Financial Press: Succeeding Through Diversity

(Financial Press) - South of the border, major energy service providers such as Halliburton, Key Energy Services, Unit Corp., Newpark Resources and Nabors Industries have had a rough start to the year. Reports of overselling of stock, coupled with demand issues have made a ripple into a wave in the US sector. However on the Canadian side of the border, things are a little rosier, especially for energy service companies diversified beyond solely serving the oil and gas sector. For one Canadian company in particular, the beginning of 2013 shattered company profitability records, and opened up new doors among not only the energy sector, but in infrastructure and in utilities as well.

When the publicly traded, and multifaceted service provider Enterprise Group received a $6 million thumbs-up from Baystreet legend Mike Wekerle’s Difference Capital in March, it was a catalyst for what was to become an astounding Q1. Now, coming off of the recent announcement of the first quarter’s results, it’s clear that Enterprise has found a winning formula. Enterprise’s Q1 was not only a company-record in profitability for a quarter, but also for entirety of any of its previous years in operation.

Prior to 2008’s economic meltdown, Enterprise had some very strong years in 2005, 2006, and 2007, however it was solely focused on one sector. A refocusing effort undertaken in 2011 changed the trajectory of the company back to profitability. The retooling resulted in a run of seven straight quarters of profitability; culminating in 2013’s record breaking Q1. In all, Enterprise now derives revenue from three different streams: Energy Services, Utilities, and Infrastructure.

“Back in 2005 we were really just in the oil field construction business and the refocus has made us a little more bulletproof,” says Enterprise VP and Director Desmond O’Kell. “If any one of those segments has a significant downturn we’re not completely reliant on any one.”

Today the company services not only major players in the oil patch, but also major utility providers as well, such as Fortis, Shaw Cable and Telus. Coupling the demand from its energy and utility clients, Enterprise is also looking towards Alberta’s expansion of infrastructure projects already in the works. Some of these include the twinning of Highway 63 between Edmonton and Fort McMurray, and the renovations planned for the airports in both those cities as well as in Calgary and Grande Prairie. In finding its new balance, Enterprise seems to have something for everyone.

“I guess the analogy we like to use is to view the current marketplace as if there’s a gold rush going on,” says O’Kell. “So do you invest in the guys out there trying to produce it, or do you invest in the guy who sells everyone the pick axes and pans?”

Instead of pick axes and pans, the Enterprise Group has invested in all types of equipment for its fleets and rental outlets. The company’s consistently growing asset base is currently worth approximately $20 million, and includes a fleet of over 300 trucks, heavy equipment and proprietary specialized heating units. The buildup of this asset base has been easy for management to justify by using previous examples, for instance the purchase of specialized heavy equipment trucks for $500,000-$600,000, which are then rented out at a rate of $15,000 per day. Payback for each new truck is relatively quick and painless.

While much of the credit for the company’s success will be attributed to Enterprise’s equipment base, more should be given to the makeup of its current management team. President and CEO Leonard Jaroszuk is a director on several oil and gas service and manufacturing companies in the province, and brings over 25 years of experience building and managing public companies. Joining Jaroszuk is O’Kell who has been with the company since its inception in 2004 and also brings more than 25 years of experience to the table. Bringing another 25 years plus of experience is COO Doug Bachman, who comes from a background of corporate finance and management with a tier one Canadian chartered bank. The most recent addition to the team is CFO Warren Cabral who was most recently the CFO for one of Canada’s largest institutional investment fund managers. The team’s ability to make a strong run of profitable quarters, and prove its experience and pedigree was enough to appease the investment tastes of Michael Wekerle’s Difference Capital into helping the company grow.

Now the new-look conglomerate consists of three business units (plus a pending acquisition set for June/July backed by Wekerle’s group). The Enterprise Group is currently riding the success of its two lead subsidiaries TC Backhoe (and Directional Drilling), and the current flagship Arctic Therm. The former currently brings in the highest amount of revenue for the company, while the latter represents the highest growth potential.

“Arctic Therm has proved to be just a phenomenal opportunity for us and probably our largest growth opportunity,” says O’Kell. “All of our business units have really great growth opportunities in front of them, but none better than Arctic Therm.”

Acquired last September, the Arctic Therm division provides the unique service of flameless heating, which greatly helps in the construction phase of new pipelines. Developed over a decade ago, the technology still carries with it an exclusivity provision that will last Enterprise another seven years. During that period, Enterprise will have plenty of time to continue marketing it at the pace that it already has.

Prior to the acquisition, the large-scale heating units in essence one of the oil patch’s best-kept secrets. Under its previous management as a private company, Arctic Therm was servicing only a close-knit client list. Enterprise seems to have taken the ball and run with it.

“Before us, Arctic Therm had some significant repeat customers,” says O’Kell. “For the last 10 years, PennWest and Shell kept coming back to them to use their large units.”

“Now since we bought the company, we’ve brought on new clients including Suncor, Husky, Imperial Oil and more. Some of these companies have already used the units for two to three occasions on different projects this season alone.”

Typically the biggest feat for new technology purveyors is to convince the majors in the marketplace to trust their wares. The whole process can take years before a big fish will bite. But in the case of Arctic Therm, Enterprise has convinced its clients to give their process a green light in only two weeks.

For the decision-makers, flameless heating is an easy solution to wrap their head around. When they ask for proof of success, the company is quick to provide examples of documents and case studies on several projects. But at the end of it all, just stating that pipes are sufficiently and safely heated enough explanation for the black and white minds of the prospective client’s engineers, and for a new relationship to begin.

The implementation of Arctic Therm appears to be sweeping the province, however, backed by its current success, a yearning global market awaits.

“With Arctic Therm, we have tremendous global expansion possibilities,” says O’Kell. “There is nothing like it in the world that can deliver this kind of dry, breathable, high BTU output heat.”

“We’re now currently out there applying a full court press on education and marketing of this solution to the broader base engineering firms and oil and gas companies. So far it’s been an easy conversion once we show the results.”

As Arctic Therm expands not only its client’s pipes, but Enterprise’s profitability, it does not solely represent all that the company has to offer. Important lessons learned from 2008 have not been lost, and the company maintains a necessary balance. Given that the oil sector can behave in a binary fashion with either the switch turned on or off at any given time, management firmly believes that it’s better to diversify and provide service for its other targeted sectors.

Arctic Therm is right now the division that’s delivering Enterprises richest and quickest growth. But also in the company’s arsenal is TC Backhoe and Directional Drilling (a utility build-out operation) which brings the largest amount of revenue. Last year TC brought in $15.5 million, and this year should bring on another $21-$22 million. The projection for 2013 is nearly double that, which includes its newest acquisition.

“We’re going to do about $42 million this year with the new acquisition starting in June,” says O’Kell.

The acquisition was announced in February. Enterprise acquired a specialized underground infrastructure construction company for $12 million. Importantly, the addition further helped to mitigate the seasonality of the company’s other divisions. It was through this acquisition that the connection with Wekerle and his team came in.

To help finance the acquisition, Difference Capital saw the potential and offered up a more than fair $6 million convertible debenture over a two-year term at only 6% interest. Wherever Wekerle’s money goes, so does the reputation, so for Enterprise this represented a major vote of confidence, which has been rewarded by a price bump of nearly $0.20 since late March.

Since the reworking of the company’s entire strategy, it appears that Enterprise has not only righted the ship, but taken its first steps into another stratosphere. With major pipeline projects such as Enbridge’s Northern Gateway, TransCanada’s KeystoneXL, and a plethora of approximately 30 more lesser-publicized pipeline projects around the corner, it appears that Enterprise will still have a lot to derive from its first love in the oil and gas sector.

“The next 3 to 5 years for underground large pipelines look fantastic,” says O’Kell. “There are plenty of opportunities for service providers to get involved and make sure that each task is carried out safely, effectively and profitably.”

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