Investment Profile and Business Overview (ticker: BDI on the TSX)

The Black Diamond Group (BDI) is one of the most boring companies I’ve ever come across.

They make & rent remote camps for the oilsands workers – from dining rooms to toilets – and supply the temporary office space. There’s no technological edge here. And they do supply some basic well site services as well. Boooooring. No sex appeal. ZZZzzzzzz.

But what a great stock chart.

It’s up 500% in two years, from $6-$30 per share. They pay a steady and growing dividend. Q1 2011 revenue was up 80% over a year ago, as was profits. They have $87.6 M annualized (from Q1) EBITDA of $4.71/share, which equals 6.25x cash flow. BMO has them at 7.4x Price to Cash Flow (Cash flow is slightly different than EBITDA) their estimate, but average in BMO coverage universe is 8.1x P:CF

$2.11 annualized earnings – 13.7x – BMO average is 16.4x – You could argue the stock is still cheap.

When oil looks like it will be trading lower for awhile and gas has a glass ceiling at $5.25, the only sector in the energy patch with pricing power – and therefore earnings power – is the energy services sector.

My colleague, Michel Massaad, who writes his own energy blog at www.beatingtheindex.com, has interviewed management and written up a profile of the company for OGIB subscribers. Neither one of us owns stock in Black Diamond.

Trading Symbols: BDI-TSX
Share Price: $30.50
2011 Revenue: $140.0 million
2011 EBITDA: $50.0 million
Shares Outstanding: 18,500,000
Market Cap: $564,250,000
Dividend: $1.14 per year paid monthly
Yield: ~3.75%

Positives for the Stock:
Provides exposure to the resources sector (oil sands, conventional oil and gas activities, mining) while shielded from the volatility of commodity prices.
Low payout ratio – 25% for Q1 2011 — 25% of the company’s Q1 net income funded the dividend payment for the quarter.
Significant insider ownership – 17%
Significant institutional ownership – 50%
Stock Chart – steady rising trend line
Negatives:
A sharp drop in commodity prices for an extended period of time will hurt the company’s long term contract portfolio
No technology edge – aggressive pricing by the competition could reduce profitability
Any regulatory changes in the oil sands sector could impact new or existing projects
75% of the company’s revenue is out of Western Canada.
Poor liquidity for buying and selling shares
Business Overview

Black Diamond has three business segments:
1. Energy Services
2. Workforce Accommodations
3. Space Rentals

While each division is independent with its own fleet and equipment geared towards answering a specific need, it is not uncommon for all 3 business segments to end up working on the same site cross selling to the same customer. For instance, the Energy Services division would not be the only one to generate revenue from the oil sands sector. All 3 segments are geared towards the energy sector by design and the company is working on expanding its business into the resources sector as a whole which includes mining and forestry

Let’s take a closer look at each of the 3 business segments…

1. Energy Services

Canadian E&P spending (energy producers) is forecasted to increase by 16% to $44 billion this year as companies bankroll projects on the back of high oil prices. Black Diamond exposes investors to all the hot energy plays minus the risks E&P companies take on. The company believes growth in these areas will continue as long as oil prices remain in a sustainable range.

Think of the Energy Services segment as a mobile Canadian Tire store – for our American readers, that would be Lowe’s – which will supply your operations on the ground with almost everything you need.

Surface Equipment Rentals

Black Diamond offers a full range of surface rental assets that would typically support a drilling or completions operation. This is the boring stuff, but is the guts of any well site or oilsands operation – tanks, pumps, water storage, steel walkways etc.

The shale revolution means a lot more horizontal wells. These wells are getting longer and are using more water per well – which means more tanks and containment systems from companies like Black Diamond.

Remote Camps

Energy Services provides housing for drill camps, geologist/engineer quarters and staff quarters in temporary and remote sites. This is different housing than their workforce division or space rental (office) divisions.

Related Services:

And of course, if you want Black Diamond to install and set them up and take them down, that costs extra – just like a drayage company at a convention centre.

The Energy Services division generated 13% of Q1’s gross revenue, and this figure should grow as demand from shale oil and gas plays grows on the back of horizontal drilling and multi stage fracking completion requirements.

When a company can’t count on a technological edge in its services, its profits are as strong as its sales team — which is one of BDI’s strong points. The company has been a first mover when it comes to securing long-term strategic partnerships with 2 first nations in B.C. with lands in the following hot plays – the Montney and the Horn River shale gas plays.

Exploration and production companies need access permits to work on traditional native land. The band can expedite your access permit if you choose to work with them as a preferred partner for your accommodation/equipment needs. The partnership between Black Diamond and the native bands is either through a royalty structure or a 50/50 ownership. So even if a competitor is selected for a services contract in this area they still need to hire the First Nations partnership – which means BDI will still get paid since they own half of the equipment in use.

This move has lead to capturing more than 70% market share in the Horn River natural gas shale play which is buzzing with infrastructure and pipeline projects in anticipation of higher dry gas prices once the Kitimat LNG export facility becomes operational.

These partnerships are not only expected to deliver strong monthly revenues from large and flourishing activity area, they are primarily long term solid relationships with the local community as it provides them with jobs and sustainable benefits in the long run.

Part of its strategy in geographically diversifying its revenue sources, Black Diamond is expanding its business into the US in North Dakota and Montana where there is a chronic shortage in accommodation and service rental equipment. Drilling continues to grow in the Bakken shale oil play thanks to sustained high oil prices.

Editor’s Note: In Part 2, we review Black Diamond’s other business segments: Workforce Accommodations and Space Rentals… along with a full valuation on the company’s stock. The company recently closed a private placement that gives it extra financial flexibility.