Oil and gas equipment and services companies are often referred to by some investors as the “picks and shovels play” of the oil and gas industry. The term “picks and shovels” may have been inspired by the California gold rush in the 1850s, where the folks who eventually profited from the mad rush for glittering nuggets turned out to be not the gold miners themselves. Instead, it was the stores which sold the picks and shovels to the miners which made the most profits. The SGX share market has its own fair share of “picks and shovels” with…
Oil and gas equipment and services companies are often referred to by some investors as the “picks and shovels play” of the oil and gas industry.
The term “picks and shovels” may have been inspired by the California gold rush in the 1850s, where the folks who eventually profited from the mad rush for glittering nuggets turned out to be not the gold miners themselves. Instead, it was the stores which sold the picks and shovels to the miners which made the most profits.
The SGX share market has its own fair share of “picks and shovels” with companies such as Falcon Energy Group Ltd (SGX: 5FL), Swiber Holdings Limited (SGX: AK3) and MTQ Corporation Limited (SGX: M05) being some examples. The trio belong to the group of 31 listed oil and gas equipment and services companies in Singapore.
Of the three, MTQ has been the clear outperformer in the last four years as shown in the graph below. MTQ’s capital gains have exceeded 100% from 1 September 2010 to 29 August 2014. By comparison, the total returns of the SPDR STI ETF (SGX :ES3), a proxy for the Straits Times Index (SGX: ^STI), was only around 11% for the same duration.
Although the returns from MTQ has been satisfying, as Foolish investors, we should be looking under the hood to understand what are the business drivers for this move in the share price.
In the process, we could perhaps figure out the answer to an even more important question: Can such growth continue?
A closer look at under the hood of the business
For the financial year ended 31 March 2010 (FY2010), the business segments within MTQ were mainly the oilfield engineering division and the engine systems division.
The oilfield engineering division covers equipment repair and reconditioning with a focus on high pressure drilling equipment, notably blow-out preventer related components. From FY2012 onwards, the segment’s revenue benefited from a new major project in Bahrain, as well as an acquisition in January 2014 of an Australian liquefied-natural-gas (LNG) pipe shoe supplier, Binder Group.
Next, the engine systems division consists of revenue from the distribution of brands such as Denso and Bosch. The division also supplies turbochargers and diesel fuel injection spare parts.
Lastly, the new Neptune division was added in FY2013 when MTQ took an 87% stake in the company. This business segment has been a major driver of MTQ’s revenue growth in the last two financial years. Neptune provides remotely operated underwater vehicles (ROV).
In MTQ’s latest completed financial year (FY2014), the Neptune division made up around 51% of its total revenue, followed by oil field engineering with 33.4% and engine systems at 15.6%.
Ideally, we would like to see profit rise together with the revenue increases. On the profitability side, the oil field engineering services is where the highest EBITDA (earnings-before interest, taxes, depreciation and amortization) margins of almost 30% is found. The oil field engineering services contributed to a hefty 79% of MTQ’s total EDBITA while the Neptune division only contributed a little more than 15%.
Finally, Foolish investors would look for the accumulated profits to end up on the balance sheet in the end. In this case, MTQ managed to increase its cash balance from S$20.3 million in FY2010 to S$37.4 million in FY2014. Debt was a modest S$6.5 million as of the end of FY2014.
As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in any company’s share price is supported by quality growth in its business.
In the case of MTQ, the oil fields engineering division growth is where Foolish investors might want to keep their eyes on. The future profitability of the company might depend on profitable growth within that segment.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.