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Poseidon Concepts (PSN-T) is a provider of safe, innovative fluid handling solutions to the oil and natural gas sector across North America. Poseidon’s growing fleet of tanks is deployed in unconventional plays across the continent, with ~2/3 of the current fleet in the U.S. and 1/3 in Canada. PSN was spun-out of Open Range Energy Corp. (ONR-T) in 2011 as a pure-play energy services company.
NBF believes that PSN’s
first-mover advantage coupled with both regulatory and patent barriers to new entrants and strong free cash flow generation makes for a compelling investment opportunity.
Furthermore NBF believes that PSN may surprise naysayers on margin sustainability. NBF rates PSN Outperform with a $19.00 target price.
This represents a total return of 35.7%, including the 7.7% dividend yield.
Lowering Costs to Producers.
PSN’s fluid handling system design uses modular assembly to help lower the costs associated with the storage of a variety of fluids on a well site. Costs can be as much as 70% lower to an E&P using one of PSN’s systems than using a comparable 400 bbl tank farm. NBF believes PSN’s design will be responsible for a paradigm shift in which 400 bbl tanks will be obsolete and completely replaced in a variety of fluid storage scenarios.
High Demand to Drive Growth.
PSN’s fleet has grown from four in June 2010 to what the company estimates will be 400 in June 2012. This growth is a result of the systems’ low capital requirements and the high demand from customers.
Very High Margin Business.
NBF estimates that PSN’s tanks generate EBITDA margins north of 80% and have payback periods of approximately four months. Even significant margin compression, which will likely occur as competitors enter the space, would still provide cash flows that can sustain the current dividend.
Large Market to Service.
Trends favouring hydraulic fracturing and changes to provincial regulations may provide for further expansion of the market as a whole. Given an increasing portion of PSN’s fleet is being dedicated to long-term storage which NBF thinks suggests that (a) day rates may be higher for longer, (b) utilization may be higher and (c) the market may be larger than NBF’s initial 5,000 tank estimate (driven by the use of frac fluid). Backing this premise is the fact that 60% of PSN’s current fleet is under long-term contracts, and 70% of their fleet growth is already contracted for. In addition, regulatory shifts could lead to increased, environmentally superior, tank adoption as environmental concerns are causing governments to consider or limiting the use of open pits for E&P fluids storage (currently 40-60%).
PSN’s currently pays a 7.7% dividend yield with an estimated payout ratio of 46%/ 42% on NBF’s 2012/2013 cash flow per share estimates. NBF believes that the trend towards multi-year contracts and rapid tank fleet growth suggests that PSN should have no difficulty funding their dividend. In turn the yield should provide support for the stock price as investors are looking for ways to obtain yield in the current low interest rate environment. Management has also stated its longer term desire to be a dividend growth company.