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Poseidon Concepts tanks

The markets were down today, but nobody took a worse thrashing than Poseidon shareholders

Nov 15, 2012

by Max Fawcett

Ouch. That’s about all Poseidon Concepts shareholders can say today, after a very disappointing third quarter report sent its shares down by more than 50 per cent on the day. The oil and gas services company, which manufactures waste fluid tanks for natural gas and oil sands operations across North America, had been something of a market darling ever since it was spun off from Open Range Energy as an independent – and publicly-traded – company in November 2011, and its share price rose as high as $16.89 earlier this year before settling comfortably in the low teens. Now, after the battering it’s taken today, it sits at exactly $5.

Earlier in the day FirstEnergy chopped its price target on the company from $20 to $8.50, and changed its ranking from outperform to underperform. It might be a bit late for that, though, given that its third quarter results were the very definition of underperformance. It undershot FirstEnergy’s revenue estimate by 44 per cent ($41 million rather than $74 million) and its earnings-per-share target by 80 per cent ($0.10 rather than $0.51). FirstEnergy chalked the epic miss up to a decline in both the use of Poseidon’s services and the prices it receives for them, and noted that it may have been particularly hard-hit by a pull-back in cap-ex spending in the Bakken. “Anecdotally, we have heard there are approximately 600 wells that have been drilled but are yet to be completed in the Bakken,” it said. “We believe Poseidon has a material exposure to this play, which would have inordinately hurt results in the quarter.”

That dip in completion activity is expected to remain low for the foreseeable future, but the company’s sudden vulnerability won’t necessarily invite additional competition in the space, given that Poseidon has fended off all comers it’s faced so far. And while the environment is fairly hostile right now, FirstEnergy expects that to change by the latter half of 2013, when it forecasts utilization rates to pick up.

Investors – that is, those that haven’t already pushed the sell button – might be wondering about the status of the $0.09 per month dividend that suddenly yields almost 20 per cent. FirstEnergy notes that it currently consumes about 87 per cent of the company’s free cash flow, but that it could be sustainable in 2013 and 2014 if things don’t get materially worse for the company.

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For those tempted to step in and invest in Poseidon’s beaten-up shares, though, a word of caution. “We remain leery on the working capital issues,” FirstEnergy said. “Clearly, the exponential growth of Poseidon has outpaced the ability of the Company to successfully manage its accounts receivable. As such, we see the need to grow the G&A, or risk further receivable issues. This will of course lead to lower margins. We also see the risk of further write-downs, with aged receivables.”

 

 

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