Is Trican Well Services undervalued?
Management seems to think so, I am from Missouri
In the two years ended December 31, 2022 Trican Well Services (TCW) purchased for cancellation 29,998,333 shares and issued 4,039,786 to management through options for a net reduction of 25,958,547 shares, about 10% of the issued and outstanding at January 1, 2021.
Trican spent $95,738,000 buying back those shares, an average of about $3.70 a share. Today the shares trade at $2.96.
Since year end, Trican repurchased and canceled at least another roughly 9 million shares at an average price in the $3.20 per share range, spending another $27 million. The actual total in Q1 2023 will be reported May 11, 2023 and will likely exceed both 9 million shares and $27 million. We will see.
No matter how you cut it, the company spent some $120 million plus buying back stock and the stock is trading for less today than when the buybacks began. So far, this is a bad bet. Had the money been spent on dividends, shareholders would have received another $0.50 per share more or less.
Management obviously likes their own cooking. I am going to eat at a different picnic.
Trican crows about spending $318 million on buybacks since it started the buybacks in 2017 and remains substantially debt free. The buybacks are premised on a belief that management has no better use for the money and prefers to shrink the share count over giving the same amount to shareholders who have held on to their shares.
Cash flow from operations in 2022 was $0.62 per share ($152.2 million on 246.7 million shares). Over $100 million was spent on capital, mostly maintenance capital. I have a bit of trouble with their claim of $157 million free cash flow when cash flow from operations was $152.2 and capital outlays at $100 million of that.
The real question for investors, assuming the operating performance is repeatable on an ongoing basis, is whether you are willing to pay $667 million for a business throwing off cash flow after capital expenditures of about $50 million. I am not, so I am out. I might have a different perspective if I was fully confident in the business having low risk of cash flow volatility (like a utility) and paying out a dividend in the 7% range with some reasonable expectation of future growth in that dividend. But that is not what I see here. As management says in its commentary, growth capital investments are tied to a minimum economic investment hurdle rate (not disclosed) and I read that as unlikely.
When well services becomes a reliable utility like TC Energy (TRP) or Enbridge (ENB) I will reconsider. As it stands, I see better investments elsewhere.