November 12, 2010

Since our original comment, Flint Energy Services has performed reasonably well, increasing approximately 15%.  The returns had been even more impressive until the Company reported its third quarter results, which happened to coincide with what we believe to be a temporary period of market weakness.  Despite the recent pullback in the stock, the investment thesis for Flint is unchanged and we remain quite positive on this holding.

On November 4th, Flint reported its third quarter financial results.  As expected, the results were down slightly on a year over year basis, due to the completion of two major oil sands projects before the start of the third quarter of 2010.  Revenue for the three month period ended September 30, 2010 was $406.5 million compared to $459.7 million a year ago.  EBITDA for the third quarter of 2010 was $30.7 million, with a margin of 7.6%, compared to $35.5 million, with a margin of 7.7%, for the third quarter of 2009.  Net earnings were $6.2 million or $0.14 per diluted common share compared to $9.7 million or $0.21 per diluted common share.  We expect that revenue and earnings will continue to contract in the Facility Infrastructure segment in the final quarter of the year before reaccelerating in 2011.

Despite the dip in Flint’s major project work, we are quite optimistic for 2011 and 2012.  In fact, subsequent to the end of the third quarter, Flint announced four decent contract awards that will positively impact future reporting periods.  Flint Transfield Services Limited, the 50% owned maintenance division, was awarded a three-year, $95 million contract by Nexen for work at its Long Lake SAGD project.  Flint also announced a contract extension of $78 million for the construction and commissioning of Suncor’s Firebag SAGD project.  In addition, the Company won a six-year construction contract from Imperial Oil, with the option for an additional four-year extension, for facilities across Western Canada.  Finally, the Company announced that it received an $18.9 million module fabrication contract from Suncor for work on its Firebag SAGD project.

In the earnings release, the Company disclosed that it had actively bid on several major construction projects and expects the decisions to be made within the next three to four months.  Importantly, several notable companies in the oil and gas sector are ramping up capital spending and are specifically targeting projects that increase oil production.  Once Flint has rebuilt its oil sands construction backlog and the market can look beyond this short-term gap, we believe that investors will be well rewarded for their patience.

November 26, 2010

Although our last update on Flint Energy Services was only two weeks ago, we feel that an additional comment is warranted.  Since the beginning of November, shares of FES fell from a high of $17.10 to a low of $14.44 (a decline of 16%) and subsequently rebounded to $16.84 as of close yesterday (a bounce of 17%).  Obviously, the Ireland banking bailout and tensions between North and South Korea are concerning events for investors.  However, we believe that the magnitude of the volatility is overly dramatic given the stable nature of Flint’s contracts and backlog.  We would view any further weakness as a buying opportunity.

Management has, quite correctly, ignored temporary swings in the Company’s share price and has gone about continuing to strengthen their business. In addition to the contracts wins that we discussed previously, they have just announced a small but significant acquisition in the United States.

On November 22, Flint completed a US$36 million tuck-in to expand the Company’s oilfield hauling services in the United States.  Importantly, the purchase included property and equipment in five locations, including three in East Texas, one in Louisiana and one in Oklahoma in close proximity to several major shale gas fields.  In fact, Flint has already expanded into the Marcellus shale gas basin, moving under-utilized assets from western Canada to Pennsylvania.  With the 170 new employees and 450 pieces of equipment, management now has the wherewithal to staff and equip an additional location in Williston, North Dakota (currently under construction) to provide oilfield hauling services to the Bakken shale oil play.  Once the deal closes, the US Oilfield Services division will have eight locations and will be one of the market leaders in the segment.

Next to the oil sands, unconventional resource plays such as shale gas or oil have garnered the most attention and capital in recent years.  We believe that management has made an important strategic decision to increase their exposure to the busiest fields in North America.  Using the strong Canadian dollar to purchase assets in the United States is also a particularly astute move.  In short, we expect that investors will be well rewarded in the coming twelve to eighteen months.

August 19, 2011

Flint Energy Services (FES) reported Q2 2011 results on August 8th. During the quarter, FES generated EBITDA of $21.4 mm and EPS of $0.09, which well exceeded analysts’ expectations of $19.6 mm, and EPS of ($0.02).  While all divisions performed well, management highlighted the strong results of its Oilfield Services division, where revenue nearly doubled on a year-over-year basis due to increased drilling activity in both Canada and the United States.  Going forward, the company’s Facility Infrastructure division should benefit from $300 million in new contract wins that were secured in Q2, which provide good visibility for the balance of the year and into 2012.  FES is also poised to benefit from strong growth in oil sands spending, which according to management, could increase to $16 billion in 2011 – a 45% year-over-year increase.

From a valuation perspective, we believe FES remains extremely cheap. At current levels, the stock is trading at a P/E of less than 9x based on 2012 consensus estimates and just above its tangible book value ($10.89 per share). We believe the low P/E multiple is unwarranted given that analysts expect the company’s earnings to more than triple in 2011-2012 (from $0.40 to $1.29 per share).  In addition, Flint continues to seek strategic acquisitions, which could represent an additional source of growth not factored into current estimates.

December 30, 2011

We continue to believe that Flint Energy remains extraordinarily undervalued. In particular, the 2011 performance of FES shares – which have declined by more than 30% – is a perfect example of the blatant disconnect between corporate fundamentals and common stock prices. To put this into perspective, in Q3 2011, Flint generated EPS of $0.40 – which exceeded the consensus estimate by an astounding 74%. Flint’s exceptional quarterly results reflected large improvements in the Production Services and Oilfield Services divisions, which benefited from strengthening levels of North American oil drilling activity. Based on a recent industry forecast, drilling activity is expected to increase by a further 12-13% next year, which should benefit both divisions in 2012.

Considering the amount of capital expected to be deployed towards oil sands projects, which could reach $22 billion by 2014, we believe Flint will likely be busy well into the foreseeable future. In fact, based on a recent conversation with management, Flint is actively seeking additional sources of labour – a clear indication of the company’s extraordinary level of business activity. On a segmented basis, at the end of the third quarter, backlog at the Facility Infrastructure segment stood at $740 million, which includes a recent $430 million oil sands contract win in Northern Alberta. Management is also optimistic on the prospects of its Maintenance Services division, which currently has a $1 billion backlog and generates the highest return on capital amongst Flint’s business lines. 

Notwithstanding Flint’s excellent operating results and bright outlook, the company’s shares continue to trade at remarkably discounted levels. At its current share price of $12.40, FES is trading at only 7.5x the consensus 2012 EPS estimate – despite the fact that earnings are forecast to increase by 145% from 2011-2012. The company’s shares are also trading at only a slight premium to its tangible book value of $11.58 per share.  While the market appears to be pricing in a recessionary outlook and contracting levels of business activity for Flint, we believe the company’s prospects are extremely encouraging.