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Petrowest: A small cap poised to benefit from LNG boom

A potential liquefied natural gas boom in British Columbia is helping to drive up the shares of energy services player Petrowest Corp., a former income trust that was facing financial troubles only a few years ago.

The small-capitalization stock has surged about 480 per cent over the past two years and is now trading at multi-year highs as the Grande Prairie, Alta.-based company attracts increased investor attention.

Petrowest, which offers well site preparation, gravel crushing and road construction services in northern B.C. and Alberta, has reported record revenues for the past three quarters. It completed a key financing deal last fall and recently closed its acquisition of a mulching services company to help grow the business.

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Analysts are unequivocal in their praise for Petrowest. All seven who cover the stock have a "buy" rating on it, with price targets over the next year ranging from $1.40 to $1.70, according to S&P Capital IQ.

"I think there is significant upside, even to my target price," said Raveel Afzaal, an analyst at Mackie Research Capital who has the most conservative target, at $1.40.

The stock is currently trading near its record high as a corporation at $1.20, reached on May 13, the day after it reported record revenue and profit for the first quarter. That followed a record year for revenue in 2013.

"This is the start to the year that should make investors sit up and take notice," Beacon Securities analyst Michael Mills wrote in a recent note. He said the second half of the year is "where things could get interesting."

That's when investors are expecting a final investment decision from energy giant Petronas and its partners on the Pacific NorthWest LNG joint venture near Prince Rupert, B.C. It's the most advanced of a handful of proposed LNG projects in the region.

About 20 per cent of Petrowest's revenue already comes from a few companies doing preconstruction and exploration work in the LNG sector in B.C., including building access roads and plant sites.

There is a risk that the proposed LNG projects may not be approved, or that there will be another oil and gas slump in Western Canada, which could negatively affect Petrowest.

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There's also the risk of increased competition if development continues to grow in the region. The company believes it's well positioned, with 10 field offices across northern Alberta and B.C. and more than 700 pieces of heavy equipment in its fleet, making it one of the largest players in the area.

"We are situated in the right spot," Petrowest chief executive Richard Quigley said in a telephone interview, while on a trip marketing the company to investors in Boston. "We are going to keep growing the company."

Business wasn't always this good for Petrowest. The company was founded in 2006, through the consolidation of 10 energy services and infrastructure companies, as Petrowest Energy Services Trust. It started trading around $10, but the units began to sink as the company took on more debt and then the financial crisis hit.

Mr. Quigley and a handful of other current managers pooled their money in 2010, recapitalized the company with the help of some banks, and converted it to a corporation in July, 2011. The stock was then trading around 40 cents, then fell to 20 cents in the summer of 2012. It has rebounded strongly since, as Petrowest racks up contracts, including work on two major highways in Alberta.

Management and insiders currently own about 35 per cent of company's outstanding shares, which is another reason investors are feeling confident about its outlook.

Genevieve Roch-Decter, portfolio manager at LDIC Inc., says Petrowest is the largest holding in her firm's small cap fund and they also own some in their infrastructure fund.

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She likes that the stock is inexpensive and the business is well-diversified. "It's not just a one-hit wonder," she says.

"People are slowing waking up to the story," said Dundee Capital Markets analyst Maxim Sytchev, who has a $1.50 target on the stock.

He said the company is also expected to make more acquisitions in future, to help fuel its growth.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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