A slowdown in drilling and well completion activity has finally caught up with Poseidon Concepts Corp., a dividend star that has been severely punished for missing expectations.
Shares of the Calgary-based company, which designs tanks for fluids used in fracking, plunged 62 per cent Thursday after third-quarter results fell far short of analysts’ forecasts.
Poseidon, which spun off from Calgary’s Open Range Energy Corp. in November, 2011, changed the fluid-storage marketplace by offering simple, proprietary frack tanks that require significantly less work to assemble than industry-standard lined pits and steel tanks.
Standard steel tanks take 30 to 50 truckloads to bring the required materials to a destination, but Poseidon’s tanks, which can hold up to 41,000 barrels, require only one or two. The company now has a fleet of 440 tanks across North America.
Dan MacDonald, an oil field services analyst with RBC Dominion Securities, said the brutal selloff Thursday was most likely a knee-jerk reaction by shareholders as the fast-growing company disappointed investors for the first time in its short life.
“I think it caught people by surprise for a company that was doing so well to have such an abrupt impact on their business from the [oil services] slowdown,” Mr. MacDonald said.
Poseidon does most of its work in the Bakken oil play in North Dakota and Montana, as well as the U.S. Rockies. Both of these regions are experiencing a slowdown in well completions, which is shrinking demand for fluid storage tanks.
But while its peers in the oil service industry felt the downturn in the first half of 2012, Poseidon continued to expand, posting record growth in the second quarter. The company’s monthly 9-cent-a-share dividend provided an additional lure for investors. Before the stock’s plunge, it was yielding around 8 per cent.
The company’s growth streak has come to an abrupt end, however. Its third-quarter earnings before interest, taxes, depreciation and amortization were $26.6-million, less than half the consensus estimate of $57.3-million.
Analysts are still optimistic about the firm’s long-term prospects. “The product category they’ve basically created is here to stay,” said Brian Purdy, an analyst with Global Hunter Securities.
Geoff Ready, an analyst with Haywood Securities, revised his 2013 EBITDA forecast down by 49 per cent to $149-million, but kept his rating as “sector outperform.”
He said in a note that while Poseidon’s cash flow numbers are weaker, “we believe that the sustainability of the dividend is not at risk, as margins remain high with minimal capital expenditures required to maintain or grow the business.”
Mr. MacDonald of RBC said Poseidon’s dividend was “sustainable,” but noted that any “further material weakness” would put it at risk.
The company is trying to transform itself from a one-trick pony to a one-stop shop.
It announced Wednesday that it had released three new products, including systems for tank heating and monitoring, as well as water transfer services.
Analyst Greg Colman of National Bank Financial downgraded his rating of Poseidon from “outperform” to “sector perform,” writing in a note that he was wary of the company’s slowing tank-fleet growth.
But he added that the announcement of new products in the field represent a “vast” potential market.