Equity research: Tuscany International Drilling, Inc. (Part 4 of 4)
Tuscany International Drilling, Inc.: Margin of safety and operational support
Tuscany’s asset base consists primarily of drill rigs, which are currently selling for a substantial discount to competitors. Price to tangible book value is approximately $0.22, where average among competitors is around $0.81. Enterprise value to tangible book value is $0.94, with competitor averages around $1.54. The asset base is quite young and not overly differentiated from competitors, so if an asset sale were needed, it should not be difficult to conduct. Given a liquidation scenario, there should be ample room to pay debt and give equity holders a decent return. Assets could be sold off at 65% of book before equity holders would start to feel a squeeze.
Since 1Q 2012, Tuscany experienced declining revenue and EBITDA (earnings before interest, tax, depreciation, and amortization) in every quarter, as utilization tanked from terminated contracts. These do not seem to be operational or performance problems; they were client-specific circumstances. Utilization is now on an upward path. 1Q 2013 utilization has improved from 60% to high 70%, with additional utilization expected into 2Q and 3Q. As the chart in Part 2 shows, Ecuador is 100% utilized; by end of 2Q, Africa is expected to be 89% utilized; Colombia should be 100% utilized by end of 3Q. Brazil, although problematic, remains encouraging. There should be adequate support for capital structure if operations improve to expected levels and in the event of a debt restructuring Tuscany should do quite well.
Saxon Energy Services and Tuscany comparison
Walter Dawson engaged in a similar venture called Saxon Energy Services from 2004 to 2008. The company was taken private by an acquisition vehicle jointly owned by Schlumberger Oilfield and a fund managed by First Reserve Corporation in late 2008 at $7.00CAD per share. Saxon had North American and South American oilfield service operations, with the South American operations in similar locations as Tuscany. Saxon’s final quarterly metrics are shown below, with a side by side comparison to Tuscany’s most recent quarter figures.
|Saxon||Q1 2008||Tuscany||Q1 2013||Tuscany Difference|
|Gross Margin %||33%||Gross Margin %||28%||-15.2%|
|Utilization Rate||77%||Utilization Rate||66%||-14.3%|
|Avg Rev/ Day||$22.7||Avg Rev/ Day||$26.9||+18.5%|
|# Revenue Days||1,866||# Revenue Days||2,195||+17.6%|
|# Rigs |
*Company Reports & Analyst Estimates
Notice how much additional leverage Tuscany has accepted in comparison to Saxon. Above is a comparison chart taken from each company’s information circular documents.
Can Dawson revive Tuscany to look more like Saxon? With time and flexibility we think, and hope, he can.
Tuscany has come under difficult times and suffered dramatically, but bright spots are beginning to emerge and the company could be on a path that will add substantial value to patient investors. With operations returning to a normalized level, financial obligations should be supportable and the implementation of strategic alternatives should add flexibility to lessen the current leverage stress.
A number of potential catalysts suggest the company is shaping up for a shareholder-friendly event, and given Tuscany’s market presence and the returning CEO’s expertise, we believe the likelihood of some event is high. Additionally, the asset base supports a low probability of loss, which sets up an attractive risk/reward scenario.
Tuscany is a small company with a speculative agenda, so position your portfolio accordingly.
The Market Realist Take
The company stated in its August 2013 filing that in April 2013, it engaged the services of two investment banking firms to assist in developing strategies to increase shareholder value. It’s committed to looking for ways to strengthen its balance sheet and refinance. Management plans to:
- Continue to pursue refinancing alternatives
- Continue to vigorously pursue the collection of outstanding accounts receivable and VAT recoverable
- Communicate with existing suppliers to help ensure their continued support
- Evaluate strategic alternatives, such as mergers
- Continue to focus on marketing efforts to increase profitability through increased rig utilization
- Continue to focus on controlling costs and the timing of cash disbursements
Browse this series on Market Realist: