Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Wednesday, May 30: My
friend, Jim Kingsdale, the oil maven, says oil wouldn't be this high and we
wouldn't be concerned about "peak oil" etc. if it weren't for two
countries in chaos:
Iraq is pumping only 1.8 million barrels a day. It could easily be pumping 5
2. Nigeria is pumping roughly the same. It too could be pumping 5 million.
is no country that can quickly step into the supply void left by these disasters.
Hence oil is staying high at $63+ a barrel.
this price, there are many companies in the oil drilling and oil services that
will (and are doing) well. I've mentioned Dril-Quip (DRQ) which
has inched up (thankfully) since I mentioned it. My latest favorite (actually
Jim's latest favorite) is Key Energy Services Inc. (KEGS.PK). Here's
a description from
Key Energy Services,
Inc. operates as a rig-based, onshore well service company. The company provides
diversified energy operations, including well servicing, contract drilling,
pressure pumping, fishing and rental tool services, and other oilfield services.
It has operations in all major onshore oil and gas producing regions of the
continental United States; and internationally in Argentina, Canada, and Egypt.
The company is headquartered in Midland, Texas.
Here's a chart:
The company has a cloudy history with all sorts of horrid accounting problems,
most of which are now apparently behind it. There's not much written on this
company. Newsletter Value Investor Insight had an April 30 interview with RS
Investments Andrew Pilara which included:
to Boston today: Colleges and graduate schools charge a fortune these
days to accommodate your privileged children. And worse, they're all short of
accommodation for their students. As a result, we (Michael and I) tour to Boston
today to find a suitable place to buy we can rent to fellow students at vast rents.
We played slumlords while Michael was in college and it worked, selling the joint
after his graduation. We might have to hold this one a little longer. But the
economics -- Michael's Marvellous Maths -- look pretty good.
Tell us about
one of your specific energy ideas, Key Energy Services:
MD: Key provides
basic maintenance services to existing oil and natural-gas wells, mostly onshore
and in the U.S. That accounts for about 80% of cash flow, with the other 20%
coming from pressure pumping, which is used to stimulate new wells. They are
the U.S. leader in maintenance services with about 35% of the market, ahead
of Nabors Industries and Basic Energy. The industry has consolidated fairly
rapidly: the top four players control about 65% of the market, with mom-and-pops
making up the rest.
We like the
service aspect of the business. The company is paid by the hour to make sure
existing wells are producing at the levels they are capable of, which results
in a more durable and predictable level of cash flow than you would see in,
say, contract drillers. Customers understand that Key's service can improve
a well's productivity by 30- 35% and its viewed as an on-going business
expense versus coming out of the capital budget.
earlier about the importance of understanding the unit economics of a business
how attractive are those here?
refurbished well-service rigs cost around $800,000. Day rates today are $400
per hour and utilization levels are about 85%, with margins running in the
low 40%s. That gets you to a roughly 70% pre-tax return on investment at the
unit level. Even if you cut hourly rates to $250, utilization to 65% and margins
to 30%, theyd still earn a pretax return on capital of over 20%. So
even in a bad environment theyll earn more than their cost of capital
and increase overall company value.
the company current in its financial reporting?
MD: They made
a lot of acquisitions that were poorly accounted for, resulting in unanswered
questions about book depreciation that have kept them from filing since 2003.
We actually got interested in Key three years ago after the stock got hit
on the news they couldnt file. Id spent a lot of time analyzing
distressed companies, and in this case it was fairly easy to look at cash
flows and see that the assets were generating very high rates of return.
financial information we get is fairly good. Creditors require monthly financial
updates, which are made public and provide a good picture of how the business
is performing. We dont believe there are accounting issues beyond the
depreciation/book value issue.
management been doing right operationally?
done an excellent job of maintaining service levels while also becoming more
of a price leader, which they should be as the biggest player in a consolidated
industry. Theyve been conservative with capital spending while they
get their accounting issues resolved. Theyve clearly benefited from
higher activity levels, but as I mentioned earlier, we dont consider
this to be as cyclical a business as the market is implying.
$18.80, what upside do you see for the shares?
MD: We think
the shares are being valued as if this was a highly-cyclical contract driller,
when its actually a much higher-quality business. We expect them to
generate $1.2 billion in free cash flow over the next four years, assuming
$50- per-barrel oil and $7-per-mcf natural gas. Thats on an enterprise
value of $2.4 billion, including $100 million of net debt. If we run an LBO
valuation model, its easy to achieve a 30% annual rate of return from
the biggest risks?
MD: Oil going
to $35 per barrel would obviously impact the demand economics. You could also
conceivably see increased supply and pricing pressure in the maintenance business,
but Key is difficult to compete with because its the leader.
has said it will file up-to-date financial statements through 2006 by the
middle of this year. If that slips, it could cause a short-term problem for
the stock, but we wouldnt expect it to impact the long-term potential.
should be an entrepreneur. Who am I to say that this dumb idea won't
wants to rent you 20 minutes in these things for $14.
Here's their promotion:
enhances workforce productivity through educational seminars and mid-day napping
equipment. Born from the realization that individuals can significantly increase
their energy with brief daytime rest, MetroNaps seeks to be the worlds
premier provider of professional napping products and services. ...
a point when all the caffeine in the world cant do the trick. MetroNaps,
a pay-per-snooze endeavor years in the making. For $14, tired workers can
snuggle into sleek adjustable pods, put on noise-blocking Bose headphones
or listen to calming music for ergonomic 20-minute power naps. Gentle vibrations
and lights start when the times up. Afterwards, grab a citrus-smelling
towel, spray on some facial mist, and the boss will never know you were napping.
They even offer
seminars on napping. In fact, go to their web
site and check how you can make science out of virtually anything, including
Let me state for
the record: I do believe in napping. I do believe you work better after
napping. I often nap twice a day. I don't believe you need this gadget. Two
pillows and a couch work just fine for me.
lag can be cured: A team of Argentie scientists announced that Viagra
could be effective in treating jet lag, at least in hamsters. Lucky hamsters.
Bob Hope's brilliance:
ON TURNING 70: "You still chase women, but only downhill".
ON TURNING 80:
"That's the time of your life when even your birthday suit needs pressing."
ON TURNING 90:
"You know you're getting old when the candles cost more than the cake."
ON TURNING 100:
" I don't feel old. In fact I don't feel anything until noon . Then it's
time for my nap."
ON GIVING UP HIS
EARLY CAREER, BOXING: "I ruined my hands in the ring ... the referee kept
stepping on them."
ON GOLF: "Golf
is my profession. Show business is just to pay the green fees."
" I have performed for 12 presidents and entertained six."
ON WHY HE CHOSE
SHOWBIZ FOR HIS CAREER: " When I was born, the doctor said to my mother,
'Congratulations. You have an eight-pound ham'."
ON RECEIVING THE
CONGRESSIONAL GOLD MEDAL: "I feel very humble, but I think I have the strength
of character to fight it."
ON HIS FAMILY'S
EARLY POVERTY: "Four of us slept in the one bed. When it got cold, mother
threw on another brother."
ON HIS SIX BROTHERS.
"That's how I learned to dance. Waiting for the bathroom."
ON HIS EARLY FAILURES:
"I would not have had anything to eat if it weren't for the stuff the audience
threw at me."
ON GOING TO HEAVEN:
"I've done benefits for ALL religions. I'd hate to blow the hereafter on
This column is about my personal search
for the perfect investment. I don't give investment advice. For that you have
to be registered with regulatory authorities, which I am not. I am a reporter
and an investor. I make my daily column -- Monday through Friday -- freely available
for three reasons: Writing is good for sorting things out in my brain. Second,
the column is research for a book I'm writing called "In Search of the
Perfect Investment." Third, I encourage my readers to send me their
ideas, concerns and experiences. That way we can all learn together. My email
address is .
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