There have been many notable “booms” in the history of investing, from the madness of the Dutch tulip disease in the 1800’s to the gold rushes in many countries in the 1900s until as recently as the technology sector bubble of the early 2000s. But outside share market booms there are also genuine large scale expansions of sectors and industries with sustainable futures.
The space race and the automobile revolution were both examples of huge and sudden expansions in industries. Now we are seeing another boom, the energy boom that has been brought on by the technology to unlock oil reserves in shale gas and other unconventional energy sources.
Profire Energy (PFIE) is a company that services this fast growing and important sector. It’s stock price has tripled since this time last year from levels around $1.50 to recent highs approaching $6 until the most recent close price of $5.05 on June 20th, 2014.
This report looks at whether the business has the potential to be a long-term player in the US energy services market or whether the share price has outrun the fundamentals of the company.
Understanding the Business
Profire Energy is a company with one aim: to service the giant players of the oil and gas industry. Importantly, this means that they do not actually acquire or develop or sell the energy assets. Instead, they provide the technology and related products that allow their clients to do so. It’s a little like selling shovels and picks to a miner, you give them the tools, they do the job.
The company has a suite of products to serve their target market. These include models such as the Profire 2100 which allows the client to actively manage combustion systems and flares at highly volatile gas and oil sites. The Profire 1300 is a flare ignition system which allows the management and controlled release of gas “burns” at sites.
There are also the parts that make gas pipelines and sites tick, such as valves, technical gauges, solar power kits, measurement tools and incinerators. None of this sounds particularly exciting or newsworthy, but like a car, there are literally thousands of parts needed to make gas extraction and oil well sites work safely and efficiently, and Profire supplies many of them.
Metrics and Measures
Profire Energy (PFIE) most recent results were welcomed by the market as they showed major increases in all areas.
The headline result was a quarterly revenue figure of $9.5 million, which was a 169% increase over the same period the previous year. Even more notable and hugely impressive was the 470% increase in net income after tax to $1.2 million for the quarter. The figures represented a swing from a loss position to a profitable one.
There was also a highly pleasing fall in the operating expenses of the company from 75% of revenues to only 33%. Results like this suggest that the intensive capital investment phase of the companies growth is over to be replaced by a profitable stage.
Sale of goods was also very strong as the profile of the company and the effectiveness of their products became better known in the market with increases of 183% in the sale of goods and a 46% increase in sales of associated services.
The Investment Case
Profire Energy (PFIE) is exposed to a fast growing market, and is poised to benefit as a result. There are several risks that attach to a company like Profire. The first is industry exposure. The fortunes of the company are completely tied to a single industry, the energy sector. If prices fall, or there is weakness in end demands, large companies defer or cancel projects. For contractors like Profire, this means lost contracts, lost earnings and highly volatile profitability.
The other major risk is that of replication and replacement. While the tools that Profire sell are essential for oil and gas sites, they are able to be replicated and copied by competitors. Rival companies are attracted by profitability and may seek to replicate the products that Profire offers it’s clients, which would lead to price competition and fragmentation of the sector. Both would have a negative effect on earnings.
Offsetting these risks is the geographical diversification of the company, with North America, Australia and South America all markets that have Profire products operating in them. Geographic spread reduces reliance on any one market.
Profire Energy (PFIE) is a strongly profitable company exposed to a rapidly growing and booming North American energy sector. Their geographic diversification and strong product suite counters the inherent risk in single-industry companies to a certain extent, and management has shown the ability to cut costs and grow profitability at the same time.