Today we conclude guest writer Michel Massaad’s profile on Black Diamond Group — an energy services company enjoying fast growth and a steady and growing dividend… with exposure to the entire resource sector.
Black Diamond Group’s Business Segment # 2: Work Force Accommodations (Camps & Logistics)
Black Diamond’s Work Force Accommodations division can be easily described in 2 words: “remote camps” – bunkhouses, kitchens, recreational centers etc. in the middle of nowhere. Except for a small presence in Alaska, almost all of the business is centered in Western Canada. Because the company is still young (5-6 years old) most of the equipment is virtually brand new with an average age of less than 3 years old – which means they have a lot of modern amenities. Operating a newer fleet with those amenities is definitely a plus when you’re bidding against your competitors.
BDI’s modular buildings can provide workforce housing for 50-2,000 people. Each camp is formed with modular structures assembled to form large dormitories, kitchen/dining facilities and recreation complexes which the company usually owns and operates. These camps are usually leased but they can be sold at the request of the customer. The structures are designed and built with Canada’s northern climate in mind.
In addition to leasing portable modular structures, Black Diamond offers complete turnkey solutions by supporting a customer’s project through planning, permitting, site engineering & design, transportation, logistics, installation, site services and ongoing camp maintenance programs.
The division’s fleet grew by +15% (+205 units) in the first quarter of this year and accounted for 57% of gross revenue for the quarter. The majority of this growth was the addition of camp assets in the Horn River area of Northern British Columbia and for a remote mining project.
The utilization of these fleet assets was strong throughout the period averaging 97% compared with 86% for the same period in 2010. These numbers should not come as a surprise at all as the company successfully built a meaningful workforce accommodations revenue from oil sands, shale plays, mining, forestry and major construction projectsas well as conventional oil and gas operations.
Current estimates show 10,000 to 15,000 new beds needed in the WCSB in the next 24 months. The company is anticipating additional capital requirements deployed on several projects in the oil sands areas of Alberta accelerating demand for accommodation over the course of the next 12 months. In fact, investments in Alberta’s oil sands are forecasted to hit $15 billion dollars this year (+$2 billion more than 2010) but total spending in the oil sands sector is expected to reach $180 billion over the next decade according to a report by Peters & Co — thanks in part to an increased interest by deep pocketed foreign investors.
With increased capital spending comes an increase in remote housing demand for personnel which fuels the growth of Black Diamond’s workforce accommodations division as new contracts are signed with an average term of 36 months. The Workforce Accommodation units typically do not experience significant seasonality due to the longer term nature of the contracts on projects requiring larger complements of labor in remote areas, which tend to start and operate without regard to the time of year. The time to recover capital costs is currently 3 – 3.5 years.
Out of the 3 business segments that profit from the boom in resources, this is the division that stands to shine. Competition for labor is intense and with the tightening of the labor market, companies are going the extra mile in order to keep a low employee turnover rate. For large E&Ps, the biggest cost is labor so it’s in their interest to avoid extra costs related to replacing an employee. Companies are requesting customized modules in order to mitigate the turnover costs. Offering better food quarters and higher quality equipment/services (internet, TV) are part of the effort for successful workforce retention.
This brings us to how Black Diamond spends its capital. There’s no such thing as speculative spending in anticipation of future contracts. BDI doesn’t buy any new equipment until a new contract is signed.
Business Segment # 3: Space Rentals (BOXX Modular)
The Space Rentals division is essentially focused on providing portable and modular buildings for workspace and storage versus the remote lodging facilities that is provided by the Workforce Accommodations segment.
BDI’s BOXX Modular buildings are typically designed for urban and industrial customers. They can be found on refinery sites, construction sites or even in public events providing workspace and mobile storage. Most of the equipment is not industry-specific which means deployments can be easily customized to deliver success on large and small projects in infrastructure, mining, energy, forestry, construction, as well as for the arts, athletics and the public sector.
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The asset fleet includes offices, lunchrooms, lavatories, portable storage and multi-unit complexes. The company also rents ancillary items like furniture and office equipment.
Business is geographically diversified covering western Canadian provinces, Ontario and the US. BOXX Modular might be contributing to the success of a golf tournament in Edmonton by providing temporary portable offices while other modules are deployed in parallel on several long term US public sector contracts. Almost 50% of the Space rental’s fleet assets are in the US.
Increasing economic activity in North America will push utilization rates and rental rates higher in both Canada and the US as infrastructure projects take off: Bridges, roads, buildings, utilities, public facilities as well as pipelines are expected to be newly built, repaired or updated. In the first quarter of 2011 the, the Space Rentals fleet grew by 3% (+82 units) while the utilization rate increased to 74% up from 69% last year.
The company expects a positive year over year results throughout 2011 in this division as the global economic recovery takes hold. However, if we do double dip because of the debt drama, rental rates will experience downward pressure and results will be impacted in the long run. As of March 31, the average contract in this division has 7 months remaining in Canada and 13 months remaining in the US.
The market likes BDI which explains why it is currently trading at 7.9x P/CF above its group average at 7.0x. The multiple would probably be higher if retail investors had more access to more shares as the stock is not very liquid. With 50% of the stock held by large institutions and 17% held by management only 33% of the float is accessible to the retail investor.
A stock split would certainly improve the liquidity of the stock pushing the price higher but as far as we know the company has not decided yet if such an action will be taken. (This has proven to be very positive for Canadian Energy Services, another OGIB stock pick that split 3:1 and is up almost 20% in the month following.)
The company recently closed a private placement of $62 million in long-term debt in the form of senior secured notes with an interest rate of 5.44% due in 2019.The financing should help reduce outstanding debt (currently at $104 million) and leaves the company with increased financial flexibility (upwards of $125 million in credit facilities by the end of 2011) to fund growth or acquisition opportunities.
WHAT THE ANALYSTS SAY
Firm / Target Price:
Raymond James – $34.00 up from $31 following Q1 results
CIBC World Markets – $36.00 up from $32.50 following Q1 results
GMP – $33.50 as of May 31 2011
Peters & Co. – $35.00 up from $28.00 following Q1 results
BMO – $35.00
Black Diamond Group lacks the sex appeal of an oil and gas producer that owns a large contiguous land base in a hot emerging resource play — but you have to admit its stock has easily outperformed many of these juniors this year. Even though it’s not an exciting business, you will get exposed to the whole resources sector without the commodity price volatility and rewarded with a dividend on top of it.
Black Diamond’s competitive edge has nothing to do with patents; it comes down to relationships with customers. Lead by an experienced management team and armed with newer equipment relative to the competition, BDI has been successful in capturing one contract after another and has walked the extra mile by weaving strategic partnerships with First Nation bands for long term mutual benefits.
The stock is trading near its yearly high but with strong growth opportunities ahead in the resources sector, the company is positioned to grow significantly in the next 12-18 months with the vast spending in Alberta’s oilsands and new shale plays in North America.
– Michel Massaad