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DIRTT goes public – but should you buy?

Also: Surge Energy keeps on, well, surging

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Dec 2, 2013

by Max Fawcett

DIRTT Environmental Solutions went public last week (TSE:DRT), but the Globe and Mail’s Boyd Erman isn’t sure investors should be jumping into the new issue. The company, which makes office interiors for a wide variety of companies – including 170 Fortune 500 firms – sold 15 million shares last week at an opening price of $3, raising $45 million that it intends to use to pay down debt and fund growth. But that growth, Erman wrote, isn’t exactly apparent from the numbers it filed as part of its IPO prospectus. “DIRTT’s marketing documents advertise a compound annual growth rate for revenue of 23 per cent over the past five years. But this year, revenue is trending flat to down. In the first six months of the year, DIRTT reported that revenue fell 8.2 per cent. The company swung from an operating profit of $1.3 million to a loss of $1.2 million. The net loss ballooned to $5.9 million from $1.4 million.”

Why did the company go public, then? Erman think it has something to do with early investors looking for a way to cash out, and something to do with a convertible debenture that would dilute existing shareholders if the company didn’t complete an IPO by the spring of 2014. “DIRTT sold $20-million (U.S.) of notes in December 2012 that are convertible into common shares,” Erman wrote. “The ratio is 325 shares per 1,000 (about $3.07 per share) – unless the company does not complete an IPO by spring. If there’s no IPO, the conversion rate goes up to 464 shares per $1,000 (or about $2.16 apiece), leading to a lot more dilution for the existing shareholders.”

The Calgary Herald’s Mario Toneguzzi had an interesting piece on the IPO and the disdain that CEO Mogens Smed has for bankers – which may help explain the timing and nature of the offering. Anyways, it’s worth a read.

And FirstEnergy released a note on Surge Energy (TSE:SGY) that suggests the company is making a successful transition, like Whitecap Resources (TSE:WCP), into a smaller but still growing dividend paying oil company. The company recently paid $76.8 million for 980 boe/d along with 2P reserves of 5.4 million boe, and FirstEnergy definitely likes the transaction. “The asset is an operated, low decline (approximately nine per cent) oil property strategically located within Surge’s core area of central Alberta. The asset is currently under waterflood, which is one of the principal drivers behind the low production decline. With an estimated operating netback of over $42.00/boe, this implies a 2.9x recycle ratio. In addition, the asset is expected to generate cash flow $15 million per year.”

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As a result, the company has increased its forecast exit rate for 2013 from 14,200 boe/d to 15,000 boe/d, with a slight increase in the oil and NGL bias. It also bumped its forecast 2014 exit rate to 15,500 boe/d and hiked its dividend an additional four per cent. The company expects to exit 2014 with net debt of $209 million – hardly overleveraged, in other words – and add $40 million to its existing $430 million credit facility. FirstEnergy has an $8.50 price target on its shares.

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