Oil Sands Growth Play

05/12/2010 12:09 pm EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Shares of energy services provider Flint have a lot of catching up to do, write Gordon Pape and Irwin Michael in the Internet Wealth Builder.

Flint Energy Services Limited (Toronto: FES, OTC: FESVF) provides a range of integrated products and services for the energy industry. With a history dating back over 100 years, the company's 10,000 employees cover the full cycle of oil and gas exploration and production from 60 locations in North America. The company offers oilfield services, production services, facility infrastructure, and maintenance services.

Flint Energy Services is relatively unusual when compared to traditional oil and gas services companies. Although Flint has significant conventional operations, a much greater proportion of its business is related to oil sands facility construction and ongoing maintenance than its peers. Importantly, oil sands capital spending is expected to rebound 30% in 2010 and 20% in 2011, after falling approximately 40% in 2009.

The facility infrastructure segment [is] the heart of our investment thesis. In 2009, the segment generated $592.5 million in revenue and $70.8 million of [earnings before interest, taxes, depreciation and amortization]—EBITDA. Although facility infrastructure accounted for only 31.6% of revenue, with a company-leading 11.9% margin, the segment produced 47.4% of the Flint's total EBITDA.

Importantly, Flint has a backlog of approximately $200 million related to various oil sands projects. With oil sands capital spending expected to rebound from $11 billion in 2009 to $15 billion in 2010 to 2011, we expect that this segment will continue to drive the company's financial performance.

Flint's maintenance services segment could almost be considered "the gravy" on the story. Flint operates this segment as a 50/50 joint venture with Transfield Services (Sydney: TSE), an Australian-based infrastructure services provider. As opposed to the other three segments that are cyclical, the maintenance division is a source of relatively stable cash flow.

The company's book value is $11.32, so readers are able to buy in at a small premium to book. The shares have underperformed both engineering and construction and oil and gas services stocks for a non-fundamental reason. It had become known that Flint's largest shareholder, SCF Partners, had filed to sell its large block of stock. Once the shares were placed with fundamental-based investors, the stock was able to lift quite nicely.

Additional upside could come from the ramp-up in oil sands capital expenditures, [which] could translate into growing cash flow and multiple-expansion. Second, the clean balance sheet with C$160.9 million of cash and cash equivalents (or approximately C$3.60 per share) and the stable cash flow from the maintenance division could be used to initiate an annual dividend and would open the stock to a new class of investors.

Finally, there is the possibility that Transfield Services could make a bid for either the maintenance services division or even the entire company. This option may not be as far-fetched as it sounds since Transfield is publicly listed in Australia and trades at almost twice Flint's valuation.

Flint Energy is a misunderstood growth stock trading at value multiples. Further, if one of the three potential catalysts fails to materialize, we believe that the company could continue to be active with its [share purchases.] In any event, we believe that patient shareholders will be rewarded through the balance of 2010 and into 2011. Buy below US$14. [The ADRs traded at $12.90 in New York Monday—Editor.]

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