 $181 $165 $149 $133 $117
$1,800 $158 $144 $130 $116 $102
$1,600 $136 $123 $111 $99 $87
$1,400 $113 $103 $93 $82 $72
$1,200 $90 $82 $74 $65 $57
$1,000 $68 $61 $55 $49 $42
$800 $45 $41 $36 $32 $27
2013 Avg. Rev. /Day
Source: Company reports; Scotiabank GBM estimates.
Lowering Our Estimates as Competition Could Put Pressure on Pricing
¦ Day rates vary significantly. We dialogued with a handful of tank providers in the WCSB,
North Dakota, Marcellus, and Rockies. Some have recently started to bid for work outside of
these markets, including the Eagle Ford. It is difficult to obtain apples-to-apples price
comparisons across different tank sizes, quality, geographies, lease durations, and product
offerings. Below are some generalizations from our discussions:
1. Canada and northern U.S. markets appear saturated. Most of our contacts have
not expressed incremental E&P demand to pursue further expansion of their tank
fleets; most view expansion cautiously. Capacity to continue to add tanks appears to
be readily available.
2. Some producers are electing to directly purchase tanks, bypassing the rental model.
3. Day rates could be correlated to level of service. While the swimming pool tank
itself is arguably (now) a commodity, some rental companies vary the way the tank is
offered. Stand-alone tanks appear to earn a lower day rate while a tank packaged as
part of a well-site integrated service offering (including drilling, completions, and/or
fluid handling) can earn a higher equivalent day rate for the value-added-service.
¦ As a recap, Poseidon missed Q3 results. While management noted some added competitive
pressures, lower utilization (particularly in the Bakken and Rockies) was the key factor
driving pricing lower in the quarter.
¦ Looking forward, we believe Poseidon's tank pricing could trend lower. As such, we
have taken a more cautious stance on our estimates, reducing 2013 day rates to $1,400 (from
$1,817). Given the humbling experience of recent Q3 results, we note that our confidence in
our estimates is not high but we feel the revised day rate is more appropriate, given our
discussion with Poseidon's competitors. In Exhibit 2, we include our 2013E EBITDA
sensitivity to consolidated day rates and operating time. In Exhibit 3, we provide a summary
of our revised forecast.
¦ We are concerned the dividend may not be sustainable. We currently forecast 2013E cash
flow of $85 million, cash dividends of $88 million (excluding DRIP), and a capital program
of $20 million, resulting in a cash flow deficit of roughly $23 million. In our view, the
collectability of existing and future accounts receivables remains a key swing factor.
Assuming the company collects half its $126 million in accounts receivables by 2012YE,
Poseidon could theoretically pay off its $56 million line. This would leave enough financial
flexibility to maintain the dividend. On the flip side, should we continue to see a high rate of
funds from operations being absorbed by accounts receivables (i.e., 74% of funds were
allotted to changes in non-cash working capital through the first 9 months of 2012), this
implies a dividend cut could be imminent. For context, consider that Poseidon has $44
million of undrawn lines as of Q3/12. This is the equivalent of approximately two quarters of
cash dividends (i.e., $22M/quarter), of which Q4/12 has been declared. Given the
uncertainly, we model flat A/Rs which is a middle of the road assumption, in our view.
57
Exhibit 3 - Summary Changes to Our Forecast
Q4/12E 2012E 2013E
Figures in $M New Prior Δ New Prior Δ New Prior Δ
Revenue
Canada $5.4 $6.5 -16% $25.6 $26.6 -4% $13.9 $21.9 -37%
United States $27.9 $31.1 -11% $154.8 $159.1 -3% $117.7 $148.4 -21%
Non-Tank Rentals $3.0 $3.0 0% $4.0 $3.0 33% $15.0 $15.0 0%
Corporate $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Total Revenue $36.3 $40.6 -11% $184.4 $188.7 -2% $146.6 $185.3 -21%
Gross Margin 77.8% 79.0% 86.4% 86.4% 76.8% 79.4%
EBITDA
Canada $4.1 $5.0 -19% $24.3 $25.2 -4% $9.6 $16.9 -44%
United States $22.1 $25.0 -12% $149.0 $152.9 -3% $92.5 $119.6 -23%
Non-Tank Rentals $2.1 $2.1 0% $3.1 $2.1 48% $10.5 $10.5 0%
Corporate ($5.5) ($5.5) 0% ($37.3) ($37.3) 0% ($20.0) ($20.0) 0%
Total EBITDA $22.7 $26.6 -14% $139.0 $142.9 -3% $92.6 $127.0 -27%
EBITDA Margin 62.6% 65.5% -4.4% 75.4% 75.7% -0.4% 63.2% 68.6% -7.9%
F.D. Per Share Data
Operating Earnings $0.19 $0.23 -17% $1.04 $1.07 -4% $0.77 $1.09 -30%
Discontinued Operations $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Adjustments/Unusual Items $0.01 $0.01 1% $0.21 $0.20 0% $0.05 $0.05 2%
Adjusted Net Earnings $0.20 $0.24 -16% $1.24 $1.28 -3% $0.82 $1.14 -28%
CF From Operations $0.25 $0.30 -15% $1.53 $1.58 -3% $1.03 $1.42 -27%
Cash Flow Summary
Funds From Operations $20.9 $24.9 -16% $125.1 $129.0 -3% $84.8 $119.7 -29%
Net Capex $5.8 $5.8 0% $34.5 $34.5 0% $20.0 $20.0 0%
Net Acquisition (Disposition) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Cash Dividends $21.9 $15.8 39% $86.4 $80.3 8% $87.6 $64.6 36%
Net Capex/Cash Flow 28% 23% 28% 27% 24% 17%
Net Debt ($40.4) ($50.5) -20% ($40.4) ($50.5) -20% ($17.7) ($85.6) -79%
Operational Statistics
Tank Fleet (Exit)
Canada 60 60 0% 60 60 0% 60 60 0%
United States 380 380 0% 380 380 0% 380 380 0%
Consolidated 440 440 0% 440 440 0% 440 440 0%
Utilization Rates
Canada 62% 62% 59% 59% 56% 56%
United States 41% 41% 56% 56% 52% 52%
Consolidated 44% 44% 57% 57% 52% 52%
Operating Time
Canada 3,400 3,400 0% 12,980 12,980 0% 12,300 12,300 0%
United States 14,500 14,500 0% 65,500 65,500 0% 72,000 72,000 0%
Consolidated 17,900 17,900 0% 78,480 78,480 0% 84,300 84,300 0%
Average Day Rates
Canada $1,600 $1,900 -16% $1,974 $2,053 -4% $1,127 $1,777 -37%
United States $1,700 $1,900 -11% $2,250 $2,310 -3% $1,447 $1,824 -21%
Consolidated $1,681 $1,900 -12% $2,205 $2,267 -3% $1,400 $1,817 -23%
Note: Historical utilization, operating time, and day rates are estimated.
Source: Company reports; Scotiabank GBM estimates.
58
Exhibit 4 – Balance Sheet & Debt Position Analysis
Figures in $M 2011 Q1/12 Q2/12 Q3/12 Q4/12E 2012E 2013E
Cash & Equivalents $0 $2 $12 $3 $2 $2 $2
Accounts Receivables $54 $83 $119 $126 $126 $126 $126
Inventory $3 $4 $6 $7 $7 $7 $7
Prepaids $1 $1 $3 $4 $4 $4 $4
Income Tax $0 $0 $0 $0 $0 $0 $0
Current Assets $58 $90 $140 $140 $138 $138 $138
Risk Management Assets $0 $0 $0 $0 $0 $0 $0
Future Income Tax $11 $7 $3 $2 $2 $2 $2
Property, Plant, & Equipment $34 $46 $50 $59 $65 $65 $81
Total Assets $103 $142 $193 $202 $205 $205 $222
Bank Indebtedness $18 $0 $0 $0 $0 $0 $0
Current Long Term Debt $10 $10 $0 $0 $0 $0 $0
A/P & Accrued Liabilities $12 $18 $24 $23 $23 $23 $23
Income Tax Payables $0 $0 $7 $7 $7 $7 $7
Dividend Payables $7 $7 $7 $7 $7 $7 $7
Other $36 $0 $0 $0 $0 $0 $0
Current Liabilities $84 $35 $38 $37 $37 $37 $37
Credit Facility $0 $0 $35 $56 $61 $61 $84
Senior Notes $0 $0 $0 $0 $0 $0 $0
Future Income Taxes $0 $0 $0 $2 $5 $5 $19
Total Liabilities $84 $35 $72 $94 $103 $103 $140
Share Capital $300 $379 $93 $93 $94 $94 $98
Contributed Surplus $5 $7 $9 $12 $12 $12 $12
Retained Earnings (Deficit) ($286) ($278) $18 $4 ($3) ($3) ($27)
Comprehensive Income/Other $0 ($1) $1 ($0) ($0) ($0) ($0)
Total Shareholders' Equity $19 $107 $120 $107 $102 $102 $82
Total Liabilities & Equities $103 $142 $193 $202 $205 $205 $222
Debt Position Analysis
Net Debt1 $27 ($55) ($67) ($47) ($40) ($40) ($18)
Net Debt - Traditional $28 $8 $22 $52 $59 $59 $82
Total Credit Facility $50 $50 $100 $100 $100 $100 $100
Drawn $18 $0 $35 $56 $61 $61 $84
Available Lines $32 $50 $65 $44 $39 $39 $16
Available Lines (%) 63% 100% 65% 44% 39% 39% 16%
Available Lines (ND1 based) $23 $105 $167 $147 $140 $140 $118
Available Lines (ND1 based - %) 47% 209% 167% 147% 140% 140% 118%
Notes: (1) Working capital adjusted. (2) Definition matches traditional E&P net debt calculation.
Source: Company reports; Reuters; Scotiabank GBM estimates.