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(JOHN LEHMANN/GLOBE AND MAIL/JOHN LEHMANN)

M&A

Drilling for the next takeover target Add to ...

If you want to know what’s going on in the energy-services sector, you have to make the acquaintance of Terry Freeman.

Mr. Freeman wears a few hats. For starters, he’s a partner at Northern Plains Capital, a private-equity firm based in Alberta that manages money for wealthy people. Northern Plains invests solely in oil- and gas-service concerns, and most of its clients work in the industry.

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Mr. Freeman is also a director of Flint Energy Services , which was just sold to URS Corp. of San Francisco for a 67-per-cent premium to its previous closing price.

In researching my newsletter, I lean heavily on Mr. Freeman for advice on the energy-services industry, and he’s never led me astray. The good news is that he still sees opportunities in the field.

Although Mr. Freeman was a little surprised by the size of the premium Flint fetched, he points out that the company – where he used to work as chief financial officer and continues to be a substantial shareholder – has strengths in several lines of work that are vital to the oil patch.

Up north, in Fort McMurray, it builds the giant plants that turn bitumen into crude oil fit for the refinery. The company doesn’t build the actual equipment, but rather assembles it into modules, which it then puts together.

Flint also has a solid presence in the shale side of the energy business, where it does field installations. And it runs a big maintenance division.

Do all these revenue streams explain why the company could be worth 67 per cent more today than it was a week ago? No. The big bid from URS partly reflects the friendly nature of the deal. It also, Mr. Freeman points out, reflects a “soft” asset, that’s not on the balance sheet but is severely scarce and therefore valuable.

This asset? Skilled labour.

Flint has 10,000 employees who are trained and relatively loyal – by Alberta standards anyway. In a province starved for labour, where oil patch workers routinely make more than $100,000 a year, it’s hard to overstate the advantages of a reliable pool of employees.

To replicate the assets of most oil field services companies isn’t that hard. To get their customer relationships is harder but not impossible. But to hire 10,000 people in the province? Good luck. That’s a big part of the premium price being paid for the company.

And Flint is not going to be the last Western Canadian company sold to a foreign bidder at a sky high price. Many companies want to play in Alberta because it’s “one of the great resource plays in the world,” Mr. Freeman says. “You used to drive down to the highway and see signs for Billy Bob’s Welding. Now a lot of the signs say Saipem,” the giant Italian energy contractor. Foreign out-of-market participants, as they’re called, are buying everything.

Mr. Freeman likes companies that are exposed to shale drilling, especially for oil or gas liquids. Hydraulic fracturing and horizontal drilling are growing briskly, and well-managed companies that provide coil tubing and down-hole tools for this work are attractive.

So are companies handling – either storing or treating – the “frac” fluid and water used in the fracturing process. The names that Mr. Freeman mentions include Pure Energy Services and Essential Energy .

And although he didn’t bring it up during our conversation, it’s worth noting that Mr. Freeman serves on the board of McCoy Corp. , a maker of drilling tools and trailers. It is benefiting from the growth in hydraulic fracturing and offshore drilling, which makes up a big and growing piece of its business.

McCoy’s board tripled the dividend in December, so it would seem the company is pretty confident about the future. At less than seven times earnings, investors seem to be overlooking it. A foreign company that wants to establish a footprint in Alberta would likely be far more generous.

Fabrice Taylor, CFA, publishes the President’s Club investment letter. His letter and The Globe and Mail have a distribution agreement.

taylor.fabrice@gmail.com







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