Phoenix Rising After Fall

09/29/2010 11:50 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

This Canadian drilling specialist combines excellent growth prospects with the best yield in its sector, writes Roger S. Conrad in Canadian Edge.

Phoenix Technology Income Fund (Toronto: PHX-U, OTC: PHXHF) will continue paying its monthly dividend of [four Canadian cents] per share after conversion from a trust to a corporation on January 1st. That ensures that the provider of horizontal and directional drilling technologies to oil and gas producers in western Canada and the US will remain by far the highest-yielding company in its sector, even as it gears up for a return to growth.

Utilization levels are still a long way from the halcyon days of five years ago. For several quarters, however, there have been clear signs of recovering activity in the energy patch, particularly in the kind of shale gas development Phoenix specializes in.

The company’s third- and fourth-quarter 2009 rig utilization was below 2008 levels, but markedly better than activity in the first half of that year. Then, first-quarter 2010 operating days saw the recovery’s first year-over-year gains, with utilization up 38% over 2009 levels. Finally, second-quarter 2010 results showed a 117% jump in operating days, fueling a 114% increase in revenue and swinging operating cash flow solidly into the black from last year’s bleed.

Better, this favorable trend looks set to continue for the rest of 2010 and beyond. The company reported the highest drilling activity for any calendar second quarter in its history. Now, management anticipates it will achieve a 29% boost in job capacity in 2010, fueled in part by a ramp-up in capital spending to a record C$42 million. Rising activity is expected to boost day rates in both the US and Canada the rest of the year. And the company has begun tapping into high potential opportunities outside North America, including Albania, Peru, and Russia.

The gross profit-to-revenue ratio was 23% in the second quarter of 2010, up from 13% a year ago, demonstrating the company is managing growth well. Margins will continue to improve [in the future,] thanks to targeted capital spending and research and development efforts. And the company continues to live within its means, boosting units outstanding by just 1% this year and paying off C$4 million in long-term debt during the quarter.

These developments are bullish for the future of Phoenix’s 5%-plus distribution and the company’s ability to grow it by adding new business. After a nearly five-year depression in the energy services sector, there’s not much froth in these stocks, to say the least. And a return to the 2008 high would double investors’ money. (Phoenix closed at C$9.80 Tuesday—Editor.)

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