SS: Many have sold off. Energy service companies are impacted by E&P capex. When the oil price falls and capital programs are at risk to be cut or moderated, the pie gets smaller for service companies to fight over. Declines vary by subsector within the energy service space: Drillers and pumpers get hit a bit harder. Those are down 35–45% year-to-date. Field service and infrastructure companies are down 15–25% year-to-date. I'd say the latter would be considered more maintenance and sustaining services versus exploration spend for the drillers and pumpers.
If you're an energy company facing lower oil prices, you're going to cut new production; you're going to cut your capex programs on new exploration and new projects. You'd rather deploy capital into maximizing existing resources and existing wells. That results in more pain for the exploration service companies, versus companies working in maintenance and sustaining.
SS: Among the companies we cover, Northern Frontier Corp. (FFF:TSX.V) is more on the maintenance and sustaining side—that generates almost all of the company's revenue. It has sold off a bit more than the sector due to a recent lengthy financing process, but generally Northern Frontier is more insulated in the current environment and should begin to trade as such.
On the other side, there's Xtreme Coil Drilling Corp. (XDC:TSX), a drilling and coil operator. This company has been hit quite hard. It was up 30–40% year-to-date in August, and once oil rolled over, Xtreme sold off, now down about 60% year-to-date. The impact and effect was almost immediate on that side.
Enterprise Group Inc. (E:TSX.V) is right in the middle. This company provides mostly maintenance and sustaining services, so it has been insulated. On the other side of the coin, the market looks at Enterprise as having liquefied natural gas (LNG) exposure, so it's been stuck with that volatility. In an environment where LNG didn't exist, you'd probably see Enterprise bucking the trend right now. But because people feel it is a highly levered LNG play, despite the fact that it has no exposure, the company is getting hit disproportionately.
TER: How is the softening of the LNG market affecting these companies? How are they responding to it?
SS: The only name we cover with any exposure would be Enterprise, although LNG is pure upside to the company. Enterprise now has operating bases in both Fort St. John and Pouce Coupe in British Columbia (B.C.), the heart of LNG, following its recent acquisition of Westar Oilfield Rentals Inc. If LNG does not go through, current activity levels will not change. If LNG is not a reality for Canada until 2020 or 2025, you're not going to see any material impact to Enterprise. None of its current activity is a function of LNG.
TER: Enterprise Group's acquisitions appear to be quite varied. Is there a common theme?
SS: The company is divided into two major buckets—Utility/Infrastructure Construction Services and the Equipment Rentals group. In Utility/Infrastructure services, the company has Calgary Tunnelling & Horizontal Augering and T.C. Backhoe & Directional Drilling L.P. In Equipment Rentals, it has Hart Oilfield Rentals, Artic Therm International Ltd. and now the Westar acquisition. You find commonalities within the two buckets. On a higher level, the common theme would be western Canada-focused companies that offer utilities/energy services to a blue-chip client base.
TER: What does Enterprise look for in an acquisition?
SS: Enterprise looks for specialized companies with a western Canada focus and substantial existing management expertise. It typically leaves management teams in place post-acquisition, and often signs a management agreement. Enterprise will also look for a demonstrated track record of organic growth, and over time, as it builds up its two business segments, it will start looking for complementary businesses. The company wants to see businesses that are tuck-in acquisitions, where it can cross-sell and leverage locations to build into new geographies. I think Westar, which the company closed on in October, is the first receipt of this new breed of acquisition for Enterprise.
TER: How is Enterprise benefitting from the acquisitions it has recently made?
SS: Enterprise has seen a doubling in revenue YOY. There is a substantial increase in its blue-chip client base, which investors want to see. Whether in a downturn in oil prices or just in a general commodity price environment in western Canada, you want to be with blue-chip companies that can weather the storm and aren't going to cut down work too much. We're also seeing an increased geographic presence across Alberta and B.C.
On top of that, there is the beginning of increased vertical integration. The company has the ability now to package three rental groups—Artic Therm, Hart and Westar—together to better service and expand its client base, and do the same on the utility side, with Calgary Tunnelling and T.C. Backhoe. The subsidiaries can leverage one another to strengthen the value proposition.
As soon as it closed on Westar, the company said it would deploy $3 million ($3M) to expand its equipment fleet as a function of the demand it was already seeing from clients of Hart, which does similar work to Westar. What that said to us is Enterprise has made a very forward-looking acquisition, knowing full well that with Westar it would get new work with a new client base as a function of Westar's existing clients and its existing subsidiaries. That's exactly what you want. You want to be able to pick up companies where you know there's going to be an immediate demand for services from existing clientele. A great way to integrate new acquisitions is with tuck-in acquisitions that are accretive.