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Friday, July 31, 2015

High Arctic Energy Services - A Look At Upcoming Earnings

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July 31:

Summary

  • High Arctic Energy Services is an oil and gas drilling, service, and rental company that is based in Canada, but generates the majority of revenue from Papua New Guinea.
  • High Arctic Energy Services will be releasing Q2 results shortly, and this article will offer an analysis of their expected results.
  • Based on this analysis, High Arctic is likely to be very closely in line with analysts expectations of .04 per share.
I first wrote about High Arctic Energy Services (OTC:HGHAF) last month and suggested one should start building a position, especially as the price of oil continues to slide. Since then, the price of oil has fallen further and High Arctic Energy Services is trading at an attractive value as it currently trades at $3.68 on the Toronto Stock Exchange.
High Arctic Energy Services is an oil and gas drilling, service, and rental company that is based in Canada, but generates the vast majority of their revenue from Papua New Guinea. The Papua New Guinea revenue is derived from contracts with larger companies, such as Oil Search Limited (OSL), in the Exxon-Mobil (NYSE:XOM) operated Papua New Guinea LNG Project; one of Exxon's PNG LNG co-venture partner is the National Petroleum Company of Papua New Guinea, a fully state owned company that owns 16.57% of the project. This government investment, in a country with limited economic resources, essentially assures the continuation of production regardless of the energy environment. When compounded with the lower production costs, and High Arctic's position as the leading service provider in the project, it seems that High Arctic is in a fantastic position right now. For a more detailed overview of the company, please view my previous article that offered more of an overview on High Arctic Energy Services.
Today, I am going to have a look at what to expect from High Arctic Energy Service's upcoming earnings release. Fortunately, High Arctic is a relatively easy company to understand, and should be somewhat easier to predict than their competitors due to their fixed contracts in Papua New Guinea.
HWO Chart
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Revenue

There should be a slight increase in revenue from Rig 115 coming online on June 15th, however, this effect will be minimal as it was only in production for 15 days. However, High Arctic did receive reduced revenue since late March as they were servicing and transferring the rig. Therefore, I would anticipate a slight increase in overall revenue compared to Q2 2014. High Arctic has also achieved contracts for a minimum of 2000 rental mats for rigs 115 and 116, which is anticipated to produce $4 to $7 million in revenue per year; however, this revenue would have not had any significant effect as it would only have occurred towards the very end of the quarter.
Looking at Q2 2014, it seems that High Arctic produced 39.8 million in revenue, in which 31.8 million came from Papua New Guinea (79.9%); however, it is important to consider the effect of the downturn affecting Canadian revenue much more, coupled with the capital expenditures in PNG increasing revenue. Therefore, I calculated the proportion of PNG revenue from Q1 2015 to be 78.7%. It's important to understand the seasonal nature of drilling in Canada makes their Canadian operations susceptible to an especially stronger Q1 and a weak Q2; therefore, I imagine the proportion of PNG will actually be even higher in Q2. I think that it is fair to consider the Q2 2014 earnings when considering the potential Canadian revenue (in light of the oil prices), while using Q1 2015 for their PNG revenue comparison. Comparing how High Arctic did in 2014 Q1 vs Q2, we see that their revenue fell from 15 million in Q1 to 8 million in Q2; this represents a 47% decrease in revenue.
Using this logic, it seems that High Arctic's PNG revenue will grow from 35.2 million last quarter, to at least around 36.5 to 37 million in Q2. I think that their Canadian revenue will fall approximately 47% due to the tough Canadian high-cost environment, and this should produce Canadian revenue of around 4.24 million. Rounding these numbers, I predict that the overall revenue should be around 41 million. The transportation revenue for Rig 115 was not provided in the financial reports, as it only said the revenue was "reduced"; if this revenue is more significant than I anticipated, it is possible for PNG revenue to go as high as 40 million, producing overall revenue of 44 million.

Expenses

I believe that expenses will be slightly higher than last quarter due to the additional rig arriving towards the end of the quarter, as well as the depreciation should increase due to the larger amount of assets; this should be somewhat offset by reduction in Canadian expenses due to declined activity, and should not be significantly higher than last quarter. Therefore I expect costs could be as low as 38 million, compared to 37.8 million last quarter. However, I think it is more realistic that expenses could increase to around 40 million for Q2.

Earnings Estimate

Lets look at four different scenario's using these numbers, starting with the more conservative expense estimate. Using the more conservative estimate of revenue, this should produce operating earnings of around 2 million, and after tax earnings of about 1.5 million (as foreign exchange and interest should not have a huge effect); for a more liberal estimate, this should produce operating earnings of 6 million, with net earnings of 4.5 million. This produces estimates of .03 per share for the more conservative estimate, and .08 for the more liberal estimate.
Now, lets crunch the numbers using the more liberal estimate for expenses. Using the more conservative estimate for revenue, this would suggest that the company would break even, and produce no profit. Using the more liberal estimate for revenue, this would produce 4 million in operating income, which would be approximately 3 million net, or .05 cents per share. Converting this confusing paragraph into a table, we are ultimately left with 4 EPS estimates, ranging from 0 to 8 cents; averaging these numbers creates an EPS of .04 cents. I believe overall that it is more likely for the liberal expense estimate to be accurate, and I believe the revenues will be closer towards the liberal estimate.
EPS Based On EstimatesConservative Expense Estimate (38)Liberal Expense Estimate
(40)
Conservative Revenue Estimate (40)0.030
Liberal Revenue Estimate
(44)
0.080.05

Analysts

Although I strongly disagree with using analysts recommendations for purchasing stocks, I think it can be helpful to look at other estimates to see how other people view the same company. The average analyst is predicting revenue of 43.9 million, with an average EPS of .04; this suggests that analysts are likely viewing what I suggested to be the more liberal evaluation for both costs and revenue. However, keep in mind that this was only based on the results of two analysts, and could vary significantly from the actual numbers.

Share Buybacks

High Arctic Energy Services has been aggressively buying back shares in the first quarter, and I believe that this trend will likely continue due to their large supply of cash. At the start of Q1 High Arctic had 55.65 million shares, and by the end of the quarter they had repurchased 473 thousand shares back, at a total cost of 1.7 million and bringing their total shares down to 55.18 million shares; this represents an average purchase price of $3.59, suggesting that management was quite disciplined with when they bought back shares, despite buying a large number; I like this approach, because this is exactly how I buy their company shares too.
I think it is very impressive when a company buys back almost 1% of their company in a single quarter, and I believe that the low commodity environment and high amounts of cash will continue to allow them to do this for at least the rest of the year; I also believe that they will release another course issuer bid when this one expires. All of that aside, I think that management will purchase a similar value of shares, with a slightly higher average price that may be closer to the low $3.80's; therefore, if they bought another 1.7 million shares, this would equal 447 thousand shares, and bringing their overall number of shares down to 54.73 million shares. This should not effect the EPS estimates as it is only 1% of the shares, and the EPS was a low number.

Conclusion

I am expecting nothing shocking from High Arctic Energy Services, and am hoping for more good news on rig 116. The analyst estimate of .04 seems in line with my .04 to .05 estimate. It is of note, however, that High Arctic Energy's share price has proven to be resilient over the last few weeks, despite the low oil prices, and therefore should not change much after a neutral earnings report. I still argue that High Arctic Energy Services may currently be one of the best values in the Canadian oil patch when considering the overall risk return, especially for the more conservative investor.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Source: http://seekingalpha.com/article/3383835-high-arctic-energy-services-a-look-at-upcoming-earnings

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