There is a growing niche in small cap stocks—ones with GOOD FINANCIAL NUMBERS are finally being rewarded with higher stock prices.

Q2 reporting just ended, and the winners in my portfolio had big improvements. I outline the numbers below.  And the stocks responded!

For the last half of 2021, all of 2022 and 10/12ths of 2023 (end of October)—small cap land was a desert for investors.

But then last November—which coincided with the peak in interest rates—micro-cap / small cap stocks have been perking up.  They haven’t all been winners, but here is the Q2 update on my best 6 stocks, all of which saw financials improve A LOT.

1. California Nano (CNO-TSXv)  $0.15 – high of $1.15 (666%) since September
2. MYOMO (MYO-NASD) $0.80 – high of $5.60 (600%) since November
3. Delcath (DCTH-NASD) $2.25 – $11.75 (422%) since November
4. Bewhere (BEW-TSXv) $0.18 – high of $0.77 (327%) since November
5. Simply Solventless (HASH-TSXv) from its 15 cent IPO in Jan – high of $0.60 (300%)
6. Itafos (IFOS-TSXv/MCNB-NASD) $1.30 – $1.60 (23%) since November

Every stock except Itafos had a big revenue jump—Itafos just cleaned up its balance sheet to basically have no debt—it has paid off almost $200 M in debt since I bought it 3 years ago.

I see ALL these stocks continuing to head higher in the next 12 months. I’m putting the original full report on the free section of my website—www.investingwhisperer.com (Example – you can find Simply Solventless report HERE.)

Let’s dive in:

MYOMO – LET THE RAMP BEGIN!

I’ve written before in the blog about Myomo (MYO – NASDAQ) –they make a unique myoelectric arm brace that basically reads your mind to help you get better fine motor function in arms wrist and hands.

MYO preannounced Q2 in early July.  At that time, they estimated revenue of between $7.2M to $7.4M for the quarter, which was a 90% jump over Q1.  A month later they reported earnings and the number was even higher – $7.5M!    All these number were WAY, WAY above estimates of $6.5M.

The stock popped on the pre-release in July but came back down to earth and consolidated at $4.

Source: Stockcharts.com

But that chart is turning up again, which may be the Street anticipating another bump up in revenue in Q3.

Estimates for next quarter are $9.3M, another big step up.

Now I don’t know how much credit the Street will give Myomo before it has a few quarters of trend under its belt.   The stock is moving up like there are believers, but we will see.  We may need a few more datapoints before the stock really takes off.

In Q2, even though Myomo saw a big increase in revenue, their EBITDA improvement was only $100K.  Operating cash flow was actually worse YoY as they build out their expansion (150 new workers).

Patient pipelines adds were also only up a bit over Q1.  And investors were a bit surprised that some Medicare Advantage insurers were still balking at insuring the MyoPro device.

None of this is cause for concern.  Myomo is ramping product, deploying more salespeople, doing all the thing that they need to grow.  The sales process of bringing on Medicare patients is going to take time.

So this move we saw the last couple days is GREAT – but don’t be surprised if the market needs more time.   It doesn’t mean the stock is stuck.  It just means that we need some patience.

The real juice here is in the O&P market—Orthotics and Prosthetics.  There are over 10,000 clinics in the US, and their patient base has just recently had an injury or health issue that has reduced their arm mobility—those people want to get back to full mobility FAST.  As they announce the successful rollout of O&P clinics adopting the MyoPro brace, the stock should gain more life.

BEWHERE BEW-TSXv / BEWFF-PINK
– HOW MUCH CAN WE PRICE IN?

BeWhere (BEW – TSXv) tracks low cost items via low-power and 5G—making them unique.  This is a new pick and I like it A LOT…lots of potential that management is now realizing.  Orders are getting bigger.  Their distribution channels are working.

They put together exactly the quarter I was looking for.  Revenue growth.  Bottomline growth.  Another big jump in recurring fees.

The stock popped and kept going, reaching as high as 77c.

Source: Stockcharts.com

Over the past few sessions BeWhere has backed off to 67c.  This is still above where it was pre-earnings and I look at this as a normal consolidation.

At this point, what is going to determine the stock price is what the market is willing to price in.  At 70c, BeWhere has a market cap of $61M.  Trailing twelve-month revenue is $14M.  That puts the stock at 4x P/S – which is not cheap.

A large part of BeWhere’s revenue is still low-margin product sales.  That high margin recurring fee revenue was up to $1.66M in Q3 and was $5.8M over the last 4 Q’s, or about 38% of sales.

Overall, the business is a mid-30%’s gross margin business.  Those margins will grow as recurring fees grow, but it still caps how much the Street will pay in the short run.

Free-cash flow over the past 12 months has been $2M.  30x FCF – again not cheap, not expensive – probably fair given where the business is going.

In other words, BeWhere isn’t crazy expensive, but it also isn’t dirt cheap.  The stock is going to grow into its valuation and the price will grow as each quarter results prove out the business.  That will take time.

ITAFOS – DID SOMEONE ACTUALLY CARE ABOUT THIS INCREDIBLE CASH COW?

Itafos (IFOS – TSX/MBCF-NASD) is the opposite story of Bewhere.  This is not about growth and pricing in the future.  Its about value and pricing in what is right in front of us.

Itafos delivers free cash flow quarter after quarter.   The Q2 results were no different.  Instead, the surprise was that the market actually bid the stock up a bit on the results!

Source: Stockcharts.com

Itafos had been mired below $1.50 for so long I was beginning to wonder if there was an iceberg order on the ask that would never allow it to break out!

Turns out that the stock can move after all.  All it took was adjusted EBITDA of US$32M, EPS of C$0.12 per share and free cash flow of over US$42M (helped by a big influx of working capital)!

Of course, if you only looked at the numbers, not the name, you’d be hard pressed to say this move has stretched valuation.  Itafos trades at a market cap of just over C$300M.  With trailing twelve-month EBITDA of US$120M+, it pegs at 2x EV/EBITDA and about 2x P/E.

The debt overhang is GONE.  Itafos has used their cash to diligently pay down debt each quarter.  With $59M of cash and $66M of debt at the end of Q2, they will almost certainly be “net debt free” by this time next quarter.

The big issue with the stock is “what now?”.  Itafos remains tightly held by private equity firm Castlelake, who completed a strategic alternatives program and came to the conclusion that they were best leaving things as is.  Now we wait and see what the direction is.

SIMPLY SOLVENTLESS HASH-TSXv–
EXECUTION WILL BE THE KEY

Simply Solventless (HASH – TSXv) has THE BEST operating margins that I have seen in the Cannabis business.  In Q2, HASH did $4.2M of revenue and $950k of EBITDA.  That works out to 23% EBITDA margin.

These margins are before we see contribution from the recently acquired CannMart and their two brands: Roilty and Zest Cannabis.

With HASH forecasting $40M of revenue and $6.2M of net income for 2024, the stock is priced at under 9x earnings.

Source: Simply Solventless Investor Presentation

That is a reasonable valuation is likely why the stock quickly digested its earnings day gap up and now looks ready to take on new highs.

Source: Stockcharts.com

What we want to see next is execution.  Integrate Lamplighter, Roilty, and Zest.  Ramp up inventory, reinvigorate the brands and (hopefully) lower cost at the same time.

My only worry with the story is how Canadian pricing plays out.  The biggest players in the Canadian market (Organigram (OGI – TSX), Cronos (CRO – TSX) and Tilray (TLRY – TSX) have the lowest margins.

This is topsy-turvy to just about every other business.  It signifies one thing to me – price wars.

If you look at the balance sheets of the big players, they are STACKED WITH CASH.  If I was running Cronos for example (which has $800M of cash in the bank), I would look at all the struggling competitors and think about squeezing them out of business but cutting prices and taking short-term losses for long-term gains.

HASH is not struggling (there are plenty of other small cannabis names trading at penny stock levels), but if a nasty price war does ensue, they wouldn’t be immune.

But we’ll see.  HASH could also be the beneficiary, buying up cheap brands out of bankruptcy.  How management integrates these acquisitions and takes advantage of opportunity is going to determine a lot.

DELCATH – ON ITS WAY TO $15+

The second quarter results coming out of Delcath were EXACTLY what I wanted to see.  And while it took a few weeks for the market to figure it out, it was clearly what the market wanted as well.

Source: Stockcharts.com

The company did $7M+ of revenue in Q2.  They will be operating in 12 centers by Q3 and 20 centers by Q4.   If they get to 20 that should be an east $25M per quarter run rate sometime in 2025.

If you run through the math Delcath should pull out an earnings run rate north of 80c per share on a fully diluted share base by 2025 (I’m assuming all the warrants and stock options are converted into shares – those $6 warrants are way in the money here).  Which should translate into a stock price of $15+.

Of course, things are just getting started.  Delcath’s pipeline of opportunities is significant, and we will see that begin to play out in 2025 as well.

We have ALREADY seen quite the move in Delcath the last few sessions and the stock is probably due for a breather.  We may see a period of consolidation to get those cheap warrants cleaned out.

But after that happens, I think there is more to go to the upside with this one.

Editors Note: My top pick is releasing its next quarterly within days–and I’m sure it’s going to be great. To get THAT update–and all the ones from these 6 stocks–CLICK HERE (66% dicount)

Keith Schaefer

Gold hit US$2500/oz last week—a new all-time high. The cheapest part of the gold market is junior developers, which are trading at 0.45x price to net asset value. The average historical ratio is twice that. It’s been a long bear market for gold stocks, which means the upside potential in junior – the more leveraged of the lot – in a real gold bull market is BIG.

Gold is clearly in a bull market. The yellow metal is up 90% in 5 years, including 23% already in 2024, and there are lots of reasons to think it will jump again this fall. Here’s a 25-year gold chart from VIII Capital that shows when gold moves, it moves BIG:

And while the price of gold is now rising, cost inflation is finally coming down—so profit margins across the board are stabilizing and/or increasing.

So if a rising tide will finally start to lift all boats now, where is the Sweet Spot for gold investors?

My colleague Lobo Tigre of the Independent Speculator www.independentspeculator.com, @duediligenceguy) did some original research that shows there is a Pre-Production Sweet Spot (PPSS) for investors, backed up by some real numbers.

What he dubbed the Pre Production Sweet Spot is the last, upward slope of the famous “Lassonde Curve” right before production.

And the numbers back him up: after assessing 124 first-mine-building companies stretching back to the 1980s, Lobo Tigre found that 95% of Construction Decisions successfully reached First Gold.

His study found that the average gain from construction decision to first gold was 111%.

That’s a risk-return setup I can get behind! And those cases occurred across a range of gold markets. The average PPSS gain during gold bull markets was 132%.

That’s one big reason why I like West Red Lake Gold (WRLG-TSX / WRLGF-OTC) right now.  They’re going into production within a year. They have raised over $100 million in the last 18 months to ready their 60,000-oz-per-year Madsen Mine in Ontario, in a time when few juniors could raise money. (That’s my estimate at annual production; as I’ll explain, WRLG is about to issue an official mine plan with that number.)

This is a past producer—that ran 9 g/t gold!  That was 30 years ago.  Then this past cycle, a company called Pure Gold tried to get it back in production, spending over $350 million on a new mill and a lot of infrastructure.

But a combination of COVID, being constantly under-capitalized, and a couple management decisions forced it back into care & maintenance in late 2022.  As a result, CEO Shane Williams and financier Frank Giustra were able to buy Madsen & surrounding deposits for only $6.5 M cash upfront, a 1% NSR, and some stock.

(Shane was COO of Skeena Minerals (SKE-TSX) as it went from $3 – $10 and before that VP Operations for Eldorado Gold (ELD-TSX) leading the build of 3 major gold mines.)

Madsen is an asset that has now had $500 M spent on it, with almost all infrastructure still brand new and production permits in place.  All Williams and his team have had to do is put the finishing touches on what others spent big capital on.

The main reason Pure Gold fell down was that the rock they mined didn’t have the gold grade they expected—from a lack of infill drilling to really know where the gold was.

Williams and VP Exploration Will Robinson have made infill drilling Job 1, to get everyone’s confidence up in the mine plan at Madsen. In the last year they have hammered the parts of the deposit they plan to mine first with tightly spaced drilling.

Huge amounts of infill drilling core from Madsen Mine

The mine engineering team have taken all that data and planned out over a year’s worth of mining areas – stope defined mineable inventory, in shop talk.

Investors have not yet recognized WRLG as a Pre Production Sweet Spot opportunity. I think a lot of people still think of Pure Gold here, and WRLG has pushed Madsen towards production so quickly that investors haven’t kept up.

Another reason for this: the company hasn’t yet issued an official mine plan. It takes a long time for external consultants to produce those detailed studies. Lacking that study, the market hasn’t understood how quick this mine will turn on again.

But I understand. And I think the market will catch on soon, because a pre-feasibility study is imminent. It should be a strong plan, with very modest capex left to spend (because the company has been funding restart work for a year already) that should lead to a high rate of return.

I think this study will highlight West Red Lake Gold Mines as a rare Pre Production Sweet Spot story just as investors are scrambling for exposure to gold.

So there will be a steady stream of catalysts for investors to get excited about here.

I follow this story really close (yes I’m long), and they were a client of mine a couple years ago. I haven’t touched on the high grade drill results previously pulled from the 8-Zone at depth at Madsen, which could put a new look on both profitability and Life-Of-Mine (LOM) here—or the crazy high grade results (296.8 g/t gold over 1 metre, 42.4 g/t gold over 3 metre, 118.3 g/t gold over 1 metre, and 56 g/t gold over 1 metre are some of the best) at the Rowan deposit several miles away.

LAST POINT—always remember, the most precious commodity is PEOPLE. Williams heading the ops team and Giustra on the finance team have great success behind them.  The stock is very liquid, but still close to the same price it was when they took over WRLG.  It has yet to have its First Big Run. I think the new PFS—Pre-Feasibility Study—will be the catalyst that starts its move.

Jill Christmann, chief mine site geologist of West Red Lake Gold

Keith Schaefer

WHAT THE HECK HAPPENED
ON MONDAY AUG 5?

VOLATILITY – MEASURING INVESTOR FEAR

CASHING IN ON “THE ROLL”

THE BIG RISK IS A BLACK SWAN

Oil Field Services (OFS) stocks can’t get a break. This is now one of the most profitable sectors in the economy—with the lowest valuations!

For a brief time, it looked like Donald Trump would cakewalk into the White House, and the OBVIOUS Trump Trade—is OFS stocks (not producers—because it would be back to Drill Baby Drill!)

Then Biden quit, Kamala took over and has surged in the polls—so now we won’t know who the next US president is until well into election night.

And folks this time it really is different—OFS sector has been gutted with a decade of low oil prices, and had to cut a lot of fat.  Add in the new mantra of return of capital over growth and hey, why are these stocks all SO cheap.

Again, like I wrote last week, the place to be in this sector is in Canada, not the USA.  The Canadian OFS sector is gushing dividends now

IS IT DIFFERENT THIS TIME?

The biggest beef against the OFS sector is that these companies always find a way to fritter away their cash.

Years of oil cycles have left investors (like me) more than a little skeptical.  Usually, an OFS cycle looks something like this:

1. Oil prices rise.
2. Oil drilling booms.
3. OFS companies put up big numbers.
4. OFS companies spend BIG on capex, refreshing their equipment and trying to gain share.
5. Oil prices fall and OFS investors are left wondering where the money all went.

Could it be different this time?  It just might be.

Today’s rig count is less tied to the price of oil than in the past.  We simply aren’t seeing the big swings in drilling that we used to.  Since 2020 there has been a noticeable decline in volatility.

Source: Pason Investor Presentation

At the same time, the OFS sector is no longer its free-wheeling spendthrift self.  Stifel estimates that the OFS sector is now spending 30-60% of cash flow on capex.

This is WAY down from the old days.  These same companies used to overspend like drunken sailors – at times there was as much as 170% of cash flow going to CAPEX – meaning the sector was taking on HUGE debt.

Priorities have changed.  The OFS mantra is no longer about taking share or demonstrating growth.  Capex is spent to maintain the fleet and keep the customers happy.  Excess cash is for shareholders.

Take Precision Drilling (PDS – TSX).  Their #1 and #2 focus (at the very front of their presentation) is free cash flow generation and returning cash to shareholders.

Source: Precision Drilling Investor Presentation

One of the best and most recent examples of returning cash to shareholders is Secure Energy Services (SES – TSX).

In April, Secure repurchased 4.8% of their outstanding shares from their large shareholder, TPG Angelo Gordon.   They followed this up with a substantial issuer bid that repurchased another 40M shares.

In total, Secure has bought back nearly 18% of their outstanding shares since the beginning of the year!!  Their plan has been to buy back up to 20% of shares by year-end.   They also pay a 3%+ dividend!

Source: Secure Energy Services Investor Presentation

While Secure has been the most aggressive, the same could be said for many OFS names.  Trican Well Services (TCN – TSX) has bought back 4.9% of shares since the beginning of the year while paying close to 4% dividend.  Both STEP Energy Services (STEP – TSX) and Precision Drilling (PDS – TSX) have bought back 2.6%.

THE OFS SECTOR AT THE LOWS

With the sector no longer spending on (over)capacity, EBITDA through the cycle has become much less volatile.  OFS are still a commodity, just not such a volatile one.

Yet while EBITDA for the sector has become more stable, you’d never know it from the multiples the market assigns.

The sector trades at multi-decade low valuations.

Stifel pegs the current average multiple at just 3.4x EV/EBITDA.  Using Peters estimates, the average FCF yield on their OFS universe is 16% based on 2025 estimates!

That includes some bigger players in the sector.  Precision Drilling trades 21% FCF yield, while STEP Energy Services trades at an extremely cheap 26% FCF yield based on their expected 2024 estimates.

To put that in perspective, a 26% FCF yield is the same as saying that STEP would recoup its market capitalization with the free cash it generates in just 4 YEARS!

IS IT BETTER UP NORTH?

Trump may about to be the President of the United States, but as far as his influence on the oil market, his reach is global.

Trump is equal opportunist – wherever the oil is coming from is fine with him, as long as more of it comes out of the ground.

That puts the Canadian OFS at a distinct advantage.

Canada has the advantage of trading in a far depreciated currency compared to their southern counterparts.  Even if Trump is successful in capping the price of oil, the oil price in Canadian dollars is going to be MUCH higher.

At the same time, OFS pricing in Canada is better today than the US.

Canada has already had its OFS Alamo, with the over supply of rigs and pressure pumping capacity that plagued Canada through the teens having long since left the region – much of it for what was hoped to be greener pastures in the US Permian.  What is left is experiencing less competition and better pricing.

Meanwhile the drilling continues.  The western Canada sedimentary basin (WCSB) rig count has been remarkably stable for the last two years.

Source: Rig Locator

On the other hand, in the US, the rig count has seen more of a decline and is now solidly below the 5-year average.

Nowhere has the outperformance of Canada been more obvious than with STEP Energy Services (STEP – TSX), who has a foot on both sides of the border.

STEP’s Canadian division saw operating days increase 20% YoY in Q1 while their EBITDA margins jumped from 26% to 30% – indicating better profitability.  Meanwhile their US division was just flat to slightly down.  STEP is extremely cheap, trading at just 2x their forecasted 2025 EBITDA.

Pure play Trican Well Services (TCW – TSX) is Canada’s largest pressure pumper, with a focus almost entirely on the WCSB.  Trican has experienced only slight price declines, but they have been more than offset by cost declines and increased volume.

At $5, Trican trades at just 3.7x their consensus 2025 EBITDA estimate.

Canada’s largest driller, Precision Drilling (PDS – TSX) preannounced a strong Q2 with significant free cash flow.  Precision paid down $100M of debt in the quarter.   Precision Drilling trades at only 3.8x their 2025 EV/EBITDA estimate.

WHEN TO TAKE THE PLUNGE

The broader OFS index, the Oil Services Index (OSX), is treading water  – ti is off the lows but still has not pierced the highs of even a few months ago.

Source: Stockcharts.com

The best performers over the last 6-9 months have been names like Secure that have focused on share buybacks and dividends and seen their stock appreciate commensurately.

Source: Stockcharts.com

The trend towards rewarding those that reward shareholders make names like Stampede Drilling (SDI – TSX) look interesting.  This small driller has just restarted their share buybacks in June, having bought back 2.6M shares or 2% of outstanding shares during the month.

With a market capitalization of $48M and an enterprise value of $72M, the company looks reasonably priced based on expectations they will do $22M-$23M of EBITDA this year.  Their full year FCF in 2023 was $7M.

For those investors more interested in dividends, PHX Energy Services (PHX – TSX) is worth a look.

PHX is the largest independent supplier of directional drilling services in North America.   This is a technology company, providing their proprietary drills and motors that other OFS firms can’t offer.  Their operations are split between the United States and Canada

PHX had $1.29 of earnings per share in 2023.   Even with lower rig counts in the US this year, estimates are for them to do around $1 EPS this year.  PHX pays a 20c quarterly dividend, which gives a yield of just under 8% at the current stock price.

While I have highlighted a bunch of names in this piece, the BROADER point is that if you believe the current OFS market dynamic is sustainable, pretty much all of these stocks are EXTREMELY REASONABLE.

Of course, the “sustainable” will always be the big question when it comes to this group.

Oil is not going away anytime soon, regardless of who wins the US election.  But if the world does get 4 more years of Trump in office, the mantra will be Drill Baby Drill!

Keith Schaefer

INTRO

Oil Field Services (OFS) was a top “Trump Trade” for the 3.5 weeks between the first presidential debate and Joe Biden ending his re-election bid. The Market considered Trump a “gimme” to win the November election.

But is OFS still a Trump Trade—even if he wins the now much-tighter election campaign?

I say YES—but the trade is in Canada, not the US.  Valuations are just as cheap in Canada as in the US…AND…the Canadians are paying dividends.  The US sector—other than The Big 3 (SLB, HAL, WFRD) is mostly not.

Here is Part 1—why the OFS sector in the US is NOT The Trump Trade—even if he wins.

There has been a rotation away from energy names in the United States.  The energy weighting of the S&P is down to 3.5% of S&P 500 vs. recent peak of 4.2% at the start of 1Q earning season in April.

Taking a step out, while the broader market has rallied since the fall, the oilfield services (OFS) index has done not much at all.

Click to Enlarge

Source: Stockcharts.com

Small caps that have taken the brunt of that rotation.

That is not to say that large cap OFS is expensive – companies like Halliburton (HAL – NYSE) and Baker Hughes (BKR – NYSE) trade at a discount to the market.  But they are much more expensive than their smaller-cap peers.

Small-cap US OFS is priced similarly to their Canadian counterparts – in some cases even cheaper!

But there may be a reason for that.  I don’t see the same discipline to shareholder returns from the US names as with Canadian counterparts.   In Canada, the message is clearly one of returns to shareholders.

Most US names are not paying dividends,  Growth capex spend seems to be favored over shareholder returns.  There are some buybacks, but not to the same extent as in Canada.

At the same time, the drilling landscape in the US looks less positive than Canada.  The pricing power of the Canadian sector is more positive.

Finally, the withdrawal of Joe Biden and replacement of Kamala Harris is a new wrinkle.  Harris has been much more vocal against fracking.

Lots of worries!  But could it all be priced in?

The US OFS sector is a contrarian’s dream.  Which is maybe the play to watch.  The slightest positive news for the sector could quickly change the direction of these stocks.

DIVIDENDS ARE ELUSIVE

The overall US market today is bifurcated.  Investors pay one price for large caps and another, much lower one, for small caps.

The US OFS sector is no different!  Large cap stocks trade at much higher multiples and offer only small dividends to investors.

Baker Hughes has an 84c per share dividend, payable quarterly.  The stock is at $36, which makes this a 2.3% dividend yield.  Baker Hughes trades at 16x earnings and 8x EBITDA.

Halliburton pays a 68c dividend.  They have a 1.8% dividend yield.  They trade at 10.5x earnings and 7x EBITDA.

These valuations aren’t expensive compared to tech or the Mag-7, but they also aren’t screaming deep-value.

There are better valuations if you step down to smaller names.

Smaller players like Liberty Energy (LBRT – NYSE) are returning more cash to shareholders.  Liberty is a best-in-class pressure pumper in the US.

Liberty is buying back stock at a $30M per quarter pace and is expected to generate a 12% FCF yield this year.

But dividends remain elusive. Liberty only has a 1.1% dividend yield.  ProFrac (ACDC – NYSE), another pressure pumper with lots of FCF, also gives no dividend yield.

Where dividends are more easily found is in the gas compression space.   Archrock (AROC – NYSE) is an outsourced compression provider.  They recently revised their 2024 EBITDA up by $10M after posting good Q1 results.

Click to Enlarge

Source: Archrock Investor Presentation

Archrock trades at 17x P/E and 8.5x EBITDA.  They offer a somewhat more beefy dividend of 3%.

USA Compression (USAC – NYSE) offers a far higher dividend yield of 8.7%.  But with it comes more leverage.   USAC comes with $3.5B of debt – about a 6x debt/EBITDA ratio.

THE US MARKET ISN’T STRONG

We haven’t experienced a downturn in oilfield services since COVID.  But make no mistake, the US OFS landscape has seen better days.

The rig count has been falling.  Day rates have been falling.  While that weakness may be showing signs of a bottom, there is no sign of a pickup just yet.

Bank of America recently commented that the “US land oil production growth is slowing materially”.

Similarly, Morgan Stanley lowered US activity estimates 5-15% for 2024. Morgan Stanley saw more downside to the rig activity (drilling) than to frac activity.

BofA, Morgan Stanley and other analysts have been surprised by the weakness in drilling activity this year.

They lay blame on “bloated OPEC plus spare capacity plus growing production in key non-OPEC/US countries”.

Many of the US focused OFS companies are echoing the sentiment.  Liberty expects that the completions market “will remain soft” in 2024.  ProFrac called out weakness in natural gas activity on their last call.

LOOK TO THE SEA?

With onshore drilling muddled in weakness, Bank of America makes the case that more drilling dollars will be headed out to sea.

In a recent piece, BofA said that they expect onshore drilling and completion spend to be relatively flat YoY, and to increase only a modest 5% in 2025.  But they expect the offshore market to do much better.  Offshore spending is expected to climb 10% this year and 8% in 2025.

Click to Enlarge

Source: BofA Research

While offshore drilling is typically more expensive than onshore, costs are low enough that today 90%+ of undeveloped reserves are economic at $70/bbl+.

Click to Enlarge

Source: Valaris Investor Presentation

Meanwhile, offshore rig utilization is back to levels not seen in 10+ years.

Click to Enlarge

Source: Valaris Investor Presentation

It seems bullish, but that has only modestly shown up in the stocks.

One of the biggest offshore drillers, Transocean (RIG – NYSE), is barely off its the 52-week lows.

Click to Enlarge

Source: Stockcharts.com

Transocean provides offshore drilling services.

Transocean agrees with Bank of America.  They project robust demand for floater rigs over the next few years.  They own and operate 37 harsh-environment and ultra-deep water drilling rigs.

Click to Enlarge

Source: Transocean Investor Presentation

Transocean trades at 7x EBITDA.  Because of their debt, their FCF yield on the shares is significant.

A second offshore is Valaris (VAL – NYSE).  Valaris has a rig fleet of ultra-deepwater drillships with the largest fleet in the industry.

Click to Enlarge

Source: Valaris Investor Presentation

Valaris is signing contracts today with day rates at $450K+.   A few years ago, day rates were less than half that!

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Source: Valaris Investor Presentation

Valaris is still working off lower rate contracts which will depress earnings this year.  Their legacy contracts for drillships average $250K versus $450K for more recent deals.  In 2025, estimates are for $9.63 EPS which puts the stock at just 7.7x P/E.

SO BEARISH ITS BULLISH?

While the set-up for offshore drillers looks decent, the onshore OFS sector in the US could be a rough go.  There is continued pricing pressure, downward pressure on the rig count and plenty of oil coming from abroad (including Canada).

Add one more worry – the specter of a Harris presidency.

But maybe that is exactly what makes this set-up so bullish?

The US OFS sector is far from expensive.  The large cap names trade at a significant discount to the S&P.  Small cap names trade at a significant discount to the large caps!

I already mentioned Liberty.  Another pressure pumper, ProFrac, is trading at $7.55, which is not just a 52-week low, it is an ALL-TIME LOW!

ProFrac is trading at 6x 2025 earnings and only 2.9x EV/EBITDA.

Yes, ProFrac is experiencing depressed frac-spread pricing.  Yes, that is expected to continue for the foreseeable future.   But maybe it’s all priced in?

Consider that at today’s pricing ProFrac is still generating significant FCF.  And because the price of the stock is so depressed, the FCF yield on the stock is over 20%!

I am always going to wait for the chart to give the go ahead.  With ProFrac and the rest of the OFS, we aren’t there yet.

But these are charts to keep an eye on.  The negative sentiment seems extreme.  It won’t take much in the way of positive news to move these stocks given the negative sentiment that dominates today.

Keith Schaefer

Small caps are getting some life!!

It’s been tough making money for the past two years, but since the Market turned as interest rates peaked in late October, good companies have seen their stocks make some big moves.

Here in oil-and-gas land, the steady to winning stocks have been
1. TENAZ Energy (TNZ-TSXv)—natgas in Europe,
2. MPLX Inc. (MPLX-NASD) a pipeline subsidiary of Marathon Petroleum (MPC-NYSE) and
3. Source Rock Royalties (SRR-TSXv), a very well managed micro-cap royalty play in Canada

Over at sister newsletter www.InvestingWhisperer.com, my wins, for the most part, did not come in Canada but in small cap NASD stocks like SPIR Spire Global and BYRN Byrna and MYO Myomo.

Here’s a quick synopsis of my current InvestingWhisperer portfolio, and why I own these stocks.  These stocks cover all areas of the Market OTHER than energy.

I try to buy simple stocks, simple stories that have a definite and sometimes compelling business edge in science, product or process. Something UNIQUE that is a moat.

And because I try to find them CHEAP, they often have at least one big hairball that still has to be resolved, and will take patience before and after that (if ever) happens.

I’ve ranked these in rough order of how much I like them TODAY:

Delcatch-DCTH-NASD-$8.50; 28 M shares–owned for 3 years, up 50% but a triple now off the recent low 8 months ago. I see $30+ in 3-4 years if Boston Scientific doesn’t buy them first. This technology is over a decade old and proven. Got FDA approval last year to market their HEPZATO med-tech in US and sales now ramping up FAST.

Doctors use it to pull the liver out of the body, re-route the blood and blast it with high chemotherapy. UNIQUE. Had first outpatient use recently (WOW!). May or may not need one more small funding to get to break-even. This procedure is HIGHLY PROFITABLE for hospitals with approved price of $750,000. Major incentive for rapid adoption across US. Inflection is NOW. They report Mon Aug 5

Blackline BLN-TSX—CAD$4.0—81 M shares–I own at $3.60 – $4, bought exactly 1 yr ago. BLN has the only gas detection device with satellite connection to safeguard remote workers. UNIQUE.

Sales ramp happening steadily last 3 Q ($100 M). Global product, multi-sector and multi-country customer base. A high margin SaaS play (over $50 M ARR and growing) with good hardware margins to boot. Positive EBITDA expected Q4; huge catalyst.

EBITDA losses steadily shrinking last 4 Q. $30 M raise just done with first round of US institutions. Mgmt built and sold a similar style company 20 yrs ago. No US listing means it will not likely ever have a steep stock chart, but 30% per year coming I think for a long, long time. They report mid-August.

MYOMO-MYO-NASD–$5.25; 29 M shares–owned for 8 months and is now 600% (80 cent ACB). I bought more at $4.95 as Q2 revenue just announced to be up 90%+ QoQ. They have an MIT-developed arm brace that allows patients to regain detailed arm wrist and finger. It reads your mind via myo-electric impulses.  UNIQUE!!!

Just received CMS approval across US at a very high re-imbursement price of $63,000. There are 12,000 O&P clinics (Orthotics/Prosthetists) who can make $20K per patient on this product. Again, the health care industry has HIGH INCENTIVE to prescribe. Between stroke, car accidents and other end-of-nerve conditions, over 750,000 new potential patients added each year. All the heavy work—funding, hiring expansion workers—DONE. MYOMO brace works, it’s UNIQUE, it’s a 1-time cost, it increases quality of life and earnings power for users. Inflection NOW.

The stock jumped from $3.25 – $5.25 earlier this month as they pre-announced Q2. I expect during formal quarterly call they raise guidance.

HYTN INNOVATIONS – HYTN-CSE / HYTNF-OTC – 77 M shares — $0.35 – my cost $0.13; owned for 3.5 years—they are 1 of 2 independent GMP-certified cannabis product manufacturers and the ONLY GMP-certified producer for psilocybin products. UNIQUE…so far. Also unique in that they built very SMALL vs rest of oversized, overbuilt, facilities that a much higher cost base embedded into their op costs.

Balance sheet always tight, but first GMP-cannabis revenue should come in late July as they pass their 90 day stabilization requirement for final stamp of approval. That should ignite the stock a bit BUT…a cheap. 9.5 cent financing comes free trading on Friday July 26 (tomorrow).

Tolling for others is high margin business. 2000kg per month capacity from one 5-day production shift in a 10’ x 10’ hyper-clean room. Break-even at 400 kg expected Oct-Nov 2024. Kelowna BC plant has at least 3 potential hyper clean rooms.

With recent cannabis approvals in Germany and Australia–and GMP certified product a must for those jurisdictions–the market is big, and ripe for HYTN.

All the universities who want to do research into psylocibin need GMP certified product. This is where they can get it.

California Nano CNO-TSX / CANOF-OTC – 44 M shares — $0.75, owned for 10 months—my cost = $0.15 and $0.25. Just reported Q revenue of US$1.7M, up 243% YoY, and net income of $696,000, up from $35,000 YoY. However, they were cash flow negative as expansion costs—biz is growing so fast they have to build a second facility.

This is an odd company—but so far more profitable than I could have thought when I first bought it last September. It is a science project, as they use two oddball technologies—cryo-milling and splintering (SPS) to make unique products for industry. Management doesn’t own a lot of stock. There is no real “sponsorship” which is something that I look for (who are the large shareholders who could get rich here and therefore hold mgmt to account).

One green steel client has been ramping up the testing of an unnamed new product, which has been ongoing for a year—and has the possibility of being their first real commercial order ever. All their other revenue is from companies testing their own R&D ideas. But that is lucrative as well, just short term and one-offs until somebody finds a KILLER APP for their business that has to be made via cryo-milling or SPS.

This is not an easy company to explain. Yet. But it is definitely UNIQUE, and so far mgmt is executing and growing revenue.

The stock just had its first run from 45 cents to $1.15 on volume, so it likely consolidates until further contracts or next quarterly.

SIMPLY SOLVENTLESS—HASH-TSXV / SSLCF-OTC – 70 M shares out – $0.35 –my cost is $0.21—simply the most profitable cannabis producer in Canada and possibly North America. That’s what makes it UNIQUE to me.

Organic sales growing with their brands in many provinces. Most importantly, good business management and good capital management allows them to use both internal cash flow and ability to raise money to do highly accretive M&A like their most recent—which takes them from $7 M revenue to $40 M and gives them pro-forma EPS run rate by Q4 24 of 9 cents per share—that’s net income; EPS! That’s after all the onerous excise tax is paid.

There are many more M&A opportunities to be had for TRULY pennies on the dollar. Other floundering cannabis teams WANT to be bought by HASH CEO Jeff Swainson because they think he gives them their best chance to deliver their earn-out pay after 2-3 years.

ARTERIS—AIP-NASD–$8—38 M shares—my cost = $7—they basically have the global royalty on automated driving. Their IP for chips in AI for automated driving (ADAS) is in 80% of the industry—over 3.5 billion chips. The reason it’s this far down—ADAS is going to take some time to develop. The big inflection for revenue—and this stock—could be 1-2 YEARS, not months or quarters.

With a market cap of only $250M, Arteris is a minnow in the industry. Yet Arteris is at the center of two big trends: autonomous driving and artificial intelligence.

To survive as a small cap, Arteris licenses the intellectual property (IP) for their designs to other chip designers.

Arteris IP is designed into about 80% of the chips that are used in advanced driver assistance systems (ADAS). In Q4 and Q1, 50% of their new wins came from machine learning and artificial intelligence (AI) chip designs. On their Q1 call Arteris said that AI is moving “very, very fast, much faster than any other segment that we’ve seen”.

Their IP is in 3.5B chips today, they have 200+ customers and 725+ system-on-chip (SOC) designs. They have partnered with major players like Mobileye (MBLY – NASDAQ) in autos. They’ve been talking about their AI designs since well before Nvidia (NVDA – NASDAQ) made AI a household word.

CELLECTAR CLRB-NASD–$2.32 a patient trade now but a big winner I think after announcing positive data on a rare type of blood cancer called Waldenstrom’s macroglobulinemia (WM).

A structured financing with too many warrants has allowed the stock to get back down close to 52 week low, and will likely stay here until if/when they get priority review status from FDA late this year.

But they are funded, they have good data, and they have both a delivery method and a payload that crosses the blood brain barrier.

HYDREIGHT NURS-TSXV / HYDTF-OTC — $0.31 (my cost as well) 38 M shares out (majority shareholder Victory Square (VST-TSXv) owns 65%) – this company has the only 50-state online health platform that can give patients pharma, doctor and nurse treatment. Their doctors have malpractise insurance that covers the platform.

They bill themselves as the UBER for nurses—where nurses can monetize their credentials doing home visits for some medical and non-medical procedures. Except that the number of nurses on their platform has stalled at 3000 for the last two quarters, as has revenue per nurse. And the med-spa growth has not become large enough to attract investors.

As yet, this is kind of a business solution in search of a problem. The good news is, they aren’t burning cash. They have multiple revenue streams—pharma scripts, nurse visits, and med-spas are adopting their platform so they can leverage their own revenue streams.

This is likely a patient story too, and of all of these ideas, it’s still an if, not a when.

There’s a few others as well, but these hold the most promise IMHO.

All these past initiation reports, and future updates — are available in the Members Center. I’ve made it super easy to join us for updates —

JOIN NOW!!

Keith Schaefer

The two keys to my largest investment in 2024 are:

1. Big pricing power
2. Small cost structure—likely the lowest of its kind in the world

HYTN Innovations, HYTN-CSE / HYTNF-PINK, has something unique—which is rare in the cannabis world, where everyone thinks all the products are the same.

They have the smallest GMP-certified production facility (that I’m aware of after a bit of digging) to manufacture cannabis and psychedelic products in North America, (located in Kelowna BC) and almost certainly the world. I’ll explain GMP in a second.

But know that these products have VERY high margins, and HYTN’s ability to process them in small, low cost batches will make them the most sought-after toll processor for not only upstream (growers) and downstream (product marketers) segments of the global cannabis trade, but other midstream (other GMP facilities!).

Other GMP facilities are so overbuilt, have such huge cost structures, that they are likely better off to sub-contract HYTN and let their own facility sit idle.

HYTN is a toll-processing company (for now).  They don’t GROW anything.  They don’t SELL/MARKET/DISTRIBUTE anything. They don’t have exposure to cannabis commodity prices (any fluctuations are passed through to customers).

This is set up to rapidly become a highly profitable picks-and-shovel play on this nascent global business, where industry players and regulators are still trying to figure everything out.

HYTN just takes raw inputs into their small facility, and puts it through their GMP-certification process, and packages it all up the way the customer wants so that when—whatever the end product is—it contains EXACTLY what the label says it does; nothing more and nothing less.

And that, dear friends, is a lucrative business if your cost structure is right-sized. Arguably, everybody besides HYTN is wrong-sized (too BIG!).

In this case, smallest = lowest cost (and biggest profits!), but let’s back up one step.

 

WHAT IS GMP?
Good Manufacturing Process

 
To sell/export these types of products—and these are now multi-BILLION dollar markets, and still growing—across international international boundaries, they MUST be GMP-certified.

As the global market for cannabis products and psychedelic products grows and matures—and trans-border trade increases—quality standards are being created and adopted by the entire supply chain. The main QA standard—quality assurance—is called GMP, which stands for Good Manufacturing Process.

Being GMP-certified gives you a BIG moat; this is incredibly hard to do.  It is an incredibly meticulous methodology to ensure purity and consistency—at every stage of production, AND verify it in real time and store all that data—in every product that leaves the facility. 

It takes into account a myriad of both 1. Safety 2. security and 3. cleanliness factors that would boggle the mind of most management teams.

It takes over two years to accomplish. It creates a big moat.  And the team at HYTN—led by COO and scientist Jason Broome—did it differently than everyone else.

 

SMALL IS BEAUTIFUL

 
From my research, I think HYTN’s GMP facility in Kelowna is 1/10^th (ONE TENTH) the size of its nearest competitor (probably less)—and you might ask, um…why is that good? Isn’t economies of scale good?

The short answer is NO.  HYTN’s tiny facility has capacity to produce 24,000 kg of dried flower product a year for export—that’s the entire market, 100%, of Australia and Germany combined! AND…HYTN can expand in their current facility with no outside funding required.

Now, HYTN made their facility so small because they had to—they had no money!  Just like Canopy (WEED-TSX) and MediPharm (LABS-TSX) have such big GMP production facilities because they could afford to do that—LABS was $7/share in 2019!

Because everybody else in Canadian cannabis had So! Much! Money! and built such big facilities, Broome and McKerr had to work with regulators to show them the validity of their small-is-beautiful plan.

Everybody in the industry interpreted the language of the various acts and legalities from a Big-Company point of view. 

But they worked with regulators on many issues and were able to build a SUPER TINY GMP-certified facility, that will almost certainly have the lowest cost processing in the country.

 

THIS SMALL GMP FACILITY CAN FULFILL
AN ENTIRE COUNTRY!

 
Germany and Australia are two of the biggest cannabis related product markets in the world—billions and hundreds of millions annually, respectively, and they are both demanding all product be GMP certified.  They don’t have in-country GMP facilities.  The opportunity for HYTN is incredible!

HYTN’s expected export capacity (24,000 kg per year of dried flower) is a big chunk of the TOTAL imports from Australia and Germany (in 2022 these two countries together imported 50,000 kg). 

The margins that their customers get for the products that HYTN processes for them, allows HYTN to take a big profit—like in a 10 x 10 x 10 hyper-clean lab room, HYTN can generate $100 million in annual revenue if they process 24/7/365 with just two workers.  I will show you the simple math to back this up below.

Right now they only have one “hyper-clean room” in their production facility.  But there is room for (at least) two more in the current Kelowna building—which would each take 6-9 months and $200,000 (payback in weeks), moving potential revenue run-rate to more than double that.

Now, that’s a big, blue-sky number—almost ridiculous.  But from what I see, it’s doable within 3-5 years as nobody else has such a low-cost structure as HYTN—because they are SO SMALL.  

Their initial goal, for 2024, is to move up to $1-$2 million a month revenue and show not just positive EBITDA but real PROFIT.

Management says they’re getting calls from other facilities looking to potentially refer business as they see HYTN can make GMP certified much cheaper than they can—because these other facilities are much too big (many tens of thousands of square feet with lots of employees) to compete.

 

AUSTRALIA AND GERMANY ARE
IMMEDIATE AND LARGE MARKETS

 
Australia legalized medicinal cannabis in 2016.  Only one territory, the Australian capital of Canberra, has legalized it for recreational use.

The estimate for the Australian medical market size was $400M for 2023.  By comparison, the Canadian medical market was about C$500 million last year.

Unlike Canada, a significant fraction of the medical cannabis sold in Australia is imported.  In 2022 about 50% came from abroad.

Australia is slow to tabulate their cannabis import data, so the 2023 numbers are not available yet.  In 2022, Australia imported 24,877 kg of flower equivalent medical grade cannabis.  That was up from only 7,173 kg in 2021.
 

Source: Pennington Institute

Importing medical-grade cannabis into Australia is very regulated.  You need GMP compliance, you need to be listed on the Australian Register of Therapeutic Goods, and you need an import license from the Office of Drug Control.  You can only import THC compounds.

The requirement for GMP certification is relatively new.  It has only been since August that GMP certification was truly required for import.  That has left a lot of cannabis importers scrambling for new, legal supply.

HYTN’s GMP certification also meets the criteria for the EU.  They are targeting Germany first, which has made medical cannabis legal since 2017.   With its larger population. Germany is a $2B market.

Germany has a history of domestic supply shortages, which has increased their openness to imports. 

Estimates are that between 80% and 95% of Germany’s cannabis comes from imports.

Germany’s cannabis imports have increased every year since 2017.  In the first 9-months of 2023 they were 8,000 kg per quarter.
 

Source: Business of Cannabis

Beginning April 1st Germany made overtures to legalizing recreational cannabis when the German parliament voted in favor of legalization for limited recreational use.

Under the new legislation, put forward by Germany’s ruling coalition party, adults can cultivate up to three plants for private consumption and be allowed to possess 50g at one time at home, and 25g in public, starting from April 1.

This change has a two-fold effect.  It will drive growth in the medical market as it removes the stigma, and allows for easier transportation and storage of product by pharmacies and distributors.  Physicians that might have been on the fence are now more likely to prescribe it.

Second, just as in Canada, the biggest winners in the recreational space tended to be the ones with the head start from their existing medical use business.

We’ll have to see if HYTN is able to add more partners from additional countries because it seems unlikely that Australia and Germany will be able to absorb all of HYTN’s additional product.

 

HOW THE NUMBERS COULD WORK
(I SAVED THE BEST UNTIL LAST!)

 
HOWEVER…see the numbers here.  They believe they have the capacity to supply almost an entire country’s worth of demand out of their 5000 sq ft facility in Kelowna. 
 

Now, these are RETAIL prices.  The best price that HYTN will likely get—as the wholesaler or tolling company–is $6.50 per gram, and $4.50/g is a certainty. 

So 2000 kg = 2,000,000 g x $4.5 = $9 M per month revenue. ($6.50/g = $13 M/m)

There is an immediate and large market for GMP-certified cannabis and psychedelic products in many countries, and it should be very profitable for HYTN to supply this.  Breakeven for HYTN is roughly 400 kg/month.

HYTN has the smallest, most cost-effective production facility in North America to make these products. 

Even companies with their GMP certified facilities would want to use HYTN, as it’s a lot cheaper to run a 5500 sq ft facility vs a 70,000 sq ft facility.

After visiting the Kelowna plant, I think they can build TWO more clean labs there if demand warrants it. 

As I outlined, this expansion is incredibly cheap; the ROI is astronomical.

An intense, two year certification process gives them a huge moat.

HYTN is just waiting for its 90-day stabilization proof period to end in July to be able to ship/export its first products. I expect that to the be The Big Inflection for the stock.

That’s why I’m long!


Keith Schaefer

Spire Global (SPIR – NASDAQ) gave me, and everyone, a big surprise when they announced their Q1 update on May 15^th.

Spire was one of my biggest wins in the last year—broken SPACs like this have been a great source of new investment ideas.  We sold the stock for roughly a double earlier in 2024, and have been waiting for a time to get back in.  Space stocks had a bid and Spire became a market darling.

But now the Market is taking its time deciding what to do—this was a BIG miss. Spire reduced their 2024 revenue forecast by 11.2% and reduced their full year adjusted EBITDA by 31%!

Misses happen, but what really surprised everyone is that Spire did all this after issuing the guidance only 9 weeks prior.

Source: Spire Q1 2024 Press Release

The stock dropped from 12 to as low as 8 in the following days.

Source: Stockcharts.com

The BIG question is: what the heck happened?  How could this business deteriorate so quickly?

The answer to this question is a little technical but very interesting.  It sheds some light on the unknown unknowns of investing and the treacherous landscape that is space.

BURNED BY THE SOLAR CYCLE

Spire’s big miss was related to the solar cycle.

A lot of us hadn’t even heard of a solar cycle before the weekend of May 10^th.  That’s when we all looked up into the sky to glimpse the amazing Aurora Borealis.

Source: Forbes.com

For a few days, this was BIG news.  A large and unusual geomagnetic storm.   There were articles about possible grid disruptions and malfunctioning satellites.

You had a storm disrupting satellites.  Spire operates satellites.  A natural conclusion would be the storm impacted Spire’s business.

But that isn’t quite what happened here.  The truth is a little more nuanced.

The May 15th geomagnetic storm occurred during a period of generally increased solar cycle activity.  Overall solar activity is at a cycle high.  What happened in May was an unusually big burst of it.

Spire’s constellation of satellites are all Low-Earth Orbit satellites (LEO).  As the name suggests, these satellites are closer to earth than the older, higher orbit geosynchronous satellites.

Ironically, being closer to earth means that Spire’s LEO constellations are actually less exposed to bursts of radiation like the May geomagnetic storm.  Much more impacted are the geosynchronous satellites (which stay above the same place on Earth all the time) that have less protection from Earth’s atmosphere.

But Spire’s LEO satellites are more susceptible to prolonged high solar activity.

Prolonged higher solar activity heats up the upper atmosphere, which increases the density of the air where the LEO satellites orbit.  That increases drag, which pulls the satellites out of their orbit faster.

This is exactly what happened to Spire in Q1.  While Spire CEO Peter Platzer was a bit cagey in his conference call response, it was clear that their older satellites had de-orbited faster than expected.

Platzer said that “it’s a highly dynamic process where things can move from you have an asset for another six months to you have an asset for another six weeks”.

While I don’t want to overstate the issue – this was only a few older satellites that dropped out the sky earlier than expected, it did put gaps in Spire’s data collection.  Spire said it created “not necessarily a volume issue with the data provision, but mostly a latency and quality issue“.  Which is directly impacting what they can bill their customers for.

DID SPIRE ROLL THE DICE?

It would be simplifying too much to say this was Spire’s only issue in Q1.  A bunch of things went wrong.  Spire had newly launched satellites which did not live up to expectations.  They also ran into contracts delays because of the impasse in passing the Federal government budget.

But it’s likely that much of the sudden change in full year guidance was tied to the lower expected performance from their constellations.

Conservatism may have played a role as well.  After all, this cycle isn’t over yet.

What has also crossed my mind, and what Spire is not going to tell us, is whether this is maybe just a little bit their own fault as well.

While it is easy to blame nature, the truth is that higher solar activity did not happen out of the clear, blue sky.   This is a cycle, after all.

That makes me wonder if Spire simply rolled the dice—in part, out of necessity.

Cash has been tight for Spire for months.  At the same time, shareholders have been clamouring for the company to show free cash flow.

I have to wonder if Spire decided to take the chance that their older satellites would last through one more cycle, rather than refresh the fleet and risk an already precarious financial position.

As CFO Leonardo Basola said on the call, “A lot of those assets [that deorbited] were fully depreciated, and we anticipated that eventually they would lose orbit soon.”

Maybe they were fingers crossed it wouldn’t happen this soon.

JUST A BUMP IN THE ROAD

The good news is twofold.  First, satellites can and will be replaced.  Spire said they can get their constellation back up to full without increasing their 2024 capex estimate.

Second, Spire is, for the first time in a long-time, flush with cash.   In the intervening period between when Spire issued their original, impressive 2024 guidance and when they ratcheted it back down, they raised a boatload of money.

In late March Spire announced a $30M private placement at $14.  This was after a previous $10M placement (at $12) with Signal Ocean in February.

Together Spire has added $40M to their coffers.  Spire exited Q1 with $62M of cash.  While the guidance reduction is unfortunate, it is much less worrisome given the cash on hand.

There can be no doubt the stock would be much lower if Spire had announced the same guidance in March with ~$30M less cash in the bank.

As it is, Spire had a hiccup.  Space is a tough place to do business and we got another reminder of that in Q1.

DON’T GIVE UP ON THE FINAL FRONTIER

While Spire reminded us of the perils of space, we got a more upbeat reminder of the potential from AST SpaceMobile (ASTS – NASDAQ).  ASTS gave us news that showed space can also be a very good place to do business.

Beginning in mid-May, ASTS made a moon shot as investors reacted to news of two agreements.  The first with AT&T (T – NYSE) and the second with Verizon (VZ – NASDAQ).

ASTS will provide satellite-based cellular service from their constellation directly to AT&T and Verizon customers.  Verizon also took a stake in ASTS and committed $65M of prepayment funding.

This is still an early-stage story – ASTS has yet to launch the first wave of their communication satellites into space.  But the potential of providing cellular service via satellites opens up a HUGE market.  The end-game are satellites replacing roaming charges which, if realized, would give ASTS a BIG, BIG use case.

And that brings us to THE BIG ISSUE for all the space plays, Spire included.  What’s the use case and how can you make money off of it?

The lack of interest in ASTS prior to the AT&T deal says it all – investors gave ASTS no credit that their space aspirations would gain traction.   This even though ASTS was clearly in negotiations with AT&T – they had already signed an MOU.

Yet the stock languished for the better part of 3 years – since coming public as a SPAC it was down 75% to $2.50 before the deals were announced.

The story of space is truly a “show me” one.  Show me the contracts, show me the money.

The same can be said for Spire.  The market is NOW treating the stock as a show me story.  Rightfully so.

While I am not in Spire today, it is gone but not forgotten.  I am actively monitoring the stock and fully expect subscribers will have another go with the name.

Spire continues to partner and sign deals for its satellite data.   In the last few months they signed:

• A multi-million-dollar deal with a financial firm for high-resolution weather data
• A space services deal to build and operate South Korea’s first three-satellite remote sensing image data service
• An $8.4M contract with the European Maritime Safety Agency (“EMSA”) for provision of SAT-AIS data services
• A partnership with Signal Ocean, a leader in shipping technology, to drive digitization of the maritime economy
• A $9.4M award by the National Oceanographic and Oceanic Administration (NOAA) for 8-months of weather data

These are all incremental but also none are the BIG ONE.   We haven’t seen that sort of game-changer type deal that we saw from ASTS (if we did the stock wouldn’t be single digits).

The bet on Spire is that someday that deal will materialize.

I continue to keep an eye on the stars.   The long-term opportunity of space is just too good.   In the short term though, Spire’s Q1 update reminded us it can be treacherous as well.