Enterprise Group | The Soaring Eagle
A hidden gem, +500% YoY, and only just starting its ascent to the summit
DISCLAIMER & DISCLOSURE: The author, James Emanuel, holds a position in Enterprise Group, but that may change. The views expressed are those of the author and may change without notice. The author has no duty or obligation to update this information. Some content is sourced from third parties believed to be reliable, but accuracy is not guaranteed. Forward-looking statements involve assumptions, risks, and uncertainties, meaning actual outcomes may differ from those envisaged in this analysis. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing.
Enterprise Group Inc. (Toronto, TRX:E)
Price: $2.35 CAD
Market Cap: $146m CAD
Enterprise Value: $162m CAD
Shares Outstanding: 59.82 MM (Public Float 58.7%)
Significant Insider Ownership
LTM Net Debt/EBITDA: 0.96x
Gross Margin: 49.8%
EBIT Margin: 27.7%
Last 3-Yr Rev. CAGR: 29.2%
Last 3-Yr EBITDA CAGR: 39.7%
ROIC: 12.4%
LTM PE: 14.75x
LTM EV/EBITDA: 8.9x
Payout Ratio: zero (this is a good thing)
URL: https://enterprisegrp.ca/
Reader Note
One of the concerns people have when investing in compounder opportunities is – “Have I missed it?” Before introducing this company, I want to address this issue because the share price has surged 500% in just a year. I would say that every business that increased in value by a factor of twenty, was once a business that was up 500% before doubling, and then doubling again. It is unwise to invest based on price because investing is all about business fundamentals. A company with improving unit economics and a different risk profile might actually present a stronger value proposition after its share price has risen than it did at a lower price a year ago. However, for every company that rapidly appreciates in value, on the way up there will always be draw-downs when some decide take profit or macro-economic events impact the entire market. Valuation appreciation is never linear, so expect pull-backs from time to time. Food for thought! I’ll leave you to decide for yourself.
Introduction to Enterprise Group
Enterprise Group is a leading provider of specialized equipment and services to the energy, pipeline, and infrastructure industries, and is positioned for significant growth.
Its customer base includes over twenty tier one oil and gas companies including Chevron and Royal Dutch Shell.
Based in Alberta, Canada, Enterprise is horizontally integrated offering everything that its oil and gas customers require at remote, off-grid locations. It operates through four divisions:
Evolution Power Projects - Established: April 2022 - This recent acquisition has been the game changer and has acted as the catalyst that is propelling the business to new heights. Oil and gas drilling requires constant power for heating, lighting and other critical equipment. Previously they have used dirty diesel generators, but through Enterprise they are now able to use micro-turbines that are driven by the natural gas produced by the drilling activity. Not only is it far cheaper, but also a much greener mobile power supply, helping further the ESG goals of its customers, with lower emissions, increased safety and meaningful cost reductions. This new segment has a great deal of growth ahead.
Westar Oilfield Rentals - Acquired: October 2014 - a highly-regarded full-service oilfield site and infrastructure company that fulfills multiple equipment rental needs for a variety of customers, it is currently operating a fleet of over 2000 pieces of equipment. This includes mobile worksite offices, bedrooms, washrooms, lighting towers, power generators, storage tanks, septic tanks and much more.
Arctic Therm International - Acquired: September 2012 - When working in remote areas of Canada in winter, temperatures can drop to well below freezing and so heat is essential, but when drilling oil and gas, flames are a hazard. Artic Therm provides safe flameless heating units, to help overcome the extreme climate challenges of Canadian winters.
Hart Oil Field Rentals - Acquired: January 2014 - a team of journeyman heavy duty mechanics, plumbers, scaffolders and service technicians providing customer service 24 hours a day, 7 days a week.
This strategic focus on offering a full stack of services means that the company benefits from its competitive positioning and has huge growth opportunities in the Canadian energy sector as shall be explained.
Insider ownership is in excess of 41% and so there is a strong alignment with external shareholders which always bodes well. Not only that, but management are top-notch and capital allocation has been excellent. This has included acquisitions and timely divestments, plus strategic buy-backs.
Currently the company is paying no dividend, which is great news (see here to understand why) and is unlikely to pay dividends anytime soon. All earnings are being reinvested in the huge growth opportunity that has opened up for this business and so it promises to be a long-term compounder.
This investment thesis outlines the key drivers focusing on the company's growth potential, financial performance, and favorable industry dynamics.
Market Opportunity and Natural Gas Growth
Enterprise Group's services are closely tied to the natural gas industry, specifically in western Canada, Alberta and North Eastern British Colombia, where the company operates. Western Canada is a key natural gas-producing region, and its industry is poised for further expansion due to the ongoing development of liquefied natural gas (LNG) facilities.
This is a significant milestone for Canadian energy, as it marks the country's entrance into the international LNG market. In the past, Canadian oil and gas has either been used domestically or shipped over the border to the US. However, it has developed a new pipeline facilitating Canada's first large-scale LNG export facility, enabling direct shipments to the Asian markets.
Canada’s first LNG facility, LNG Canada, is expected to begin operations in 2024, with full production by 2025. With the anticipated increase in LNG exports, Canada is set to become a top-10 LNG exporter by 2028. This means that the scale of gas extraction operations in Canada will increase by several orders of magnitude and Enterprise, being the leading logistics and support company for the industry, is surfing that wave. It’s a wave that has barely started and promises to continue for decades to come creating a strong tailwind for Enterprise Group’s growth.
Enterprise has also recently announced partnerships and strategic alliances to strengthen its presence in Western Canada. In particular it is collaborating with the Indigenous communities that are signatories to Treaty 8 First Nation, extending its operational reach within the Treaty 8 Territory - a vast area extending to 840,000 square kilometers with plenty of LNG supply.
Additionally, it is exploring opportunities to expand into adjacent industries. Mining, for instance, also occurs in remote off-grid locations and requires power supply, heating and many of the services that Enterprise supplies. It too seeks to improve its environmental credentials and so would welcome the opportunity to utilize the clean technology that Enterprise is able to supply. Mines do not produce natural gas, and so utilization of these generators would require the supply of compressed natural gas (CNG) from elsewhere, which is easily arranged.
The company is quite literally falling over new opportunities all of the time and the only limiting factor is the availability of funds to grow quickly enough - a very nice problem for a company to have.
Competitive Advantages of Enterprise Group
Enterprise Group has established a leadership position in a fragmented market with few dominant players. It has also developed unique competitive advantages that sets it apart from smaller competitors, particularly in its ability to provide natural gas-powered solutions.
Through its Evolution Power Projects division, Enterprise offers mobile power platforms that leverage natural gas turbines instead of diesel generators, delivering significant cost savings and environmental benefits. This technological edge is critical as environmental regulations become more stringent, particularly in Canada.
The shift from diesel to natural gas not only reduces operating costs but also helps customers meet regulatory emissions targets. The use of natural gas turbines provides clients with the dual benefit of environmental compliance and economic efficiency, positioning Enterprise Group as a preferred partner for companies looking to reduce their carbon footprint. As you can see below, the Flex turbine produces the lowest emissions and so is the greenest option available.
Enterprise recently announced a new strategic exclusivity agreement with FlexEnergy Solutions, a globally recognized original equipment manufacturer of turbine and microturbine power generation equipment. This agreement positions Enterprise as the sole provider of short-term turbine and microturbine applications across all commercial and industrial sectors in Alberta and British Columbia. This strengthens its market position as a comprehensive energy solutions provider and establishes a differentiated services which is a competitive advantage.
Strategic Acquisitions and Organic Growth
Enterprise Group has a strong track record of identifying, acquiring, and integrating complementary businesses. Over the years, the company has successfully consolidated smaller firms to bolster its service offerings and geographic reach. Its management team, led by CEO Leonard Jarosuk (owns 15.2m shares, 25.67% shareholder) and President Desmond O’Kell (owns 2.1m shares, 3.56% shareholder), - both co-founders of Enterprise with significant skin in the game, and each with over three decades of experience building businesses - has demonstrated expertise in managing both vertical and horizontal integration strategies.
In addition to its acquisition-driven growth, Enterprise has made significant capital investments to expand its operational capacity. Earlier in 2024, the company raised CAD $7 million to fund the expansion of its fleet, enabling it to capture more business in the rapidly growing natural gas sector. The ability to scale its operations through both organic and acquisitive growth will allow Enterprise to capitalize on the rising demand for infrastructure service.
Financial Performance and Profitability Trends
Enterprise Group does not report financials by individual business divisions, and the reason is clear: it's a horizontally integrated business that thrives on offering a full suite of products. Instead of contracting with multiple providers for various needs at an oil and gas extraction site, customers can rely solely on Enterprise to fulfill all their requirements. The company’s impressive performance stems not from each division excelling on its own but from the combined value they create together. In essence, the whole is greater than the sum of its parts—when all four divisions operate together, their collective value is far more significant (1+1+1+1=6). However, if one part is removed, the advantage diminishes (1+1+1=3).
Enterprise Group’s recent financial performance further strengthens the investment case. Despite the seasonality inherent in its business, the company posted strong results for 2QF24, with revenues of CAD $7.7 million (+41.2% YoY) and adjusted EBITDA of CAD $2.65 million (+34% YoY), significantly surpassing expectations. Notably, the company turned a profit in what is typically its weakest quarter, signaling improved operational efficiency and capacity utilization.
Management has guided for continued revenue and earnings growth, with a projected full-year 2024 EPS of CAD $0.17, a 37% increase over the prior year. The company expects to grow EPS by an additional 25% in 2025, driven by increased capacity and further operational leverage.
These results point to a clear trend of margin expansion and improving profitability.
Risks and Mitigating Factors
While the outlook for Enterprise Group is favorable, there are risks to consider. The company’s fortunes are closely tied to the health of the Canadian natural gas industry, which can be cyclical and volatile due to fluctuations in energy prices. Additionally, competition could intensify as the LNG market develops, attracting larger players to the space. However, Enterprise’s established relationships with major energy producers and its technological edge should help mitigate competitive pressures and may make it a takeover target.
Another potential risk is weather-related seasonality, which can impact the company’s ability to deliver services in remote areas during certain times of the year. However, management has accounted for this in its operating model, and the strong financial performance in historically weak quarters suggests that the company is well-prepared to manage such challenges.
Valuation
Although the share price has shot up over the past 12 months (+500%), Enterprise Group’s valuation remains undemanding.
Given the company's forecast EPS growth, the stock is trading at a modest forward earnings multiple well below its projected earnings growth rate, indicating that the market may not yet have fully recognized the value of the company's underlying business. EPS guidance for 2024 is CAD $0.17, rising to $0.21 next year, implying a forward earnings multiple of 13.8x this year, falling to 11.2x in 2025. As such, despite the stock being up 500% this year already, the company may still be trading at a significant discount to its increasing intrinsic value driven by expected earnings growth and increasing market share.
Gross margins have expanded averaging in the low twenty percent range pre-Covid, to the high forty percent range today trending towards 50%. Similarly, operating margins were negative pre-Covid, but are now in the mid-twenty percent range and heading towards 30%.
Increasing revenue, improving margins and multiple expansion are powerful drivers of shareholder returns as they have a multiplicative effect on valuation.
The company's margins which almost defy belief in the services sector, make Enterprise a key acquisition target itself. This could also be a catalyst for strong shareholder returns in the short to medium term.
Conclusion
Enterprise Group presents an interesting investment opportunity, underpinned by its leadership position in a growing market, a strong competitive moat through its fully integrated service offering, and a proven ability to execute both organic and acquisition-driven growth strategies. The anticipated forthcoming LNG boom in Canada provides a significant tailwind for the company, not to mention plans to explore expansion into adjacent industries such as mining. Its financial performance to date demonstrates the quality of its founder led management team and it looks well-positioned to capitalize on this opportunity.
If you want to learn more, watch my interview with Desmond O’Kell, President and co-founder of Enterprise Group.
Deep Dive Video interview (1hr 28 mins) ~ transcript at the bottom of this post
TRANSCRIPT of Video Interview Above
James Emanuel 00:00:04 Okay, Des, thank you for sparing some time to have a chat this afternoon or this morning where you are in Canada. I'm in London, so we've got to manage that time zone difference. Before we get started, just a point of curiosity. I've seen quite a few video interviews that you've given over the past months or even years. And I noticed it's always you giving the interviews rather than Leonard, your CEO. Just wondering what that's all about. Is he camera shy? Des O'Kell 00:00:34 No, actually, we actually do quite a bit together with respect to these investor presentations and so forth. Usually these recorded ones, you know, I've been doing them, you know, I'm very, very close to the operations, some of the technical aspects and so forth. And, you know, sometimes, you know, on a recorded call having, you know, Less faces on these screens sometimes is a little more efficient. But having said that, we do a lot of calls with the capital markets world. We do them together. And, you know, when we're doing a presentation, I give the presentation and Len will come in with some color commentary. We kind of do it like a football match, you know. James Emanuel 00:01:26 That makes sense. Makes a lot of sense. Okay. Okay, so without further ado, let's kind of dive in. I've got a number of questions for you. So first, let's just kind of zoom out a little bit and look at kind of the bigger picture and the history of enterprise generally. And zooming out over the past 10, 15 years or so, revenues and profits, you know, they're up and down. There were peaks 2007 and 8 and again, another peak in 2013, 14. We're seeing another kind of peak at the moment, 2023, 24. And in between these periods, there are kind of large dips in revenue and, you know, where profits turn into losses. So the business is clearly cyclical. What I'm wondering is the acquisition of Evolution Power Project seems to have been a pivotal moment for enterprise, with the growth trajectory and profitability of the company changing dramatically from that point forward. How do you see that impacting cyclicality going forward, if at all? Des O'Kell 00:02:24 Okay. Well, quick history. We are in our 20th year of business as Enterprise. Leonard Drozic and myself, we founded the company in 2004. We've made nine acquisitions across that 20-year span. There's been a couple of amalgamations. There have been two very timely acquisitions. dispositions at very, very good valuations for the company. I'll explain a little bit of the cyclicality. Obviously, we are an energy services support firm, so we are a bit tied to the events that happen globally and locally to the energy economy. Having said that, you are correct. We've had a morphing of the company certainly since 10 years ago when you indicated the last peak of revenues and so forth. We're back in 2013 and 2014. We moved through a seven-year downturn. It was really a commodity price hit. If you remember back in 2014, we had the Permian Basin in the US, the shale, you know, basically revolution, the way they call it. Saudi Arabia was... You know, having none of it, so they stepped on the gas pedal and started producing, you know, like crazy, and they basically, on purpose, tanked world oil prices to try and teach them a lesson. It didn't work out that well for them. Having said that, it created a seven-year... you know, commodity down cycle that, uh, certainly here in Canada, it affected, uh, it affected our clients and their cap expense. So we had very, very, uh, low activity levels during that period. Uh, but what it did is it, it kind of, you know, you know, good and bad, uh, it cleaned out half of our energy services companies here in Canada. You know, they just couldn't make it, uh, out the other end. And, uh, We actually, we thrived through that. I mean, we were cash flow positive each of those seven years through that downturn. Many of our competitors and peers can't say that. We made two very, very opportune dispositions at very good valuations. We sold our two businesses that were in our underground specialty construction business. We had a tunneling business in And we had a underground utility installation business, high voltage power to fiber optics and what have you. So those two businesses we sold in 2016 and 2018. We sold them for well over what we paid for them. And it allowed us to go net debt free. completely in 2018. And that was right around the time that we started retooling our power fleet, our mobile power fleet, which is what was born of that is Evolution Power Projects, the company you just earlier mentioned. And we have developed... some methods that are different. We have a first mover advantage. None of our peers and competitors have made any investments to be a competitor of ours in our sector with these types of methods. And one of the interesting, and we'll get into this, but There's very few microturbine manufacturers in the world. In fact, I can only identify three. On that subject, James Emanuel 00:06:04 let me just interrupt you there because I actually had some questions around that a little bit later. So rather than kind of duplicating, if you can just hold that thought and we'll kind of go address the turbines a little bit later, if that's okay with you. Des O'Kell 00:06:16 Perfect. Yeah. James Emanuel 00:06:16 Yeah. And I was just wondering about. So you kind of answered the question about the cyclicality. I suppose the last the last point there really was whether the acquisition of evolution power projects is now going to reduce that cyclicality or whether you're kind of still riding the the energy wave in the background and there's nothing you can do about it. Des O'Kell 00:06:39 Well, there's two points I want to make here. One is that there's been quite a change here in the Canadian energy economy. I'll explain that. And the other is the fact that with the power division, we're now looking at adjacent industries. James Emanuel 00:06:57 That's another question I've got for you actually coming up. So that's interesting. Des O'Kell 00:07:02 Let's go to what's changed in our Canadian energy economy. For the history of Canadian production of oil and natural gas, we've only ever had one client, and it's the US. All pipelines, all transportation points to the US market. uh we've had uh two major developments uh it which is our transmountain expansion pipeline uh i don't know if you've heard of that i haven't okay so in 1953 Canada built a uh or the the sector built the transmountain pipeline uh it came into commission i believe 1955 or 56 And it is still transporting almost 300,000 barrels a day to the West Coast. And really, that is supplying the West Coast and, again, down over the border into Washington. So it still is a domestic and US benefited pipeline. We just recently commissioned, it was under billed for the last number of years, basically a twinning of that pipeline. uh but it's tripling uh this this new pipeline is almost 600 000 barrels a day so we're going from almost 300 000 barrels a day to approximately 900 000 barrels a day that uh tripling of that that trans mountain pipeline was commissioned and started moving uh uh oil uh on may 1st of this year now What that is allowing the industry to do is sell the product to Asia. So if you look at any of the new articles or what have you about the TMX line, the Trans Mountain Expansion, it is targeted at Asia and the rest of the world. So this is a magnificent change in our ability to get our oil to other markets. And other markets are hungry. I mean, just recently... half the population of the world is now in Asia. There's third and second world countries that are bound to be increasing their lifestyle. So this is a big market for Canada. It will level out the bumpiness of the cyclicality by only having one customer for our product. Now, further than that, Canada is about to... to be involved in the global LNG market. We have, as you know, Royal Dutch Shell, they have Shell Canada, their Canadian division. They are the lead operator of LNG Canada. It is on our west coast, up in the Kitimat region. The liquefaction plant is basically ready to go. They'll be filling up the pipeline that was that was built and finished here earlier this year. They'll be pressuring up the pipeline with with feedstock. And they're looking at shipping their first LNG cargo in in probably, you know, late Q2 of next year. This is, you know, Albert or sorry. North America has the cheapest natural gas in the world here locally uh you know our price of a eco uh gate uh station uh was was under 50 cents in mcf well you know we're getting into like you say it's getting into autumn it's it's moved it's more around a dollar eighty today But generally speaking, it barely gets over $2. So we have an opportunity. This LNG Canada that Shell is the lead, it also has three other partners that are all Asian. So Petronas is a 25% shareholder. They are a major client of ours in the field. Also Mitsubishi, Korea Gas. And there's one more. But anyway, like I said, it's all destined for the Asian market. And Canada has three other LNG projects right behind at different stages of construction and permitting. Two are led by First Nations groups with major partners like the Cedar LNG, which is majorly owned by the Nisga'a First Nations in the same area of Kitimat and Prince Rupert. on our West Coast. And their midstream partner is Pembina Pipeline. So you can see that Canada's, the shape of where our product is going now, we're going to have access now with the TMX line, with oil to the world markets. We've got LNG product going out later in 2025 and other projects behind it. So this is a massive, massive, needle mover for not only Canada's natural gas producers, but Canadians at all. Recently, there was an article done, and just to give you the magnitude of the TMX line that just came into commission on May 1, that I believe in the month of July, 0.25% of Canada's GDP was that TMX line alone. The province of British Columbia was 0.023. So this magnitude of the GDP was estimated at being just a shade larger in GDP than the whole province of British Columbia. So these are massive projects. They're 40, 50-year projects. And this will level out a lot of the cyclicality that the Canadian energy market has had historically. Long answer, but I hope I got it. James Emanuel 00:12:51 That's fantastic. You know, you've really helped me pull a lot of the pieces together. In my mind, I had all these pieces of a jigsaw floating around. Now I've been able to put them together. It makes a lot of sense. Thank you for that. Okay, so we've looked at the longer term cyclicality, but the business looking at the numbers also shows intra-year cyclicality with Q1 and Q4 typically being your stronger borders and Q2, Q3 slightly weaker. However, your recent Q2 figures this year, they surpassed all expectations. which signaled improved operational efficiency and capacity utilization. Is there something that is likely to persist or was that just an exceptional situation, an exceptional quarter? Des O'Kell 00:13:32 Well, it's going to be a terrible answer that you're going to get, but it's a little bit of both. Here where we're operating in the Western Canadian sedimentary basin, I mean, the majority of it is what you would call Arctic or semi-Arctic. We have basically, if you appreciate the landscape up in the frontier, there's much of it that's wet in the spring and summer. OK, so the Q4 and Q1 are the are the two quarters that are frozen in the north here. So when you have a frozen terrain, then you can move any type of heavy equipment out there. OK, so when you have competent ground, that's a time where our sector likes to get out there and get the work done. Okay, so when we come into April and May, we get what we call the spring thaw. And those areas that are wet, pretty much comes to a halt in those areas. Now, later on in June, those areas dry up and we can get back out there. But there are some areas that are just wet, period, in the spring and summer. And you just can't move any heavy equipment around out there. So they are particularly targeted in the cold, frozen months. So that gives you a little bit of an overloaded Q4 and Q1, and less so in Q2 and Q3. So yeah, a little cyclicality in the calendar. Having said that, our power division had their best month historically in the month of April, believe it or not. But like I said, these areas that are wet, they They slow down, obviously, but activity doesn't stop. There's other areas that are dry that we don't have to worry about competency of the ground and so forth. So they carry on. But they had just a knockout quarter in April. It just happened to be one of the months that is confined to that thawing period. Having said that... Our energy sector really turned on pretty good a couple and a half years ago. The industry has been very, very overworked the last couple of years. So a number of our clients were looking at giving their people a break here coming out of Q2 into Q3. There's projects that are starting right now that normally would have started 40, 50 days ago. So we'll see a little bit of that coming into sneaking into this Q3. But, you know, many of our major clients that have, you know, comprehensive programs for drilling completions and so forth. they've given us the indication that we're going again hard. So we expect Q4 and Q1 and into 2025 to be, again, that trajectory that you see our financial results on, that trajectory will be intact going forward. James Emanuel 00:16:34 Okay, that makes sense. A couple of questions kind of come out of that, flow from that. Earlier, you were talking about LNG and the new Shell project, and you mentioned that that was likely to come online in Q2 next year. What I'm wondering is, you know, we're talking about Q1, Q4 being your strongest quarters, but those are your financial quarters, not calendar quarters. And I'm just wondering, when you said the Shell LNG is coming online Q2 next year, was that calendar Q2, or does that correspond to your Q2? Des O'Kell 00:17:02 Yeah, we have a December 31st year end, so we are on the calendar. So you're aligned, perfect. We're aligned on the calendar. So sorry, probably good to state that. So when we say Q2, we mean the calendar as well as our fiscal. James Emanuel 00:17:17 Perfect, that makes sense. Yeah, don't worry about that. Okay, thank you. And the other thing is you kind of mentioned and explained how, you know, Q1, Q4 are your kind of strongest quarters because it's drier. It's cold. The ground is frozen. It's not so wet. What I'm wondering is, is how climate change is impacting you guys in Canada. I know that in the UK we used to have four very distinct seasons and now it's not really the case anymore. Some of the seasons are kind of merging into each other. We maybe get three seasons now. Sometimes the summer is really wet instead of dry. Is that impacting you at all? Are you seeing a lot of variation there, or do you still get really freezing winters and wet weather? Des O'Kell 00:17:55 We have very much four distinct seasons. I remember back in 2006, we were in San Francisco with some people from the capital markets, and I got the same question, are we going to be frozen? Listen. James Emanuel 00:18:14 Yeah. Des O'Kell 00:18:15 come, come visit us, uh, in, in January and February and, and then come visit us in the middle of July when it's, you know, we, we get past minus 30 degrees C and, uh, we get well over, uh, plus 30, uh, C in the summer. So we, we are, we are not seeing, uh, any, any variation, uh, you know, that is outside historic, uh, records at all. Um, you know, obviously, you know, we just came out of, uh, an El Nino and that typical last winter was a typical El Nino exiting winter and or exiting El Nino winter. Very, very similar cyclicality in that is is not changing. And certainly in my or anybody that I speak to in the industry. James Emanuel 00:19:08 Got it. Okay, thank you. Thank you. Okay, so kind of drilling into the numbers a little bit. Your gross margins are very, very strong, you know, close to 50%. So I'm guessing there's probably not much room for those to expand further. But you know, correct me if I'm wrong there. Are you able to give us a better idea of how revenue and margins break down by each of your four divisions? Des O'Kell 00:19:30 We simply are not segregating or segmenting our four divisions. Let me just tell you, they're all very similar. They're very, very good margin businesses. Obviously, the power division, because we have... some equipment offerings that are very exclusive. I mean, there are some premiums to them. And, you know, the fact that the client can save vast amounts on their fuel costs by switching from diesel to natural gas use. And in most cases, the natural gas that is being used to fuel our power systems on the client sites is the client's natural gas that they're producing on site or nearby. So they don't pay anybody physically for that fuel. So that's massive savings. We've got tremendous gulf of cost efficiency there. I mean, the turbines, that we have actually cost more than the diesel generator equivalent. So I mean, it's a higher priced unit to begin with, but that's the only way to access these massive cost reductions in fuel. James Emanuel 00:20:50 Okay, I got it. I got it. So based on the fact that, you know, your kind of profitability and your numbers have improved significantly since the evolution acquisition, I'm guessing that, you know, evolution is kind of a more powerful engine to drive the fortunes of the business going forward. So, you know, what I'm wondering, although you kind of haven't broken out the various divisions. I'm guessing some are going to be stronger than others. And I'm wondering, will you be looking to scale into the higher margin divisions and possibly scale down on the lower margin parts of the business? And what I mean by that is that in the past, you've been both acquisitive and growing by acquisition, but you've also made strategic divestments. And I'm just assuming how the acquisition of Evolution, if that is the real powerful engine driving the business at the moment, how that might change the shape of the business going forward. Or am I thinking about this in the wrong way? Des O'Kell 00:21:42 A little bit. Let me explain. All four of our divisions are at one point or another, we are supplying the client with site infrastructure. We are a site infrastructure business. So we have... And let me quickly explain that. So when these... producing companies that are our clients when they have their project sites. And that could be drilling, it could be fracking and completions, it could be water transfer operations, they could be building their plants, their gathering system plants out in the remote areas where their resources are. They need, because these are sites that operate 24 seven, there's always activity all 24 hours of the day. The project starts, it may be several weeks in length, It may be several months in length. But that project starts, power gets turned on, lighting gets turned on. So we bring out the site infrastructure. So let me give you the three anchors around what site infrastructure is. So we bring out the mobile power systems, which we've talked at some length about. We also bring out the mobile structures. So the people, the superintendents that are working there, they need offices. the superintendents are there 24 7. one works uh to one 12-hour shift the other works the other 12-hour shift so in that office building there's it's a 60 foot long by 14 wide there's a bedroom accommodation on each end and an office in the middle you know one a superintendent will be working one 12 hours while the other one is sleeping type thing we have command centers so other types of office floor plans we have medic shacks that we call them shacks the these mobile structures that can handle any type of injuries and so forth. There's bathroom and wash car units. So on any given site, there's five to 12 mobile structures. So we have an extensive fleet of mobile structures. That's power systems, mobile structures, and the third anchor is lighting. all lighting is on 24 7 whether it's middle of the day or middle of the night that keeps on and of course for half the calendar up here in the north we have more dark hours than we do have light hours so lighting is another anchor so all of our four businesses uh uh at some point or another offer these uh site infrastructure uh uh equipment that's necessary on these sites now one of the keys to enterprise and all of our units is that we can supply the entire package. And of course we have our other specialty company, which is Arctic Therm International, which is a IP and patent rich, blameless heating business. So for, call something cyclical. Obviously, in the cold months, it's on. And of course, in the non-cold months of spring and summer, it backs off a bit. But these are basically all site infrastructure-based companies. The power division, because of our exclusive offerings to the client and nobody around us in the competitive landscape is entering that offering, that type of equipment offering, we've had this first mover advantage We've secured our moat. We announced just the other week, and we'll talk about the micro turbines a little more, I think. But we signed our exclusive arrangement for Western Canada with that particular manufacturer, who we have a very robust relationship with. And that relationship is growing. But when you talk about the businesses, they all complement each other because no matter if we look at the energy sector or some of the adjacent industries, like away from grid construction or the mining sector here in Canada, which is also very robust, these are other areas that could not only use our mobile power systems, but some of our other mobile site infrastructure as well. So- We're pretty fond of our equipment offering at all, if you know what I'm saying. And some of it does go hand in hand. Now, the power systems at the moment and our advanced offerings is the tip of the spear of enterprises. All of our companies, as the energy sector increases their capex spend, all of our companies are experiencing some growth. It's our power division that is on hyperlift at the moment. James Emanuel 00:26:17 Right. Okay. So, you know, what I'm hearing is that you've got this horizontal integration. Effectively, you're offering everything that the oil and gas sector need on site. Are there any parts that you don't have at the moment that you're looking to bolt on to the Ford that you have? Des O'Kell 00:26:33 No, we've spent the last decade accumulating the entire package. Certainly in the class of equipment we have now, we feel very complete. I think what we're going to be looking at going forward um, are more, uh, adding more valuable regions, uh, to, you know, the nation for the nation. Um, you know, and as we start, uh, exploring and committing to some of these adjacent industries that will flow, and that will be a, uh, a driver of, of growth. Uh, like I said, uh, the tip of the spear being the, the, the unique power systems that we have. James Emanuel 00:27:15 Yeah. Got it. Got it. Thank you. Um, So if your gross margins we've already discussed are really good, probably unlikely to expand very much further. So one of the key drivers is going to be the top line growth. How do you see that breaking down as between acquisition and organic growth in the years ahead? Des O'Kell 00:27:38 Well, right now... What is competing for our dollar, our investment dollar at Enterprise is growth capital into equipment that we can bring in and expand our business. Because we've been a serial acquirer over our history, we do see a lot of deals, but We've got fairly strict criteria. We really need something to be a one plus one equals three. Just adding on another location in a region, that's probably not the best way our dollar is spent. So right now, customer demand and the rate of adoption from transitioning from diesel to natural gas is... is at a pace that the best dollar spent right now is buying more of these systems. And they're accompanying microgrid cabling and distribution panels that go out with our power systems. They're very, very high return payback. And, you know, we're only scratching the surface in our energy economy here in Canada. We barely think we're on 15% of the sites that we could be on. We could be on hundreds of sites. So we still have a tremendous runway in front of us in our energy sector. And then, of course, there's these other adjacent industries that we most definitely have our eye on. James Emanuel 00:29:12 Okay. All right. That's a good answer. Thank you. So, you know, you've kind of answered that you're going to have this organic growth. You're going to be investing in new equipment so that you can expand your offerings. So, you know, the CapEx is going to be material going forward. Looking at the OpEx, that appears to be relatively fixed. You know, as the top lines increase, the OpEx hasn't increased at the same pace, which is good to see. So... As I see it, as you're growing, you're unlocking operating leverage. How do you see that kind of dynamic playing out in the years ahead? Des O'Kell 00:29:49 Yeah, I mean, one of the reasons why we like the model that we've developed here is because it's light on employees. And, you know, what we do, for an example, another energy services business that, you know, that is in our sector, we don't cross over, obviously, but, you know, some of these drilling operations, fracking rigs and so forth. I mean, when these people want to get another rig going, they have to go out and hire another 20, 30 people. I mean... I couldn't imagine if we had to go out in a short period of time, go find 20 or 30 fairly skilled people. So in what we do, so if I can just back up a little bit. So when we work with a client and they say, OK, we've got our project out here, we mobilize all our equipment from our location out to their location. We get everything set up, we get the power turned on, and it's our obligation to keep that site operating. All our site infrastructure equipment, it's our obligation. So our field techs are, especially in winter when we get very, very low temperatures, And if we can talk traditionally, the diesel fired equipment, you know, when you get to about minus 25 and lower, diesel starts to gel a little bit. So you have you have operating problems with with the fuel. Sometimes you've got to swap out equipment. So that's all our costs for our field techs going out there to make these these these pieces of equipment operate now. The very, very desirable thing about these micro turbines is that they have 99.5% uptime. The micro turbines that we're building our fleet around are rock solid all the way down to minus 40 C. They have tremendous fuel tolerance. So we have very, very few, you know, impedances to its operation. When we turn it on, we turn it off when the project is over. And, you know, the... The maintenance intervals on a diesel reciprocated engine, every six hours, you have to, just like your vehicle, you've got to shut it down, change the fluids, the filters, get it back up and going again. The maintenance intervals in a turbine are in the thousands of hours. So we will never shut down a micro turbine or a turbine on site for the sake of a maintenance interval. We would always wait till that comes back to our shop and yard to do that. So the uptime is absolutely critical to the client, especially during fracking operations. Power cannot go out. It's a major technical issue if power was to go out during the frack. So these... these advantages to switching from diesel to gas and these micro turbines that we have this exclusive arrangement with the manufacturer is really developing this competitive moat that we've enabled. And this arrangement that we've made with the manufacturer is step one of some further to be developed as we go into the future. James Emanuel 00:33:10 Okay, that's good to hear. Just out of interest, you're talking about maintenance and the equipment that you install has to be running, has to have 100% uptime. But all equipment, man-made equipment, it goes wrong from time to time. I'm just wondering, do you always have people on site so that they're there to maintain and ensure that the equipment's running on a permanent basis? So every site that you're operating, you've got people there? No. No, you don't? Des O'Kell 00:33:35 No, they're not there physically 100% of the time. Very good point to note here that because what I just explained, I should have finished off the thought, is that because those costs are ours, when we move from a diesel-fired site to a natural gas microturbine site, our field techs are going out to site much less. So it reduces our cost to operate a site there in, you know, the more natural gas turbine sites we have out there, the higher our margins are because of the upkeep and the maintenance that is our responsibility to the client. Um, There are all sorts of things. You're right. I mean, they spent $25 billion on a space shuttle and it blew up too. So, you know, yes, machinery does and will. If something is bound to happen, it will happen. Now, there's a number of things that can happen. And we do have backup systems out there. So if we're utilizing the client's natural gas, and it happens, their supply of gas may get interrupted for a mechanical or a temperature reason or what have you. And that, of course, if the unit is starved of fuel, it will stop. We do have backup systems. At the moment, we use a backup diesel system. So it is standing there, standing by. And we have automatic switching gear. So if it loses power, it fires the other one up. And it's seamless. We're also looking in the future, we're looking at where there's some utility grade battery storage. If there's clients of ours that want to basically communicate to their ESG scorecard that we don't use any diesel whatsoever, then there's these battery banks and we can almost make a hybrid where our ESG Turbine is feeding and keeping, no different than a hybrid vehicle. It's powering the battery power system, and it turns off and on as it needs. And of course, even though if you've looked at our deck, you can see the difference between diesel and natural gas in the emissions reductions. It's massive. It's huge, yeah. If we can get a 3 to 1, 4 to 1, even a 2 to 1 ratio on uptime with the microturbine powering the battery array, then we can actually reduce fuel consumption and along with that emission. So we are looking at other types of improvements to get near zero pollution. James Emanuel 00:36:27 OK, that's good to know. So you kind of mentioned very briefly there that with the new turbines, you you need kind of less people on site. And so that cuts your operating costs. That kind of implies that your operating margins are likely to expand. At the moment, you're talking about mid 20s. Where do you hope that they might get to in the near term? Des O'Kell 00:36:48 Well, you know, I. We've talked about this internally, we've kind of mapped out, modeled out where, because we're a reporting issuer, we would rather promise to the shareholders that these types of margins, we feel we can sustain them while expanding our market. reach with, with our, our product, uh, to the client. So, um, I don't know how many extra, you know, basis points we can wring out of this. Uh, but I, I feel, we feel that, that we can, we can maintain these margins as you described high forties, gross margins, you know, EBITDA margins in, in the, you know, well above 40. Um, so these are, these are, I keep a table internally of all the reporting issuers that are also in the equipment-based energy services world. And the best of the pack is in the 25%, 27% EBITDA margins. The majority of the pack are between 15% and 19%. So when you're looking at the financial performance of Enterprise Group at... you know, 40 and sometimes 40 plus EBITDA margins. These are miles and acres away from the rest of the pack. So we feel these are very good margins in our industry. We feel that we can go out and sustain those margins while we're building the business higher and generating bigger revenues. James Emanuel 00:38:18 Got it. OK, thanks for that. You touched earlier on the fact that you are looking to expand into adjacent industries outside of oil and gas. And I understand that you've been considering expanding into mining, you know, perhaps by supplying heating and electricity. Can you tell us more about how likely that is and the timescales involved? Des O'Kell 00:38:39 Yeah, there have been a few here in Canada, some portfolio managers, asset managers that obviously they see publicly traded managements come through in the oil and gas sector and, of course, in the mining sector. So these are great people to get involved. recommendations and introductions with. And of course, we believe at a high level that the mining sector is somewhat no different than the energy sector. We're in very remote areas. Diesel has been traditionally the fuel of choice because of mobility and, you know, containment. We can contain volumes of this on these and it's transportable. But so is CNG, compressed natural gas. We have a company that we're, you know, we have a bit of a relationship with. We're looking at expanding that relationship. Our management teams are meeting next week, and that's Certarus. And they were acquired by Superior Propane, a very, very large propane-based company here in North America. And the compressed natural gas industry is going to expand greatly because there is a massive, and we haven't talked about this, there's a massive arbitrage between North American natural gas prices and prices of oil and diesel, which is a derivative of oil, there's a massive arbitrage between the two prices. And natural gas on these sites are an absolute problem. you know, it makes all the sense in the world. As long as you have the ability to have industrial quantities of CNG transportable to these remote sites, which Sir Terrace, that is their business. Many of the sites where we are on, where we're not using the client's natural gas in the energy sector, they will usually have Sir Terrace supply the fuel. So there is an opportunity. Now, there's a difference between the mining sector here in Canada and our energy sector, because when you look on the map, the Western Canadian sedimentary basin, it's a chunk of northeastern BC, all of Alberta, most of southern Saskatchewan, and a sliver of Manitoba. That's our sedimentary basin here. Well, we could have eight or 10 locations spread across the basin and be able to have two and three hour access to all of our clients' locations. Well, in the mining sector, you know, they're mining in Labrador and Newfoundland and the Yukon and all of BC and northern Quebec. It's everywhere in remote Canada. So there is a logistics issue. Now, let's face it, there's service companies that are in the mining business. I mean, we don't have to reinvent that wheel, but there may be some partnerships. There may be some acquisition opportunities there. in the mining sector. So we're looking at it at a high level right now, but it is definitely a hand to glove fit. And we've been introduced to two CEOs, leaders in the mining sector, and they know nothing of these mobile power methods that we have. They find them extremely intriguing. And one of the things I learned on that one call is that the mining sector uh is thirsty and hungry for anything that they can show the investing public and the public because they have a big pr problem with you think the oil and gas sector has some pr problems the mining sector has tremendous pr problems and they are interested in any opportunity where they can show better practices in the field environmentally they're hungry for those types of uh opportunities James Emanuel 00:42:44 Got it. Got it. So, you know, a lot of it comes down to the partnerships because of the location. But you've also got that CNG angle because obviously a mine doesn't produce LNG. Sorry, it doesn't produce natural gas for propelling the turbines. So unless you can get the CNG there, it's just not going to work. Is that correct? My understanding? Des O'Kell 00:43:07 Yeah. Yeah, and we've got a chart that's on our deck that when we're using a traditional diesel-fired unit and you use our turbine with the Certarus service, you pay about $7 an MCF. for that compressed natural gas to be on site. It's still an 86% savings. That's the arbitrage in the price of derivative of Brent and WTI based prices. to make diesel. And of course, there's crack spreads in those as well. All you have to do is multiply the natural gas price by 5.65 to get to an oil equivalent. So if you're buying natural gas at $2 Canadian and MCF multiplied by 5.65, the equivalent is just over $15, $16, $17 a barrel of oil equivalent. The arbitrage is massive. James Emanuel 00:44:15 Okay. So in theory, it should be an easy sell to the miners. It's going to be a big cost saving for them. Okay, interesting. That kind of leads me to the next question, which is, you know, how do you think about balancing expansion into these adjacent industries with the investment required to optimize the forthcoming opportunity in LNG? Des O'Kell 00:44:36 See the question again? You mentioned LNG. James Emanuel 00:44:39 Yeah, so effectively, you've got this LNG wave coming over, which you should be able to ride for a long time. And it's going to be a big tailwind for you. And you obviously want to optimize that opportunity. But at the same time, you're looking at expanding potentially into adjacent industries. And I'm guessing... you're not going to be able to do all of those things at the same time. So I'm just wondering how you think about balancing the expansion into those adjacent industries with the ability to optimize the LNG opportunity. Des O'Kell 00:45:10 Mm-hmm. Well, that is a good question. Obviously, the infrastructure that we have, enterprise and its subsidiaries, will have to be in growth pattern as well. Like I said, the mining industry, we have had some introductions. We're starting to look at it a little more diligently. Like I said, there might be acquisitions. There might be partnerships available. We're not there yet. there are still opportunities in these adjacent industries that we can service from our existing locations in Western Canada. So, you know, we can attack these things, these different industries. I mean, away from grid construction projects, we've already done a number of them. You know, we haven't done 20 of them, but we've done a number of them. It's hand to glove. There's much more that we can be looking at in the away from grid construction. Also temporary and emergency power opportunities that we can do from our existing locations. But again, all of these industries allow us to move into some more valuable regions of Canada as we develop these opportunities. The mining one is obviously, to us, it's an obvious sector to look at. But there are some infrastructure issues to deal with. But like I said, there's other service businesses that deal with the mining industry and how they dot out their infrastructure to service those locations. I mean, we're not going to be looking to reinvent that wheel. But we are at the front end of that discovery of that particular industry. James Emanuel 00:47:03 Is it the case, my understanding may be wrong here, but I've kind of been given to understand that you have some major shareholders in enterprise who also have significant holdings in mining companies and may be able to kind of bridge the gap and help you kind of transition into that new industry. Des O'Kell 00:47:22 That's exactly how these introductions came about. James Emanuel 00:47:26 Got it. Des O'Kell 00:47:27 Okay. As they are connected with us, you know, with our growth and what, and that we've, they're sure they've been shareholders now with us for, for the last year. They're connecting us with other management teams in other industries. And that's how that introduction came about. James Emanuel 00:47:46 Okay, great, thank you. You've mentioned a few times in decks and in presentations about hydrogen power coming over the hill, and that presents opportunities, but I guess also challenges. So on the one hand, it could be positive because it could enable you to offer your services with an even smaller carbon footprint, which would be great for your customers. But on the other hand, it could be a threat because it's an existential threat to the hydrocarbon fossil fuel industry that makes up your customer base. And I'm just wondering how you see this hydrogen thing evolving. Des O'Kell 00:48:25 Yeah. Well, let's put a few things straight here. There is no hydrocarbon economy to speak of, of any kind of substance. Until we see, you know, natural hydrocarbon, which is... Sorry, James Emanuel 00:48:41 sorry, sorry, just to kind of cut in there. When I'm speaking hydrocarbons, I'm meaning fossil fuels, oil and gas, traditional oil and gas. Des O'Kell 00:48:49 Sorry, I used the word hydrocarbon instead of hydrogen. I'm talking, sorry, hydrogen economy. There isn't one yet. It's a very thin one. It's not global, but it's a long way away. Obviously, the ability to make hydrogen It's almost two times the energy in for the one-time energy out. So unless we have – there's been some talk about some natural hydrogen reserves. That's in the very early stages. Who knows if it can be a proper – extractable uh industry uh for for natural hydrogen i you know the fact that uh some of our uh turbines in the fleet can utilize hydrogen uh is is a benefit but i i don't see hydrogen being a fuel anytime uh in in you know as far as i can see i don't see hydrogen being a uh a possibility in any kind of substance. James Emanuel 00:50:01 Okay. No, that answers that. Thank you. So next, kind of moving on, I'd like to focus on... how you're kind of planning to kind of expand and the speed of customer acquisition. And we've already discussed some of this already. But I believe that at one time you had a really large Canadian competitor called, was it Wolverton or something like that, which ran into financial difficulties, maybe even filed for bankruptcy. I haven't been able to find too much information about them. I've only kind of picked up whispers on the grapevine. Sorry, what were they called? Wolverine. Wolverine, OK. Des O'Kell 00:50:39 They were publicly traded, like ourselves, have other subsidiaries. They crossed over into our site infrastructure with one of their divisions. They had some other offerings in the energy services, like they were doing clearing, bush and tree clearing for right-of-ways and so forth. That's not what we do, but they were in the energy services business. They had a division that directly competed with us in a very, very significant region in the basin here. Yeah, they didn't make it past last January. They went into receivership and we saw their equipment sold at auction here in June. James Emanuel 00:51:26 Okay, so the question I had around them is, you know, while it's always great when a major competitor is wiped out, are there any lessons to be learned from where they went wrong? And how do you kind of distinguish what they were doing, where they went wrong from kind of the enterprise business at the moment? Yeah. Des O'Kell 00:51:45 Well, we knew about them. You know, I can say that they were in our boardroom about five, six years ago. They weren't public at the time. They were looking, they were canvassing us to see if there was, you know, you got to remember, this is before the upturn in our energy sector that happened in, you know, mid-2021. So it was well before that. And, you know, they were looking to maybe merging with us together. Of course, we had, you know, a fairly good look under the hood of what they were doing and their management style and what have you. And it was just of zero interest to us all the way around. So their eventual demise was of no surprise to us. um the the the style and the operational uh you know brain power just was not the same um that's where we are here in 2024 no that's fair enough but we do know about them and and their movements James Emanuel 00:52:46 Right. So what seems to be left is enterprise is the biggest player in the field. And the rest of the Canadian market seems to be full of kind of smaller operators. Is that right? Des O'Kell 00:52:59 Yeah. Our traditional site infrastructure competitor in these regions, it's a single proprietor. um with maybe one maybe two locations uh private you know we have a friendly relationship with a a uh another single proprietor uh guy as uh a location and a satellite location and you know we because he's in a different region than us we we have a friendly relationship uh We pass along equipment. If he doesn't have something, we'll third-party rent it to him. We just do things like that. So we have a rapport with each other. And he said, I see what you guys are doing with the natural gas systems. But he says, I want no part of that. I'm 53 years old. I'm looking for an exit in three to five years. I'm not looking to reinvest money. $6 to $15 million at retooling a power fleet. I'm looking at exiting, not reinvesting in his fleet. And this is a massive investment for somebody to... It's one thing to have the capital to say, we're going to buy and compile a fleet. But the difference between our ability to be how we traditionally had our diesel fleet, that is a very mechanical business that you're in. The transition to what we are doing, these are 480-volt systems. So these aren't small voltage by any stretch. So the majority of our employees at Evolution Power are master electricians, journeyman electricians. We have an apprentice program. I mean, five years ago, we had no electricians in our business. So there's a buildup of expertise. We've already made all of the trial and error efforts to find out what equipment works properly in our conditions. We've gone down that path. We know what we're going to build the fleet around. And, you know, and we've sort of locked up that relationship with that manufacturer. So none of our, you know, peers and competitors can get access to that particular micro turbine. James Emanuel 00:55:18 Okay. So this other guy, this other operation, the 53-year-old guy who's thinking about kind of winding down in retirement in a few years' time, does that give you guys an opportunity to maybe incorporate his business into yours? Des O'Kell 00:55:30 Yeah, well, I mean, he's the reason why we got real friendly and talking, you know, more and more a few years back is, you know, we were looking at his region as an acquisition. But what's been slowly happening is, you know, his clients have been wanting our equipment offerings, these power systems. And one by one, we've been kind of merging and directing some activity into that region. um just by just attrition and expansion so um so now begs the question do we you know is our best dollar spent acquiring him or just slowly mowing his lawn yeah James Emanuel 00:56:11 gotcha yeah no that makes a lot of sense and and um i mean we've touched on this a little bit in relation to this particular guy and also in relation to um the geographic spread of mining industries. But the question I had for you, what I was wondering about is that at the moment, your operations are concentrated in areas rich in natural gas resources, particularly in Alberta and Northeastern British Columbia. But would you consider an acquisition strategy to enable you to more easily expand beyond that territory? And I think you've already answered this and said yes, Des O'Kell 00:56:50 Yeah, the answer is yes. Obviously, we've got criteria. It really, really has to be a one plus one equals three. We're not interested in just acquiring to tack on more revenue and some more margin and what have you. You got to remember, it's tough to find an equivalent you know, business service business that, that can match our, our, our, our margins. So if we tack on, you know, we've got to make sure that we can improve those margins with our, our offerings. So, and, and that, that obviously is, is, you know, if we're going to enter a new region, we're obviously going to be fortifying that region with our offerings, which are the higher margin offerings. equipment offerings. So all of these are absolutely how we would expand regionally. James Emanuel 00:57:45 Got it. Okay. So I'm aware, and you mentioned it earlier, that you recently announced partnerships and strategic alliances. And I'm referring to the MOU to collaborate with the group of indigenous communities that are signatures to the Treaty 8 First Nation. So, you know, that extends your operational reach within the Treaty 8 territory, which is a vast area. I think it's, what, 840,000 square kilometers. Can you kind of speak a little bit about how you see that in the context of the evolution of the business? Is this all to do with LNG? Des O'Kell 00:58:24 Well, I mean, the Treaty 8 region encompasses much of that natural gas rich, you know, the Duvernay and the Montenay are these two very, very large gas and liquids reservoirs that are absolutely world class in size. And they happen to be in the Treaty 8 region. But what's happened here in Canada over a good, if we can just look at the last decade, The First Nations have been a little bit frustrated with the exclusion of their ability to be not only a part of the decision-making in what happens on these particular traditional lands, but they're very involved in the industry. I mean, many people on the inside of Canada and the outside think that, well, all First Nations people are... you know, against natural resource development and extraction. They're absolutely, that is not a true statement. In fact, the majority of them are absolutely involved in it and want to be more involved in the sustainability and proper decision-making. And what happened a few years back is one of the major First Nations in the Treaty 8 area, the Blueberry First Nation, they had... been litigating and they finally got a favorable decision from the Supreme Court of British Columbia. And that kind of stopped everything. So there was a moratorium on any type of permitting for drilling, even in the forestry and all resorts. And it took a year and a half to get the province of British Columbia, the energy sector or the resource sector, and the First Nations groups to come together and hammer out a settlement. And that settlement came a year and a half later, so January of 2023. So we're coming up to almost two years of that settlement. So now the First Nations, they're involved in the permitting of all activity in their lands. They also had in the agreement, the settlement, that there will be 50% less ground disturbance. Okay, so building their drilling pads and what have you, there has to be 50% less of that. And that is something that our energy sector was able to deal with because we're now drilling horizontally, almost six kilometers horizontally. So our ability, the industry's ability to use less land, just the pads will have more wells and they'll be extended out. You know, we can get the underground, coverage with 50%. So that really was something that was the ability of the industry to adhere to. So now the First Nations are at the table for development. They're at the table, they're involved in the economy now. They were paid vast sums of money to get this agreement going. They're now a part of the revenue stream. They are now ownerships of pipelines, of future LNG projects. I mean, this is one way, very much so, to lift themselves out of, if you want to use the word poverty, some are, some aren't. But in our sector, we're working along First Nations-owned service businesses. They're in our employment. They're in the industry. They just now are at the table for how we develop the topography, and they're involved with the economy. So now I think everybody is happy. I'm pretty sure because we've been now at it almost two years and it's, it's, it's, it's been, it's been. James Emanuel 01:02:31 So, so did you anticipate this becoming a more formal arrangement than simply being an informal MOU? Des O'Kell 01:02:37 Well, no, it is a formal arrangement. There is a structure involved. They are not involved, that First Nations Development Company, they're not involved in anything we do. So them coming to us and working together. Now, the other part of that settlement is that there actually is a percentage of these oil and gas extractors, these producers, are bound by legislation, they have to use a certain percentage. And I believe, I can't remember if it's 30 or 40% indigenous involved or owned businesses. So they have a quota of how much First Nations involvement they have to do in the actual services in the field. So this allows this arrangement with this development corp allows us to be at the forefront. So if any of those producers are on that particular locations of that Treaty 8, we're kind of first in line. They kind of are pressured into making sure they understand our systems and they should be a motivated and influenced to be using these systems first. Now, because of all the benefits that we have, it's an easy decision to make. James Emanuel 01:04:00 All right. Okay. That makes sense. Thanks for clearing that up. Okay. So let's move on. And we spoke very briefly earlier about the turbines, and I said I wanted to come back to that. So this exclusivity agreement you've got with Flex Energy Solutions in respect of their turbines, I find it interesting. And as I understand it, your exclusivity extends across all commercial and industrial sectors. in both Alberta and British Columbia. Are you able to help me better understand how that agreement came about? And in particular, what I mean is, if this is cutting edge technology that they have, what motivated Flex Energy Solutions to limit their sales by granting you guys exclusivity? Des O'Kell 01:04:39 Yeah. Okay, let's understand. So Flex Energy, they have this tremendous technology and IP. It is the only microturbine that can withstand with reliability, true reliability in these conditions that we operate in. It is the gold standard. Our producing clients actually buy or purchase or long-term lease these flex units for permanent installation in their gathering system gas plants. They know it well because of all the reasons, its ability to operate in all temperature conditions, and its fuel tolerance. When we started utilizing and getting flex energy turbines into our fleet and the absolute success we were having, you must remember that we're utilizing them in a very mobile and short-term project site applications. So when we start buying and building our fleet of Flex units, Flex has a Canadian location because they are a manufacturer and they sell and long-term lease to industry. They're watching us and we're building up and they're wondering, are we creating a potential competitor of ours? down the road. And of course, they came to us and said, we're very enthusiastic of what you're doing with our units in a mobile short-term application. Would you be interested in an exclusive arrangement where we have the long-term fairway and you guys stay in your fairway? And we said, of course, because we're getting two, two and a half times the revenue from our applications for that particular piece of equipment than they are on the long-term purchase and sale and leasing application. So we were absolutely fine to, to now inside of that agreement is reciprocal. We're working together. Whenever one of our clients needs something long-term in a permanent installation, we refer the client to, to flex. And, you know, we've already had referrals for them from them, three tier one clients that, you know, they, they own some in the field and they said, you know, we, we need some for these projects. Yeah. Well, you got to talk to enterprise or revolution power. So there's a very, very good relationship going back and forth. And it's a growing relationship. I would say that expect more to come from this relationship here with Flex. James Emanuel 01:07:17 Okay, understood. So it's kind of a symbiotic thing. You both kind of feed off each other. Well, that makes a lot of sense. But from what I've seen, I looked at the Flex Energy Solutions website and their gas turbine seems to be an adaptation of a Siemens unit that was first developed in the 1970s, believe it or not. So I imagine the original patents on the Siemens turbine have long since expired. And I'm wondering if the flex energy variation has its own protected IP. And if not, why are competitors who make these kind of turbines not simply able to create something similar and supply those to your competitors? I'm just trying to understand how much of a competitive edge this is for enterprise. Des O'Kell 01:08:00 You don't have that quite right. So the micro turbines are Flex Energy’s, patents, and IP. Right. The flex along with Siemens, they combine to make the larger turbine units, like two megawatts and bigger. James Emanuel 01:08:22 Right. Des O'Kell 01:08:22 Those are in collaboration with Siemens. James Emanuel 01:08:24 Okay. Des O'Kell 01:08:25 Okay. And a little history on Flex. I don't know if, are you familiar with the Fortune 500 North American company called Ingersoll Rand? James Emanuel 01:08:35 I've heard the name, but I don't know very much more about them. Des O'Kell 01:08:37 Anyway, Flex was a division of Ingersoll Rand. They developed these microturbine IP and technology. Like many of these large Fortune 500 companies, they have all these what they call non-core businesses. They spun them out well over a decade ago. If you're a golfer, you'll see Club Car, the The golf carts called Club Car, that was also an Ingersoll-ran company, also spun out in the same time era. Management bought that company, the Club Car. Flex went to some management and a private equity player, a large player in Texas, acquired Flex. um over a decade ago uh they moved it from New Hampshire they're now in Denver closer to the uh to the energy sector um and of course they they have a brand new uh manufacturing facility in fact we're heading down there in in less than a month in in first second week of November we'll be going through their uh new new facilities uh and their new capabilities uh in Denver so uh there is some history to that The arrangement with Siemens is with the larger units, the megawatt plus units, which will be a part of our fleet going forward as well. Right now, the microturbines are the absolute fit for what we're doing at the moment. We do have the appetite for the larger units as we move forward. James Emanuel 01:10:09 Okay. And those micro turbines are the ones which you have exclusivity for, but only in those two regions, right? Only in Alberta and British Columbia. So if you look to expand beyond those regions, there's a danger that, you know, some of your competitors in those other regions will have access to these micro turbines. Des O'Kell 01:10:27 Yeah. It's not happening yet. But having said that, like I mentioned, our business plan is even far more aggressive than Flex's up here in Canada. They've got a booming activity in their domestic marketplace, and they're very enthusiastic about what we're doing. So that's why I was saying there's more to come. with our arrangement with Flex in the coming months. We're looking at expanding these relationships further in Canada with them. James Emanuel 01:11:03 Got it. All right. Thanks for that. OK, so let's move on. Leave the turbines behind. You know, we've spoken about your competition in Canada. You know, there are no big competitors. Most of them are smaller. But there are some sizable U.S. businesses offering similar services to enterprise in the U.S., particularly, I think, in Texas. Why do you think the U.S. companies in this industry haven't tried to tap into the Canadian market? Des O'Kell 01:11:31 Well, first of all, it is an absolute given. Most Americans think the Canadian market is too small. All right. And, you know, I mean, it's barely 10%, you know, on a per capita basis. And, of course, we've got, you know, tremendous travel distances and so forth. And, you know, we know our business. But, you know, in the oil and gas sector, American companies have come to Canada and Canadian companies have gone to the U.S. and so forth. What we've seen, we have a dreadful federal government. And that federal government has rinsed out nearly all foreign players from the energy sector. In fact, most of the transactions, while those foreign extractors have left Canada, have all gone to Canadian-based players like Canadian Natural Resources or Tourmaline on the gas side. Basically, there's been a consolidation by Canadian players. there is no appetite for Americans to come to Canada just yet. I believe we're going to have a new federal government in a year or within a year, and that will start to change. But I'll tell you what, our footprint would be more if an American company that was doing similar activities in their areas, got to remember they're dealing with different ambient temperatures and what have you. That's another reason why Americans don't like to come up here because it's a set of conditions they're not used to. But we would be an absolute acquisition target for an American operation that's doing similar work. I mean, why wouldn't we be? We have the physical infrastructure in the energy sector. We have the expertise. We have the fleet. Customer base. Yeah, the customer base, we're reputationally mature with our clients. They know who we are for the last two decades and everything that comes along with that. So I see not much of a threat as maybe an opportunity as an eventual takeout. James Emanuel 01:13:51 All right. And then that opportunity is likely to get bigger with the LNG coming over the hill, right? Des O'Kell 01:13:56 Exactly. And eventually, I think we'll have a new government that'll be friendlier to resource development and not just the oil and gas, but resource. I mean, we're the richest country geographically and resource-wise in the world. And we've been mismanaged to heck here. And I think Canadians have now seen enough of this. All right. We're almost 1.3 trillion in debt with 40 million people. It's ridiculous. And I think we're going to get a new government, one that is going to be resource friendly and business friendly, and that will change some things for sure. James Emanuel 01:14:32 Perfect. That's good to know. All right. Let's kind of start winding down. I'm just wondering, you must have a vision for enterprise in your mind. So if everything goes to plan, as far as you're concerned, what do you think the company will look like in your mind's eye five and 10 years from now? Des O'Kell 01:14:52 Well, we're going to be, you know, the tip of the spear is going to be our power division. There's no doubt with obviously a full basket or mix of site infrastructure. You know, we're a vast country with, and like I said, I believe natural resource development extraction Canada is going to be an absolute disaster. gigawatt player, if you want to use that terminology, in the future. And we fit right in the middle of that. I think it's going to be led with our power division and our ability to innovate. I mean, one thing we haven't talked about is we have very, very gifted people here that are absolutely given free reign on innovation. We've developed products that complement everything we're doing in the field. And some of it is novel enough for patenting. We already have almost 30 design patents in the group. So we will be doing more of that. And we feel led with our ability for mobile and, you know, in some cases, permanent. You got to remember, we have this, we talked about the arbitrage between natural gas. You know, in North America, we have a dreadful industry electrical grid infrastructure. It's going down in quality. There hasn't been the proper expenditure to keep it up at a time when North America is looking for vast more electricity deliverability. So what's gonna happen is the two can't operate together. We're gonna have far more interruptions in grid. So you're gonna have industry and commercial and manufacturing that are gonna wanna self power. We've got very, very cheap natural gas going into almost every building in North America. So the ability to have access to natural gas and produce your own power, power is disrupted all the time. there's never been a disruption in natural gas, you know, in any major way unless somebody regionally digs up a line and makes an interruption. But generally speaking, natural gas is a solid reliability. So industry from, you know, manufacturing, commercial, industrial, self-powering is going to be, you see it with Microsoft doing that deal with Three Mile Island, Constellation Energy. They need power. for their AI data centers. There is no reliable power on gross mass. So that kind of a deal is very now mainstream. You bring that down to commercial industrial, there's absolutely applications for this turbine technology for self-powering, utilizing natural gas, which is massively cheap here in North America. James Emanuel 01:17:39 Wow. Okay. So data centers might be migrating north over the border, right? Des O'Kell 01:17:45 Data centers in Canada, because I don't want to get into that, but there's reasons why American data center players are placing them in Canada because we have different privacy laws than the US. So we have an abundance of data centers here in Canada because of surveillance laws. Okay. Yeah. In the U S they, the FBI, CIA, they can, they can surveil without anybody knowing it. So a lot of these privacy, they're putting them in Canada because we have different privacy laws on surveillance. James Emanuel 01:18:23 Interesting. And I guess the climate is also good because data centers need to be cooled down, right? You have pretty harsh, cold winters. Exactly. Yeah, that makes sense. All right. And let's move on again. As cash balances accumulate on your balance sheet, which clearly they will because, you know, your cash flows are improving year on year. How does the board think about capital allocation, particularly share buybacks versus dividends? Des O'Kell 01:18:50 Right, well, you know, we're a growing company. So the ability to, you know, obviously you talk about the buyback of the shares. You know, when we were out of favor, we were cashflow pop, what I mean, our sector was out of favor for that seven year low activity level. We were, you know, our stock was 18 to 25 cents. Nobody was interested in the Canadian energy sector, let alone the services side of it. And we were languishing like the rest of us in the segment. We were cashflow positive and we just thought, you know, we bought back 20% of the company at the time at an average cost of 26 cents. So we put the cash to use. And of course, as the stock price moves up, our ability or the competition for our cash flow dollar into more equipment that is in demand or buying back stock, when we crossed over sort of that 50 to 70 cents, that started to tug on each other what was the best use of our dollar. You know what I'm saying? And we raised some capital at 85 and 95 cents. So can you be printing shares at 85 or 95 cents and buying back at higher prices? That doesn't make sense. So our buying back shares at the valuations, once they started to track and we started to get recognition, of our position in our industry and our cash flow abilities, that starts to get recognized. And so I'll assure you, our NCIB program isn't buying any shares at $2 plus. But we're very much willing to spend dollars on acquisition of more equipment that's in demand. As opposed to dividends, again, we still think we've got so much growth to fund that will be a benefit to the appreciation of the actual common shares. That, you know, again, once we start leveling out and getting the kind of stability in our business and generating and earning that cash flow, I mean, us insiders own 35% of the company. We'd love to start kicking out dividends. I just don't think that's the best dollar spent at the moment. James Emanuel 01:21:10 No, no, I agree with you. I think dividends are actually the worst way to allocate capital, always the last resort. You know, dividends really are a partial liquidation of the company. That's exactly what they are. Right. They're a distribution of assets, balance sheet assets. So, you know, the way I look at it is there's kind of a waterfall. If you've got the opportunity to reinvest capital at accretive rates of return, then that's always got to be the number one priority. Yeah, you seem to have loads and loads of that. It's only when you have surplus cash building on the balance sheet and no opportunities to reinvest that you have to work down that waterfall. And it's always repayment of debt and then maybe repurchase shares. But only then, of course, if the shares are trading under what you perceive to be intrinsic value. And then as an absolute last resort, if everything else has been exhausted, then you kind of go to dividends. But yeah. So no, thanks for that. That answers the question. Good. Two more quick questions for you and then we're done. I've kept you for a long time and I really do appreciate your time and the answer. The next one is kind of an interesting one, I suppose. So thinking about all of the investors that you engage with, what do you think is the most misunderstood aspect of the enterprise business that you'd like to set straight for the record? Des O'Kell 01:22:24 Well, you know, there's a couple of, obviously, you know, we talked about the cyclicality of the Canadian energy sector or what, you know, certainly the Canadian energy sector. And you've identified the, certainly in the history of our financials. And I really do go back to the conversation that Things have changed with these added conduits of getting our oil and natural gas to other parts of the global markets. I don't think that's properly understood at how much of a needle mover that is for Canada and Canada's producers. And we've already seen... just since May 1st of the contribution of the TMX line, which I described its GDP to Canada. I mean, it's needle moving. And that is a big deal to us, certainly in our minds. And I think that's not properly understood. The other part is... not everybody says, well, you're going to have competitors. You know, we probably at some point we'll have somebody trying to compete, but it has been very, very difficult for capital to attract capital. I'll tell you that even with the financial performances of many in our industry, it's tough to get charter bank interested without having you tied up eight ways to Sunday with restrictions. The banking sector is not like it was a decade and a bit ago. So the attraction for debt capital is really a different animal. I know the private equity is really trying to fill that void. But I'll tell you what, they're asking... They're asking for big numbers for rate and fees. It's ridiculous. And so we've been fortunate that our story is starting to be recognized. We have the opportunity for some debt applications and equity applications. So we have some financial nimbleness and the fact that we're we're creating tremendous cash flow for ourselves. And that's run our complete capex, even from the times of in 2018 before the uptick. We've been very, very self-sufficient. I think that's, I don't mind us management patting ourselves on the back. We came out of a very, very difficult time and came out very financially flexible and nimble enough to retool a our power fleet in the manner to earn this position that we're in, which is a leader, right? Yeah, that makes sense. I hope that answers your question. James Emanuel 01:25:29 Yeah, I think it does. And the fact that you mentioned about it's difficult to raise debt at the moment, does that mean that if you see a huge opportunity to expand into the LNG and the mining sector, that it might be equity financing that you need to effectively some kind of a rights issue? Des O'Kell 01:25:48 Well, certainly. I mean, at the moment, all of our internal CapEx desires and driven by the client has been funded by cash flow. I mean, we raised $7 million in March. It's not a big amount, but we've got $8 million in the account. So we had a $10 million growth and maintenance capex for 2024. We just got out of the end of September. We're into it for nine. We're going to go past 10. But we've been driving that with internal cash flow. And we haven't really pecked away at the money, the capital we raised back in March yet. So we're in a pretty good position. But we do expect that we are going to have a special situation where we're going to have some of our clients and they're going to have some serious demands for us and our equipment offerings. And it may bring us back to the market in the future because of what we're hearing is happening for these programs that our clients have. It's going to require more equipment, and we'll see how we'll have to manage with that here in the coming months. But we're expecting, our clients are saying 2025 is going to be another extended CapEx spend, certainly for these areas that we're supporting. James Emanuel 01:27:15 Got it. OK, now that answers the question perfectly. Des, you've been really generous with your time. We've been on the call now for 90 minutes. I won't keep you any longer. Thank you very much. It's much appreciated. You've cleared up a lot in my mind. And we've recorded this and I'm going to be sharing this with other investors. So, you know, thank you. Keep up the great work. It looks like, you know, you've got a bright future ahead. Des O'Kell 01:27:41 Thank you. And thank you for the time. I really enjoyed the questions. Many questions we haven't had. So I can see you've looked at the file and you were very prepared for today. I'm glad I could settle some of these questions you had. James Emanuel 01:27:56 Great. Okay. Des O'Kell 01:27:57 Thanks again. Cheers, folks.
Q3 figures have resulted in a draw down presenting an interesting entry opportunity today.
While the quarter was softer than the corresponding period last year, the nine-months to September were better than last year. Quarterly cyclicality in the oil and gas sector is nothing new.
The investment thesis still looks very much in tact.
Key points I pulled out of the quarterly release:
(a) Third quarter saw a reduction in activity... for two primary reasons. First was apprehension and preparation for a potentially severe forest fire season, leading some customers to delay the execution of planned projects to the end of the forest fire season. The second reason was some customers took advantage of the summer months to allow employees extended time off to prepare employees for the up coming demands of another year of busy field activity
(b) The increasing demand for natural gas power generation systems indicates a shift towards lower emission alternatives, and going forward, market conditions remain favourable for the energy sector, resulting in increased drilling, completion, and infrastructure projects. These factors are expected to continue for the remainder of 2024 and 2025.
(c) During the nine months ended September 30, 2024, the Company acquired $13,452,761 of capital assets, primarily for natural gas power generation equipment and facilities, upgrading existing equipment, and meeting specific requests from customers.
(d) Enterprise announced a new five year exclusivity agreement with FlexEnergy Solutions... The agreement positions Enterprise... as the sole provider of short-term turbine and microturbine applications across all commercial and industrial sectors in Alberta and British Columbia.
My take away from this are:
1. Low activity in Q3 will very likely translate to higher activity in the quarters to follow
2. Both customers and Enterprise are gearing up for an acceleration in activity
3. We still have the LNG revolution happening from 2025 in Canada
4. The company is still expanding into adjacent industries and expanding its territorial reach
A note for anyone following Enterprise. Q2 is a soft quarter, not because of a cyclical slow down in demand, but because after the winter thaw, the ground is very wet and moving large, heavy equipment is impossible for Enterprise (or its competitors). So all the site equipment that Enterprise supplies to its clients either needs to be in place prior to this period, or else wait until the summer warmth dries out the ground. As such, the spring quarter is quiter than others.