In one sense, this makes NO sense: Aveda Transport and Energy Services (AVE-TSX) hit record revenue (US$52 million) and record positive cash flow (just over $5 million) this last quarter, Q2 17.
I mean, all this company does is move drill rigs; nothing else. And there are just HALF the drill rigs operating in the US today vs. three years ago—see this chart:
And yet, look at this revenue chart for Aveda–it has dramatically outperformed the increase in rig count off the bottom in the last year–generated more revenue and EBITDA than when oil was $100, gas was $4 and the rig count was 2x what it is now:
How did they do that? That is so counter-intuitive.
If you want to get the WHOLE story, direct from the two men who have delivered this stunning turnaround, you better register (for FREE!) for the Subscriber Investment Summit (SIS) in Vancouver this October 3. (REGISTER HERE!!)
And…moving a drill rig only gets you 65-85% of the money it did in 2014.
How have they done it? From a most unlikely source—an acquisition they made in 2015, near the bottom of the market, that saddled them with a lot of debt.
But this acquisition gave them the scale to leverage their competitive edge—safety, and attention to detail…and also leverage the huge rolodex of the new CEO, Ronnie Witherspoon.
They now have hundreds of fairly new pieces of equipment, and they are showing they can win business from the competition—increase market share. But investors haven’t caught on yet in any significant way.
They’re hitting their stride in all markets and all business units. But despite this increase in revenue and EBITDA, utilization on their fleet of equipment is still low at 40%; there’s 90% upside there to 75%.
The Big Change happened when new President Ronnie Witherspoon took over the reins last year. He’s a 20-year veteran of the Oil Field Services (OFS) sector, with a lot of that time in Texas. He has a great rolodex that he has used to drum up business. He was also able to recruit his two VPs who also had a long list of industry contacts, and they have all been winning business. And Aveda’s efficiency and their safety track record means when they get business, they keep it.
They move oil rigs, and help get the rig set up for drilling. Obviously, as the rig count has gone up and up the last few months, so has their business. Aveda is active across all basins in the US, so they can move equipment around to whatever basin is busiest.
There’s less than 60 million shares out, so there is lots of leverage here to continued success.
If the Market values AVE at 8x EV/EBITDA, that would be $160 million. Subtract $78 million debt to get $82 million market cap. Divide that by 57.4 million shares = $1.42/share
7x EV/EBITDA = $1.08/share
6x EV/EBITDA = $0.73/share
Aside from the rig count moving up in the last two quarters, rigs are changing—they’re getting A LOT bigger, and most of the industry is mom-and-pops that don’t have the capital or scale or meet these needs.
The company has two new terminals, one in Caspar Wyoming—for the DJ Basin in northern Colorado and another in Midland Texas—for the red-hot Delaware Basin—starting up.
CEO Witherspoon says it’s important for investors that they get invited in to these basins by an anchor customer who wants them there to do all their work.
“If you look at our Wyoming terminal, that’s an area that we want to get in to, especially in the D-J Basin. It’s a tough area. It’s always been a very tough market, it’s very fragmented. We had an opportunity to get a sponsor to take us in there, it was a large drilling contractor in the Rockies. That kind of got us started, and now we are back into the D-J, moving the rigs.”
“Our expansion into the north east was similar. We had a sponsor, this was an operator on a contract at this time, and then we were able to leverage several long rig moves early on, and now we’re starting to build up a good business locally.
“Then, we recently moved into an area in Ohio that will allow us to service the Ohio markets and West Virginia, which will really let us tap into the Utica market, which gives us another 50 to 60 rigs work. We’re much more competitive with those, because we’re so much closer.
“If you look at our expansion we’ve had in Midland over the last six to nine months now, we’ve opened two terminals there, and it’s just been for necessity, to continue to meet the demand from our clients. Obviously the Permian is a very active area.”
Not only can cash flow jump from more of the fleet in the field, cash flow can increase from margin expansion. Even though pricing power is fragile, Aveda is using many 3rd party operators while they re-furbish their own fleet. Margin on using these 3rd party groups is close to zero.
And there is always more planning and communicating with clients better to create better utilization rates.
“We have a new Performance Optimization Program,” says Witherspoon. “We go out and assign a guy to do nothing but evaluate, document and truly understand where the efficiency gains could lie on the rig, and/or where the deficiencies were.”
“Then we apply those, sit down with the operator, kind of a post job meeting, post job execution review, if you will. Everyone wants to make sure we’re on the same page. Then, as I said, we apply those to the next rig move as well, to make sure that we become more efficient.
“Those are some of the things that we’re trying to do to kind of differentiate ourselves, if you will, from the rest of the market.”
This is the kind of success story in the oilpatch that I want investors to hear about. The other thing I like about this company—management and board own more than 25% of the company, and there’s only 60 million shares out—lots of leverage for shareholders!
CEO Ronnie Witherspoon and CFO Bharat Maharajan will be in Vancouver presenting at our SIS conference on Tuesday October 3. It’s the easiest way for you to meet them face to face, and get more details and colour on their growth plans.
This event sells out every year—don’t be sitting outside with your ear to the wall—REGISTER TODAY
Keith Schaefer
