Acquisitions and low oil prices add risk for this rising oil transportation firm

Investment Advice

Pat McKeough responds to many requests from members of his Inner Circle for specific advice on buying stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.

Recently an Inner Circle member asked about the prospects of a Canadian oil service stock. Aveda provides transportation services for oil and gas producers in both Canada and the United States, with three quarters of its revenue coming from the U.S. The company has made several key acquisitions this year that have added to its profits—and its debt. Pat takes a hard look at the company’s balance sheet and considers its prospects in light of the dampening effect lower oil prices have on energy projects.

Q: Dear Pat: A company that would seem to be moving in the right direction is oil-service firm Aveda. Perhaps I can have your input regarding this prospect?

A: Aveda Transportation and Energy Services Inc. (symbol AVE on Toronto; www.avedaenergy.com) provides transportation services to oil and gas producers in Western Canada and the U.S., mainly in Texas, Pennsylvania, West Virginia and North Dakota. The U.S. supplies around 75% of the company’s revenue.

Aveda’s trucks haul drilling rigs, storage tanks, pipeline components, temporary structures and other equipment. It also rents related gear, such as power generators and light towers.

In January 2014, Aveda paid $51.4 million for North Dakota-based M&K Hotshot & Trucking, Inc. and M&K Rig Service, Inc. These businesses own 79 trailers, 15 transport trucks, 14 winch trucks and three cranes, along with 395 pieces of rental equipment.

The purchase expanded Aveda’s presence in the fast-growing Bakken shale oil and gas region. It will also let it redeploy underused equipment from Western Canada to the U.S.

Aveda also recently paid $24.0 million U.S. for Precision Drilling’s (symbol PD on Toronto) U.S.-based rig-moving assets.

M&K acquisition and strong demand in Texas help fuel revenue gain

The company’s revenue jumped 60.1% in the three months ended June 30, 2014, to $32.1 million from $20.0 million a year earlier. The new M&K operations contributed $7.3 million in the latest quarter. Strong demand in Texas also fuelled the gain.

Cash flow rose 31.2%, to $3.4 million from $2.6 million. However, cash flow per share fell 34.6%, to $0.17 from $0.26, as the company issued more shares to fund its acquisitions.

Aveda’s long-term debt of $49.2 million as of June 30, 2014, is a high 61% of its market cap. However, it holds cash of $25.7 million, or $1.29 share.

The stock is down from its high of $5.95 in early September, but it’s still up nearly 22% over the last year at $4.25. The company’s industry is highly fragmented, so it should have plenty of opportunities to make more acquisitions.

However, demand for Aveda’s services depends on volatile oil and gas prices, which have been down lately. That has already prompted several producers to postpone plans to expand big projects in the oil sands and elsewhere.

We view Aveda as a hold, but only for highly aggressive investors.

Coming up Next

Monday we tell you why we now have a once-promising Canadian oil and gas producer as a sell.

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