High Arctic Energy Services - $HWO.to

another O&G service co

I added some HWO recently to my energy services basket given the pullback in interest. HWO is an interesting mix and provides geographical diversification. Here is a quick look at why I purchased shares.

Price: $1.24 CAD

Shares: 49 mil approx.

Market Cap: 60 mil CAD approx

Enterprise Value: 15 mil CAD (pro-forma)

Yield: 4.8%

Background

High Arctic Energy Services Inc., an oilfield services company, provides oilfield services to exploration and production companies in Canada and Papua New Guinea. The company operates through three segments: Drilling Services, Production Services, and Ancillary Services. It offers snubbing services, including foothills standalone snubbing system for completions and workovers; hydraulic workover units, such as a patented L-Frame equipment configuration; rig assist snubbing unit, a truck-mounted hydraulic system to manage underbalanced wellbore conditions; and power tower to install a snubbing unit and blowout preventers in one lift. The company also rents oilfield equipment comprising accumulators, blowout preventers, casing cutters and scrappers, hydraulic catwalks, rig shacks, chokes, boilers, boiler blowdown tanks, generators, light towers, cross over and rotary subs, elevators, EUE collars, fire suppression kits, fuel tank skids, hot tap kits, mud cans, pickers, pipe racks, power swivels, pumps, slips, spools, flanges, thread washers, tongs, trailers and accommodations, tubing, gate, plug, hydraulic/air actuated, and safety valves; and kelly cocks for drilling, completions, workover, and abandonment of oil and gas operations. In addition, it provides nitrogen pumping units; and well servicing. Further, the company owns and operates two heli-portable drilling rigs in Papua New Guinea; and offers support equipment, such as rig matting, crawler cranes, water pumps, forklifts/wheel loaders, telehandlers, lighting towers, camps, trucks, wash-down packages, vehicles, and drill pipes and BHA. High Arctic Energy Services Inc. was founded in 1993 and is headquartered in Calgary, Canada.

CEO & Management

Michael Maguire was appointed as CEO on March 23, 2020. Previously, he was President, International from December 2016. This is important as he has been successfully executing the PNG side of the business in a less than optimal level of activity. He owns 272,000 shares or a little over one year’s worth of salary depending on the share price.

The Chairman (Michael Binnion) owns 1.9mil shares or 4% of the outstanding and has been with the company for over 15 years.

Cyrus Capital Partners owns 45% of the company and has a couple of board members.

Covid Impact

HWO paid a monthly dividend for many years going into the pandemic. This company continued this tradition from way back in the income trust days here in Canada. The dividend was suspended in early 2020.

As with everyone, the company went into survival mode to get through the ultra low activity. Remember negative oil? Lol. 2021 saw a lot of delays in activity in PNG as a direct result of travel restrictions from the Covid-19 pandemic, leading to the drilling rigs being cold stacked for most of the year.

Recent Events

The company announced the sale of it’s Canadian well servicing division for $38.2 mil CAD as well as the the snubbing business for a 42% equity stake in Team Snubbing Services Inc. (they get to appoint 2 board members) and a $3.4 mil CAD note with a 4.5% interest rate.

What’s left

High Arctic retains its Ancillary Services Segment in Canada comprised of the Nitrogen Pumping business and a Rentals business focused on pressure control. High Arctic also retains its snubbing assets in the USA. The US assets have been underutilized and not been a focus of management over the last few years. I don’t know if anything happens with this part of the business, so I am not expecting anything.

Tax Losses of $130 mil CAD.

Minority holding (49%) on Seh’ Chen partnership formed in July 2020 with a focus on local indigenous communities. I’m not sure how much this is worth as there isn’t a ton of details. They have some work for the remainder of 2022 and they did 2.1 mil CAD of revenue in 2021.

As mentioned they have 42% equity stake in Team Snubbing Services Inc. moving forward. I am not sure what this business will earn and I can’t find a ton of info on their fleet size, so I am not sure what to model here. Anything from Team Snubbing is a bonus here.

PNG (Drilling Services) - key points from AIF

There are significant oil and natural gas reserves in PNG and the country has become a key energy exporter to the Asian LNG markets. A major investment in the oil and gas industry in PNG was the completion in 2014 of a liquefied natural gas project. Both primary participants in the project are customers of High Arctic. The project provides both liquefaction and storage facilities with a name plate capacity of 6.9 million tonnes per annum to Asian LNG consumers through long term agreements, however it has consistently produced at above nameplate since inception.

High Arctic currently operates the largest fleet of tier-1 heli-portable drilling rigs in PNG, with two owned rigs (Rigs 115 and 116) and two rigs (Rigs 103 and 104) managed under operating and maintenance contracts for one of the Corporation’s key customers. The company said it would require a couple million to get the rigs fully upgraded and operational as they get contracts.

The two owned heli-portable rigs, 115 and 116, were acquired in 2014 and became available for use in 2015 upon the completion of certain customer requested upgrades necessary to meet PNG’s high international drilling standards. Each rig is a 1500 horsepower, AC electric, self-erecting rig that is designed to be broken down into 4500kg loads to allow for flexible helicopter, barge and land transport to areas with remote or limited access. Rigs 103 and 104 are owned by one of High Arctic’s key customers. These rigs have been operated and managed by High Arctic on behalf of its customer since 2007. Rigs 103 and 104 are also heli-portable 1500 horsepower, AC electric rigs. Supporting Rigs 103 and 104 are two partial rig packages which are referred to as “Leapfrog” Rigs 103 and 104. These Leapfrog Rigs consist of a center rig section which is identical to the center rig section utilized in the complete Rig 103 and 104 rig packages. Where appropriate, these Leapfrog Rigs are utilized to advance the setup time at the next drilling location while drilling is completed by the main Rig 103 or 104 at its existing location. While drilling operations are ongoing at the existing location, the Leapfrog Rig is setup at the new location. Upon completion of drilling at the existing location, the remaining drilling rig components are moved to the new location which already has the center section of the Leapfrog Rig setup. Rig camps are also provided as part of the rig packages for the rigs.

Conclusion

It’s hard to get an idea of what HWO will earn with the shift in focus to PNG primarily. We can look way back to 2008-15 to get an idea when HWO was focused on PNG or strip out the Canadian assets and make some estimates. From what I can see, they are capable of earning their market cap in EBITDA in 18-24 months with strong business activity. There is no guarantee that activity returns, but it does look like the interest is there. I’m sure you have heard about the high nat gas prices and shortages in Europe.

They have been shareholder friendly in the past and I would expect that they don’t waste the capital from the recent sale of the Canadian assets.

The downside seems limited given the valuation relative to assets. Outside the pandemic, HWO didn’t trade much below tangible book value and I’m assuming that pro-forma it’s around 0.52x. It’s also right around net-net territory.

I think owning HWO as part of a basket is a reasonable approach given the risk/reward set-up.

Thanks for reading.

Dean

*long $HWO.to