Pason Systems Inc. (Toronto: PSI) is a Calgary based oil services company, which provides specialized data management systems for the oil drilling industry, explains Gavin Graham, contributing editor to Internet Wealth Builder.
The company describes itself as providing the Internet of Things for the oil drilling industry, and it also has a small but rapidly growing information management system for solar farms. With a market capitalization of $1.2 billion it is a mid-sized stock with decent liquidity, trading over 100,000 shares most days.
Pason reported revenues up 60% in the third quarter ended 30th September 2022 to $95.2 million, generating $46.2 million in adjusted Earnings Before Interest, Tax, Depreciation & Amortization (EBITDA), representing a gross margin of 50%, and net income of $34.2 million ($0.42 per share) compared to net income of $13.1 million ($0.16) in the corresponding quarter last year.
North American operations generated revenues of $75.2 million, up 63% from 2021, and revenue per industry day of $871 was an all-time record. International revenues of $15.8 million were up 52%, and solar revenues of $11.4 million rose 23%.
For the nine months ended 30th September, revenues were up 67% to $240.6 million, adjusted EBITDA more than doubled to $110.6 million, and net income more than tripled to $71.4 million ($0.87) from $22.7 million ($0.27).
The company generated $66.8 million of free cash flow in the nine months after capital expenditures of $18.1 million, reflecting catch up of some of the deferred expenditures during the Covid-19 inspired downturn in 2020-21, and expected to spend $30 million for 2022 as a whole.
Pason has no debt and cash on the balance sheet of $206 million, up $30% from $158 million at the end of 2021. CEO Jon Faber noted that revenue in the third quarter was the highest since the first quarter of 2015 and adjusted EBITDA the highest since the fourth quarter of 2014, just before the Saudi inspired collapse in oil prices.
Meanwhile, North American rig counts were back to the level of the first quarter of 2020, the last before the onset of Covid-19. Reflecting the improved conditions, Pason has recently raised its quarterly dividend by 50% from $0.08 to $0.12, equivalent to a 3% yield.
Pason has survived the most severe downturn in the drilling industry in forty years thanks to its rock solid balance sheet and control of costs including reducing capital expenditures by 75% to less than $10 million in 2021.
Now that the industry is recovering strongly, its operational leverage is delivering dramatic increases in adjusted EBITDA and earnings, but although the share is up 56% over the last year, against a decline of 15% for the S&P500 and 5% for the S&P/TSX, it is still down 10% from its price five years ago.
Selling at less than 16 times its last twelve months’ earnings and with a rising dividend, it is an attractively valued play on increased activity in the drilling sector.