Pason Systems Inc - $PSI.to
Another OFS co for the basket
I first purchased PSI during the summer of 2023. It happens to be the 10th or 11th summer in a row that I said I would have abs and failed to sufficiently starve myself. But I digress, you aren’t here to talk about my physique.
Price: $14.35
Shares: 80.7 million
Market Cap: 1.1 billion CAD
Enterprise Value: Approx 1 billion CAD
Background
Pason is a leading global provider of specialized data management systems for oil and gas drilling. Pason’s solutions, which include data acquisition, wellsite reporting, automation, remote communications, webbased information management, and data analytics enable collaboration between the drilling rig and the office. Pason services major oil and gas basins with a local presence in the following countries: US, Canada, Argentina, Australia, Bolivia, Brazil, Colombia, Dubai, Ecuador, Mexico, Peru and Saudi Arabia.
Pason Systems Inc., an energy services and technology company, provides data management systems for drilling rigs in Canada, the United States, and internationally. The company offers Electronic Drilling Recorder, which monitors and records drilling operations around the rig; DataHub for data and information collected from the rig for on-demand retrieval; DataLink service provides direct connection interfaces for IT systems and analytics tools; Pason Live for monitoring rig operations in real-time using desktop computers or mobile devices; and daily and end-of-well KPI reports provide visual statistics on rig performance. It also provides Drilling intelligence to suggest drilling parameters, detect disfunction, and send event alerts to onsite personnel and remote engineers in real time; and Drilling automation, a reality across rig platforms. In addition, the company offers Pason Gas Analyzer for real-time gas measurement; a robust system of alarms and sensors to monitor ambient gasses in the atmosphere and in the drilling fluids; and Pason Pit Volume Totalizer to track the volumes, gains, and losses of drilling fluids on location.
What do they make/sell or What sets them apart?
Pasted from AIF and Annual Report.
Products and services for both the North American Operations and International Operations segments are primarily comprised of hardware and software provided on a rental basis to drilling rigs on land. Pason's system of computers, instrumentation, and monitoring equipment is networked around a drilling rig to provide data at the wellsite and to customer offices. The software installed on Pason's hardware provides a variety of monitoring, guidance and data storage tools. Pason reports revenue for both those segments along five product categories: Drilling Data, Mud Management & Safety, Communications, Drilling Intelligence and Analytics & Other.
Drilling Data - 50-55% of revenue
Drilling Data contains all products and services associated with acquiring, displaying, storing, and delivering drilling data. This includes the Electronic Drilling Recorder (“EDR”) and all its peripherals, Pason Live/DataHub, various data feed services, and the Electronic Service Recorder.
The EDR remains the Company’s flagship product. It provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at the wellsite. The EDR is the base product with which all other wellsite instrumentation products are linked. Each EDR system consists of a proprietary server, sensors, junction boxes, and a series of workstations, all connected via a local network.
Mud Management & Safety - 25-30% of revenue
Mud Management & Safety includes products such as the Pit Volume Totalizer (“PVT”), Gas Analyzer, Hazardous Gas Alarm, and the Electronic Choke System.
The PVT is used to monitor mud tank levels and mud flow rate out of the wellbore to detect and warn rig crews of impending "kicks" or lost circulation resulting from gas or fluids entering or escaping the wellbore while drilling.
The Gas Analyzer measures the hydrocarbon gases in the drilling fluid exiting the wellbore and then calculates the formation depth where the gases were produced.
Communications - 4-5% of revenue
The Communications segment includes satellite and terrestrial Internet bandwidth, Wireless Rigsite, VOIP, and Intercom services.
Drilling Intelligence - 5-6% of revenue
The Drilling Intelligence segment bundles Pason’s offers targeted at enabling customers’ drilling optimization and automation efforts. It contains products such as AutoDrillers, and the deployment of the advanced Drilling Advisory System™ (DAS).
Analytics & Other - 5-6% of revenue
Analytics & Other includes the ETB and Verdazo products, various types of reports, and other revenue streams. Half of this segment is the solar and energy storage side of the business resides.
Some business highlights
They break apart the various segments geographically by North America, International and Solar.
North America is about 80% of revenue with Drilling Data and Mud Management & Safety together making up 85% of North America. This is the major needle mover.
Almost 700 employees.
Has serviced over 1600 unique rigs in 2022.
Balance Sheet
The balance sheet is quite strong. Management has been conservative and runs with a net cash position consistently. They have about 170-175 mil in excess cash.
Share Structure & Ownership
There are currently just over 80.7 million shares outstanding. That is a bit less where it has was 10 years ago.
One of the drawbacks I have with PSI is that management and the board are not large shareholders on the common. Although they are more tied to the share price performance as shown below.
Management & Compensation
The compensation target for the CEO is 25% base salary, 25% STIP (short term incentive plan) and 50% MTIP and LTIP. Other executives have similar compensation targets with a slight tilt toward base compensation.
Adj EBITDA, revenue per industry day, ROIC, DSO (days sales outstanding), safety and ESG are the performance measures for STIP. Medium term targets are based on total shareholder return, and relative return compared to the S&P/TSX Capped Energy Index. Long term alignment is achieved via stock options.
The Executive Share Ownership Guidelines require that:
The CEO must have Share ownership equal to three (3) times base salary.
All other NEOs must have Share ownership equal to one (1) time base salary.
Board
There are 6 directors. 4 of them are classified as independent.
Ken Mullen was appointed to the board early this year. He has been a director in several private and public energy and energy service companies. He is representative with Barometer Capital Management. He was co-founder of Savanna Energy Services. He is also on the board of Total Energy Services, another one of my holdings.
The prior CEO (Kessler) is the chair and the current CEO (Faber) is on the board as well.
Director compensation is 220-250k/year.
The directors exposure to the share price is via DSU (deferred share units). A couple independent directors have over 1 million in potential value in DSUs.
Risks
Of course there is the typical O&G exposure risk. As with many companies the ROE and ROIC is very high during the good times. Despite the constant cash on the balance sheet, they ROIC profile is very strong.
Given the strong ROIC profile, market position and balance sheet the valuation is higher than other companies in my basket. I suppose this could underperform the index even if activity remains high.
There is the risk that their products lose their presence or has increased competition in the marketplace.
Valuation
PSI is currently trading at a tad under 6x EV/ttm EBITDA and closer to 5x looking ahead. Prior cycle peaks have seen around 10x EV/EBITDA.
The current dividend yield is just over 3.3%.
Most Recent Financials
Q2 2023 was strong for the company. Revenue was up 15% and EBITDA up 19%. They have increased the allocation to growth capex as activity has stabilized.
There were no questions on the conference call. lol.
My Thoughts
So we obviously have something tied to industry activity. Their EDR & PVT products have a strong presence in the marketplace. This is confirmed with some channel checks in the industry. I wouldn’t be surprised if PSI is bought at some point in the cycle.
When I think of the basket of OFS cos I like to have a balance of very strong balance sheets and some that are in repair and getting better. As well a mix of “expensive” and cheap. PSI brings a strong balance sheet to the table, high ROIC and a strong presence in the marketplace. Of course, I have to pay up for it relative to other cos that are more asset heavy.
Thanks for reading. I stole this idea from someone, but I forget who. I’m sorry to this person.
Dean
* long PHX.to