Value Library

The following is an excerpt from the ABC Perspective - April 2008 - Pg. 3

ABC Fund Value Favourites

SEASPAN CORPORATION

On February 19th, Seaspan announced fourth quarter and full year results for the period ending December 31th 2007. During the quarter, cash available for distribution increased 35.7 % to $31.9 million compared to $23.5 million a year earlier. The increase was mainly the result of 6 vessel deliveries which contributed an additional 552 operating days in the quarter. For the full year, cash available for distribution improved 68% to $114.4 compared to $68.0 million in 2006. Ship operating expense increased by 55.7%, or $4.6 million, to $12.9 million in the quarter, from $8.3 million in the comparable prior year's quarter.

On April 7th, Seaspan announced that it would issue an additional 7 million shares to the public with another 1.1 million available to underwriters. This is Seaspan’s fourth financing since it’s IPO in 2005. What we found interesting, however, was that for the first time since its IPO, Seaspan’s executives will be participating in the deal. They are expected to invest an aggregate of $18.1 million of their own money at the same price as the public. We view this commitment as a positive signal that Seaspan’s prospects look bright and that its shares are currently undervalued.

In addition, Seaspan has also secured $235 million in term financing at an attractive rate of just 60 basis points above LIBOR. More importantly, it should be noted that due to recent adverse credit conditions, some of Seaspan’s competitors are either unable to borrow or must do so at less attractive rates. This is an important differentiating factor which results in financial flexibility and a low cost advantage for the Company. Armed now with close to $1.5 billion of capital, we believe Seaspan can be opportunistic over the next 6 to 12 months in acquiring new vessels. It is possible that some ships may even be acquired from competitors who cannot get access to financing and must sell at distressed prices.

In January, Seaspan’s Board of Directors announced a dividend increase of 6.1% from $1.79 to $1.90 per share. This represents the second increase in Seaspan’s dividend since going public in 2005. Based on a $1.90 dividend, shares of Seaspan now yield 6.7%. This is attractive given that similar asset classes such as REITS and MLPs trade at lower yields. In fact, while many investors may regard Seaspan as simply a yield play, we believe that the market is underestimating the company’s growth potential as well as its net asset value. With 39 containerships already contracted to be delivered over the next three years, EBITDA should grow from $150 million in 2007 to around $500 million by 2012. We believe this would allow Seaspan to eventually pay a dividend of $2.50 per share. Also, with regard to tangible assets, Seaspan is currently trading at an 18% discount to our $33 per share calculation of net asset value. In summation, if Seaspan can continue to effectively execute its growth strategy we believe that its shares will eventually be recognized by a wider audience of investors.

SAXON ENERGY SERVICES INC.

Saxon Energy Services Incorporated (TSX: SES) is an international oil and gas drilling and services company headquartered in Calgary.  Based on revenue, the Company is evenly split between North America (Canada, the United States and Mexico) and South America (Venezuela, Colombia, Ecuador and Peru).  Currently, Saxon has 58 rigs in its fleet (including 11 rigs held in a 50/50 joint venture with Schlumberger); 37 (32 net) in North America and 21 (20.5 net) in South America.  Senior management, led by President and CEO Dale Tremblay, are experienced ex-Precision Drilling staffers. 

After facing serious headwinds in 2007, the oil and gas services sector has rebounded sharply in early 2008.  Last year, reduced drilling activity stemming from both weak natural gas prices and a change in the Alberta oil and gas royalty regime led investors to punish the stocks.  However, with fewer new producing wells, reduced LNG (liquid natural gas) imports and growing demand, excess inventories have been drawn down.  Specifically, the Energy Information Administration reported that working gas in storage as of Friday, March 28th was 1.25 trillion cubic feet, 20% below last year’s storage level and only 0.5% above the trailing five year average.  Not surprisingly, natural gas has strengthened in recent weeks and currently trades around $10 per mcf (thousand cubic feet) after bottoming below $6 per mcf last fall.

As we have discussed in the past, we believe that investors who have lumped Saxon in with the Canadian oil and gas services sector are ignoring the Company’s outstanding relative and absolute growth prospects.  On February 14, Saxon reported its financial results for 2007 that supported our investment thesis.  For the year, revenue totaled $242.3 million, an increase of 42% from 2006.  EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to $68.6 million or $0.81 per share, an increase of 50% and 45% respectively.  Net earnings in 2007 were $26.8 million, or $0.32 per share, up 71% and 68% from $15.7 million, or $0.19 per share, in 2006. 
Perhaps the only weakness in Saxon’s results was a dip in the utilization rate from 84% in 2006 to 72% in 2007.  However, considering that the Canadian industry reported an average utilization rate of 38% in 2007, Saxon outperformed the sector quite nicely.

Despite the solid financial and operating performance and ensuing share price rally, we believe that shares of Saxon Energy are still inexpensive.  Based on consensus estimates, the stock is currently trading just over 7 times 2008 EBITDA and under 15 times earnings.  Although the stock trades at 1.8 times tangible book value, which is relatively inexpensive for an oil and gas services stock, we believe that the replacement value of the Company’s rig fleet and equipment is above the current share price.  Should this discount persist, Saxon could become an attractive takeover target for anyone looking for exposure to international growth markets.

Irwin A. Michael, CFA