Pulse Seismic was previously discussed on this site with our original thesis and previous fiscal year update. After almost a year in PSD, let’s resume the progress in earnings and revise our estimates.
Pulse Seismic purchased Divestco last year and so doubled their database of seismic information and a reasonable (read cheap) price. I expected EBITDA to increase by 0.38$ per shares and reduced that increase to 0.24$ per share following fiscal year update for an expected total EBITDA / share of 0.56$ in 2011.
Following Q3-2011 release, can we prove right or wrong? I was wrong.
Revenues are up, hell they are. Sales increased almost 100% year over year based on the first nine months from 14M$ to 27.9M$! The major increase is mainly due to sales of recently acquired 3D data. But, to our disadvantage, out of this 27.9M$, 4.3M$ were related to new data survey. These data surveys are necessary to increase the library but consumes a lot of cash and returns no immediate profits.
Commissions and salaries increased slightly this year due to higher sales (commission) and pay raise (salaries). The major increase in charges is due to financial charges. The interest paid on the debt used to acquire Divestco data library accounted for 3.1M$ for the first nine months of 2011. This represents 50% of PSD losses YTD! The good side of it is that they paid down 12M$ worth of debt since Q3 2010. Interest rates did drop in Q3-2011 (5.5% to 4.25%) and capital is lower so the net effect should be interesting. I think that we must account for another 0.75M$ interest per quarter for the next year.
Dividends were restablished…shily restablished at $0.0125 per quarter or 0.05$ per year. The dividend yield is at 2.7% on current price (1.86$). It is better than a bank account or double the US Treasury Bonds, but there are a lot higher dividend yields in the market.
Last year 53M shares were in circulation but this number of shares increased considerably this year. The share issuance actually diluted shareholder capital by 25% from 53M shares to 66.5M shares! That is an incredible hit to shareholders’ value.
Operations generated a lot of cash this year. Data library sales generated 17.7M$ in cash. Unfortunately, this cash was used in participation surveys (6.1M), data purchase (0.6M), Debt payment (9.7M) and debt special capital only payment (2M) for a total cash exceeding cash generated by 1.6M$.
So what are we left with? We got a company generating 17M of free cash flow in 9 months from its operation but we also have a company growing its database by investing in data survey (assets) for around 7M in 9 months. It should total up to 23.6M of FCF from operation and 9M in data survey (basic total divided by 3 quarters multiplied by 4 quarters). Leaving us with a net FCF of 14.6M$ to pay down debt and return cash to shareholders per year ( P/FCF of 8.6). But wait, debt repayment is required to at a rate of 12M per year! Leaving us with only 2M$ per year for shareholders.
Surely this company is relatively a safe investment and Alberta oil exploration are on a high curve. Market for data survey should be nice in the following month/years but is it worth the wait? I’m trying to figure out.
Disclosure : Author is Long PSD but may sell shares in the following 72 hours.