Computer Modelling: Software for Oilfields

10/21/2015 7:00 am EST

Focus: STOCKS

Vivian Lewis

Editor and Publisher, Global Investing

It is hard to find little-known energy companies likely to gain from further upward movements in oil prices. But we have one that is based in Calgary, suggests Vivian Lewis, editor of Global Investing.

Computer Modelling Group (TSX:CMG)—like others in the oil patch—suffered from lower prices. However, its specialized business of modeling oil reservoirs and gas wells to extract the most is doing better than others.

It managed to increase revenues and cash flow despite weak oil and gas prices in the past 12 months, mainly because its technology is in demand.

It also has changed its billing system to get more business, mostly outside Canada and Latin America, where drilling has slowed down.

It upped its licensing of software to model oil- and gas-fields, particularly its perpetual licenses, to build out its US and Eastern Hemisphere business to offset losses in Canada. Eastern hemisphere means Europe, Africa, Asia, and Australia.

CMG has sales offices in Houston, London, Caracas, Dubai, Bogota, and Kuala Lumpur as well as in Calgary and sells to over 60 countries. Most buyers are in the hydrocarbon business but it also sells to analysts and drilling specialists and does contract research.

In Q1 FY 2016 (it uses a March 31 yearend) it landed a $1.1 million US perpetual license and another 9 digit one in the eastern hemisphere, both records.

Licenses account for about 90% of revenues. The licensing revenue can vary quite a bit from quarter to quarter since often the buyer is an oil major.

At least one major client is suffering from economic conditions in its Venezuelan homeland and its orders are only recognized when payments are in hand.

Another factor which you need to consider is the C$-US$ exchange rate, since most oil industry licenses are denominated in greenbacks.

CMG total sales in the June quarter were C$21.44 million, so these greenback denominated deals make a big difference when translated into loonies and helped boost total loony sales by 10% over Q1 2015 and net income up 9% to C$6.8 million.

Its operating profit comes in at close to half of revenues, a nice bit of business if you can get it. It gross margins are at over 77%, another nice piece of change.

The dividend for the quarter was kept flat at 10 cents Canadian and R&D spending was boosted by 5%.

While I don't want to predict, CMG usually books higher revenues in the second half than the first half mainly because of recognition of orders received earlier.

The company also bought back shares in 2014, and while it has a program in place for the current year, it did no buybacks in the first quarter.

As must be clear from its numbers, CMG is a small-cap in the world of oil majors. We are adding the stock to our global model portfolio.

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