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No. of Recommendations: 6
It's a bloody day so far for the Orange portfolio. ITRN posted some disappointing results this am and apparently slashed their dividend in the process. ITRN is down about 7.5% today while PDS is down 6% on lower oil prices. The drop in oil prices is creating opportunities among oil stocks including PDS but if the free fall continues at some point it will impact PDS's business. As long as oil stays above the $60 level demand for their services should remain very strong. The oil shale plays are certainly less commercial as oil prices drop below $70 but the land rush is on and just like the shale gas plays, E&P's will drill to capture acreage even if prices don't support the wells they are drilling. The need to add liquids to their production mix and the strong belief that oil prices will return to higher levels in the near future will keep shale oil drilling going well into a downturn.

The biggest threat would be a prolonged downturn from another deep recession like 2008/2009 where cashflows are severely crimped and operators cannot afford to keep drilling at the current pace. The risk of Europe unraveling and triggering another global recession is the principle driver behind the correction in oil prices over the last few weeks. It is the same fear driving down all stocks and commodities. Even if a major recession takes hold and oil prices drop below the $60-80 range there is little doubt that oil prices will rebound which will keep exploration cos drilling as much as they can afford to. The world has reached a point where oil is scarce and demand is only increasing as southeast Asia/India and Brazil emerge. There is simply not enough oil available below $60 to supply the world. We need prices above that level to justify the enormous investments in ultra-deepwater, artic, shale and Canadian tar sands. At current prices, I think the market has is already pricing in another recession and PDS presents a compelling valuation. Of course, it will go lower if those fears are realized but for those willing to ride out the turbulence, PDS and many other oil service cos are dirt cheap today.

TMFDoodlebugger
(Long PDS and ITRN)
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Doodlebugger,

Glad to see you here. Did I miss you over at GG or are joining the Orange Portfolio team because Nathan picked PDS?

Bruiser
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I post where ever I want to. I did post on GG occasionally on the CGV board and PDS board. Ironically, the only two GG stocks that I owned were Nathan's first two picks for the Orange Portfolio so I'm following it now. I'm not affiliated in any way with the Orange Portfolio but I do enjoy international and small cap investing so I'm watching.

TMFDoodlebugger
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No. of Recommendations: 1
TMFDoodleburger,

I am guessing HEK, CJES, DWSN, and PDS are at the top of your list.

Are you considering HAL or CRR at these levels?

Also, what do you make of CJES's acquisition today?

Thanks.
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Also meant to ask if you were considering DNR at these levels. Thanks.
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A question on valuation.

Nathan Mentioned in his valuation " I peg the shares at seven times their price-to-cash-flow and enterprise-value-to-EBITDA multiples. "

The last year and the current TTM has negative cash flow. Also, why would anyone chose ev to EBITDA multiple for valuation? Especially for a company that is capital Intensive and cyclical? The money provided by depreciation will be used and some more by new capital needs. Being cyclical margins will be all over along with revenue but interest and depreciation costs remain same irrespective of where you are in the cycle.
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No. of Recommendations: 3
The last year and the current TTM has negative cash flow. Also, why would anyone chose ev to EBITDA multiple for valuation? Especially for a company that is capital Intensive and cyclical? The money provided by depreciation will be used and some more by new capital needs. Being cyclical margins will be all over along with revenue but interest and depreciation costs remain same irrespective of where you are in the cycle.

Both are rules of thumb. I actually prefer to model out the cash flows and then normalize them a bit as Precision's capex is largely expansionary and demand driven. Cash flow will have its ups and downs, of course, but the maintenance capex here isn't much and if the contracts dry up, so will the expansion capex.

Free cash flow has been negative of late, because of the demand for new rig builds. But I was talking about plain cash flow or operating cash flow here. Again, as a rule of thumb as I don't expect everyone out there to be building models.

EBITDA is a far from perfect metric, but it is a good rough indicator of operating cash flow for Precision.

As a general rule when coupled with enterprise value, EBITDA is quite handy for comparing similar companies. It definitely has its warts and its not a good tool for absolute valuations, but for relative valuations ev-to-ebitda is actually quite a bit more useful than P/E because it takes financing decisions into account. As imperfect as it is, companies often shake out fairly logically in comparison to each other on this metric.

I don't, however, recommend getting wrapped up in EBITDA growth from year-to-year, etc.

Best,

Nathan
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