Tidewater Midstream and Infrastructure Ltd

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) is a Canada-based company operating in the midstream and infrastructure industry. The Company is engaged in natural gas processing, fractionation, liquids upgrading, storage and transportation, and marketing.

Key highlights

• Solid Quarterly Performance: The Corporation delivered a record quarter and its year-to-date performance. Adjusted EBITDA increased to CAD 47.6 million in the third quarter of 2020 as compared to CAD 25.5 million in the third quarter of 2019, resulting in 86% Adjusted EBITDA growth as a result of the continuing strong performance of the Prince George Refinery (“PGR”) and the Pipestone Gas Plant. The Corporation’s volumes across its operations have returned to pre-pandemic levels.
• Reaffirmed guidance: The management is positive on the performance and expects to continuethe momentum during the fourth quarter and into 2021. The company reaffirmed the guidance regarding forecasted Adjusted EBITDA, which is likely to be in a range of CAD175 million to CAD185 million for the full year 2020.
• Divesting stake at Pioneer Pipeline:The company together with its partner TransAlta Corporation has entered into an updated purchase and sale agreement with ATCO Gas and Pipelines Ltd. to sell the Pioneer Pipeline to ATCO for gross proceeds of CAD255 million. The company anticipates getting regulatory approval in Q1 2021. Net cash proceeds to the company will be approximately CAD138 million that will be used for debt reduction.
• Focus on debt reduction: The group’s top priorities remain free cash flow generation and debt reduction. Tidewater remains committed to reducing leverage throughout 2020 and 2021 with a target of 3.0x to 3.5x Net Debt to annualized Adjusted EBITDA, upon closing of the Pioneer Transaction.

Financial overview of Q3 2020

Source: company

• The Company delivered a record quarter with revenue clocking at CAD 273.4 million, an increase by CAD 126.4 million, over CAD 147 million recorded in the previous corresponding period (“pcp”).
• Adjusted EBITDA increased to CAD 47.6 million, reflecting an increase of 86% compared to CAD 25.5 million in pcp, as a result of the robust performance of the PGR and the Pipestone Gas Plant.
• In Q3 2020, the Company reported a Net loss attributable to shareholders of CAD 2.0 million as compared to net income of CAD 11.0 million in pcp. The decrease in net income is a result of a non-cash loss on disposition of certain non-core assets.
• The Company reported positive net cash flow from operating activities which totalled to CAD 64.0 million in Q3 2020, with a distributable cash flow of CAD 10.6 million. 

Risk associated with investments

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the lower demand for crude oil and natural gas, lower production, inflation, interest rates etc.

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock recommendation

The company managed to bring their volumes across its operations to pre-pandemic level successfully. Financial markets and commodity prices continue to remain volatile and expect to remain volatile into 2021. The company continues to see increased demand at PGR since large infrastructure projects in central and northern British Columbia, resulting in a more robust market for refined products. The company is likely to receive approximately CAD 138 million in Q1 2021, from divesting its stake in Pioneer Pipeline. The company will utilize the proceedings to bring down net debts. Moreover, at the last traded price, the stock was offering a dividend yield of 5.88%, which is lucrative amid a low-interest rate environment. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 0.68 as on November 17, 2020. We have considered AltaGas Ltd, Secure Energy Services Inc, and CES Energy Solutions Corp etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Computer Modelling Group Ltd.

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based computer software technology company serving the oil and gas industry. The Company operates through the development and licensing of reservoir simulation software segment. 

Key highlights

• Healthy margins: The company is enjoying a decent margin profile and maintaining consistency. The company maintained an EBITDA margin above 40% over the last eight quarters and Net margin above ~20%. In Q2 2021, the company reported EBITDA margin at ~61% and net margin at ~38%.

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Dividend: Despite a challenging operating environment, the company continued with the dividend distribution. On November 12, 2020, the company approved a quarterly dividend of CAD0.05 per share, payable on December 15, 2020, with a record date of December 7, 2020. At the last traded price, the stock was offering a dividend yield of 4.56% amid low interest rate environment.

Financial overview of 2Q 2021

Source: Company

• In Q2 2021, the company’s reported total revenue decreased by 10% to CAD 17.8 million as against CAD 19.8 million in the previous corresponding period. Annuity/maintenance license revenue decreased by 14% to CAD 14.1 million, primarily due to the ongoing disruption to the oil and gas industry caused by the COVID-19 pandemic, consolidations in the industry and reduced activities. In contrast, the Perpetual licenses revenue increased by 55% to CAD 1.7 million.
• Operating profit as a % of total revenue stood at 55% in Q2 2021 as against 47% in previous corresponding period mainly due to the first and second quarter CEWS benefits both being recorded in this quarter, combined with compensation reductions.

• On the back of lower operating expenses, the company reported a net income of CAD 6.7 million in Q2 2021, as against CAD 6.8 million in the previous corresponding period.

Risk associated with investment

Due to high dependency on the oil and gas clients, adverse effect on crude oil demand can hit revenues of the company. Lower demand for crude oil would result in lower drilling activity by the oil producers resulting in lower budget allocation for the software and maintenance purposes.

Valuation Methodology (Illustrative): EV to EBITDA

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock recommendation

The company is focused on ensuring the resilience of its business by adjusting the cost structure. It has taken various cost reduction measures and is preserving its liquidity and maintaining a strong balance sheet to deal with these uncertain times. The group settled the quarter with decent numbers such as CAD 44.0 million of cash with no debt on its books and realized free cash flow of CAD 7.4 million.

However, the company is serving the oil and gas industry, which saw lower demand in the past some quarters. The demand recovery is coming; it is still not close to pre-pandemic level. We believe as the industries start working on their full capacity again, the demand for oil and gas is likely to get a push.

Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 4.39 on November 17, 2020. We have considered Pason Systems Inc, Mind Technology Inc, CES Energy Solutions Corp etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.