Description

Just like the King of Pop, Macro Enterprise is defying gravity.  It is a niche oil & gas services provider doing its part to connect a much-needed energy resource to the rest of the world.  It is one of only a few entities building a pipeline between desperate producers and hungry consumers. Over the next few years the takeaway imbalance in Canada will be corrected and the world market for Canadian natural gas will improve.  At that time, conditions will get even better for Macro as tens of thousands of new drilling sites in Canada will become economically viable. Macro will have a hand in tying these wells to the same pipelines they are currently building. They will also profit from ongoing maintenance and service agreements.   For these reasons, I believe we are looking at a good 5-10 year run for Macro. The depressed spot prices for natural gas in Canada actually improve the value proposition that Macro offers and have no additional negative effect on their earnings.

My largest holding and most recent contribution to VIC prior to this is Tourmaline.  Tourmaline is now the largest natural gas producer in Canada (a change since January!).  Tourmaline will eventually sell gas through Macro’s pipeline work, if it doesn’t already.   Since I posted Tourmaline, natural gas prices have decreased but Tourmaline has increased their dividend and their share buyback - all the while increasing production and reserves.  I still believe that Tourmaline is the best investment right now (despite not being immune to gravity). Macro is not in the same “quality” league as Tourmaline but for the reasons listed below, in no particular order, I also own Macro:

(1)  Unique asset because of size ($127 million Canadian market cap, no net debt).  Most oil and gas service companies are large and highly acquisitive. There are no publicly traded oil and gas services companies in Canada at this size point.  

source Bloomberg

(2)  No analyst coverage.  Macro is not on the radar of sell side as they don’t issue equity.  They don’t term out their debt. Small companies like this in Canada tend to have a tight relationship with a single bank and keep a revolving credit line.   Macro has a healthy credit line with an established bank in excess of market cap but no net debt.

(3)  Backlog (and valuation).  Their backlog is 7x larger than their current market cap - signed contracts for $870 million in net revenue over the next few years.   Historically, 6% of that falls to the bottom line. So without any heroic assumptions they are on track to earn over 40% of their current market cap regardless of AECO spot prices.  Assuming a 6% net profit margin is conservative as they are currently doing 11% EBITDA margin and their capex, interest and depreciation is minimal. Historical peak net profit margins were near 15% which would mean the profits from their current signed contractual agreements would cover their entire market cap.

source: Macro Enterprises company presentation, May 2019

(4)  Cyclical timing.   For the last few years I’ve said we are much closer to the bottom than the top.  Eventually I’ll be right. E&Ps are still cutting capex. You want to buy o&g services later in the stage when E&P companies are expanding capex.  However, given the nature of this business I believe the timing is right for this now. The EIA’s long term outlook on natural gas prices is as good a starting point to thinking about the big picture.  Here is the link. https://www.eia.gov/outlooks/aeo/pdf/aeo2019.pdf

Low prices of natural gas increase consumption in the near term in both residential and commercial use.  On the supply side, I’d like to point out a slide from a Canadian oil & gas producer, Peyto, pointing out “who’s left?” in the oil patch.  

Source:  Peyto Energy 2019 AGM meeting.

The point of this was to highlight supply issues but as far as longevity is concerned, Macro Enterprises, a service provider, has been around for 25 years.

(5) It’s going up.   I was tinkering with Bloomberg’s groovy FTW command and I find out that this particular security has both a bullish value factor and a bullish momentum factor associated with it.  There are no other oil & gas companies in the top quintile for momentum, but many in the top quintile for value (including this one).   While it is hard to be impressed by momentum, given the amount of pain & suffering that has been experienced in the oil & gas industry I thought it was nice to know.  Similarly, other VIC posters on the Range Resources thread have astutely mentioned, “wait until it turns” and “don’t worry about missing the first 20% of the turnaround.”   If you are seeing momentum - I guess it has turned?

(6) Insider ownership.  The CEO owns 30% of the company.  While I don’t see dividends or buybacks in the future nor the past, at one point during the last cycle Macro traded at a $200 million market cap.  I’m sure the CEO is thinking to himself, “I’ve been doing this 35 years. 30% of a really big number is good. What do I need to do to get a really big number?” His $800k annual paycheck is likely not his focus.  

Here’s why this investment opportunity is available at this price:

(1) Pain & suffering in Canada.  Natural gas is stranded. AECO spot prices are lower than operating costs.   Lazy macro investors are likely making tons of money by shorting the Canadian energy sector as it spirals downward, of which this is a small part.

(2) Venture Exchange - The equity is listed on the the Venture Exchange.  Frauds are abundant here. The nickname for this exchange is the Vulture Exchange.  It has earned that nickname.

For an even better writeup and even more details, see the VIC writeup from 2 years ago. More information can be found in the company’s presentation http://www.macroindustries.ca/investor/presentations-webcasts

Summary:

Macro Enterprises is defying gravity and trading near the 52-week high because it is providing a missing piece of infrastructure so producers and consumers can capitalize on a profitable arbitrage opportunity - cheap, clean natural gas in Canada vs. expensive, dirty coal in China.   Macro is looking at a long runway beyond their current backlog as Macro helps connect these new projects to the pipelines they themselves created.

Catalyst

- Kitimat LNG