Description

Overview

Pason Systems in a Canadian information services company with products that service the oilfield. The Canadian oilfield has been hammered over the past few years as rig count has more than halved due to the uneconomical acreage that exists north of the border. PSI’s market value has fallen by 60% since the peak and now trades at 8x EBITDA and 14x LTM FCF…in line with commodity OFS companies. However, most of the PSI’s exposure is to US onshore rigs and the company has been able to maintain attractive ROICs, ROEs and gross margins throughout the downturn.

Despite a 35% decrease in rig count since 2010 in their core geographies, the Company has been able to increase revenue by 35% over the same period due to significant price increases. The company’s day rate has risen every single year and is now double where it was in 2010 despite tons of volatility and deflation in the sector. We haven’t seen many companies with such impressive historical pricing power inside or outside of the oilfield.

“The single most important decision in evaluating a business is pricing power.” -Buffett

Most companies in this space have been price deflationary as operators have increased efficiency and beat up service companies to compete in a lower priced commodity environment. PSI has avoided this trend by operating in a duopoly marketplace (with NOV) where their sensor package sits on essentially all the rigs in their geographies. Their installed base coverage on each of the rigs in the field makes it virtually impossible for a new entrant to compete in the space.

In summary, PSI is a high-quality compounder with inherent stickiness and pricing power on the right side of trends that is for sale to investors at an extremely attractive valuation.

General

Pason offers rig contractors and E&P’s access to drilling data during the drilling process. The Company offers a variety of data options; but they are most known for the Electronic Drilling Record (“EDR”) product. EDR data is a set a variables such as rate of drill-bit penetration, mechanical specific energy and other regulatory required reporting variables that anyone who drills is required to track. The market is split 50/50 between Pason and NOV (largest rig manufacturer). Both companies have their sensor package on most rigs which allows them to flip a switch and start reporting to their customer. Aside from a quick inspection to confirm the sensors are operating correctly, there is almost no incremental expense per sale. The MOAT that PSI and NOV have built is an extremely expansive installed base that would be extremely challenging and likely not worth it for a new competitor to try and upend.

Continued Pricing Upside

The PSI sensor package that sits on most of the rigs in the field allows customers to track several other variables which Pason upsells. The oilfield has spent significant energy increasing performance tracking and optimizing the drilling process. Many operators and service companies are using this to optimize drilling costs and expand into automated drilling. This dynamic has weakened many OFS providers whose equipment and labor are in demand less but has behooved PSI.

The trend toward more data consumption has allowed the company to upsell their additional products at very high incremental profits. As previously mentioned, the average day rate for PSI has gone up every year for the last decade and now sits at $800/day. This is a mix of some customers who only subscribe to EDR data and other laggards that have the full suite of options. We believe that as the remaining customer base continues to get upsold there will be significant pricing upside (>2x upside).

Risks / Mitigants

The Company is of course levered to rig count. It is hard for us to take a stance where that is headed but if that can stay reasonably flat there is significant upside for an investor. LTM FCF is ~$60m on a $850m market cap implying a 7.1% free cash flow yield. They have increased their day-rate like clockwork for the last decade. If they can continue to do that for the next 2.5 years, they will double earnings. If they can do that for the next 4.5 years, they will 3x earnings. At 14x FCF (below the SPY and near the broader OFS group) this seems undervalued and worth the rig count volatility risk.

Catalyst

Continued pricing increases