Mechelany Advisors’ MODEL PORTFOLIO has been running in a fully transparent way since January 1st 2014. Its Purpose is to implement the conclusions of our research analytical process in a portfolio managed using institutional liquidity, diversification, risk management and asset allocation processes. In our TRANSACTION UPDATES we keep our readers informed in real time of the transactions in our MODEL PORTFOLIO
Ready for the Year-End Rally
Our decision to cover our shorts last week was timely and the market sentiment is now starting to change to a more positive stance. China is re-opening tomorrow and we expect the weakness in Chinese H-shares to be over. Today we had a major reversal in the index and the Chinese tech stocks as we expected.
We have replenished our long exposure in China at cheap prices and today added the second part of our Japanese Nikkei 225 future position, lifting our Japanese exposure to our desired 10 % of the Model Portfolio.
We were also right in our timing of shorting Natural Gas and doubled up on our short position today, as we se pressure easing on the energy complex altogether. We took profits on our energy ETFs in the US but are adding today a new engineering company that is doing an extremely interesting transition form Oil and gas to Water treatment EXTERRAN.
We also re-instated partially our position in QuantumScape 20 % lower than we sold it last week.
Transaction Update Oct 7 2021
Buying EXTERRAN EXTN US @ USD 4.31
Exterran Corporation is a Houston based provider of products and services to the oil, natural gas, water, and power generation industries. The company is in the process of transforming from a traditional oil services business to a more broadly focused energy industrial concern.
Worldwide oil production is expected to be flat through 2030, natural gas production will grow but produced water should rise significantly – by as much as 30% through 2025 and another 20% in the second half of the decade.
This is a function of aging oil fields requiring additional water to maintain field pressure. Exterran puts the total market opportunity for its water solutions technologies at $5 billion over the coming decade with the unit contributing at least $150 million per annum to the company’s top line in the coming years.
While based in Houston, most of Exterran’s revenues are generated overseas, with only 7% of its top line coming from the U.S. In 2020, Argentina was the biggest contributor to the company’s top line, providing $103.7 million, or 17%, of the company’s total; Iraq was the largest revenue source in 2019 at 22%. The Latin America as well as Middle East and Africa regions are typically responsible for ~80% of its revenue.
The transformation in the industrial business of the company has been a rough path.
After its IPO, Exterran’s stock had initial success, trading in the low 30s for most of 2017 and early 2018.
However, the company’s traditional customer base began shifting its focus from growth to capital preservation and an emphasis on the bottom line when crude prices began a protracted decline in 4Q18 – further exacerbated by the pandemic – causing Exterran’s earnings, cash flow, and stock price to fall.
After eking out a small per share gain on a GAAP basis in 2017, the company suffered significant losses in 2019 and 2020, forcing it to increase its long-term debt from $368.1 million at YE17 to $562.3 million at YE20 as stockholder equity fell from $554.8 million to $295.8 million over the same period.
To dampen its earnings volatility and correlation to oil prices, Exterran has deemphasized the U.S. in favor of international markets, where spending is not as knee-jerk and less a function of oil prices.
Additionally, the company has expanded its offerings, underscoring its water solutions business, which it originally entered in 2008. It has also completed an exodus from low or negative margin product lines with the sale of its U.S. compression fabrication business to Compass Energy Systems in November 2020.
Exterran took a big step in its transition to an energy industrial concern when it announced on March 2, 2021 that its water solutions business had been awarded a ~$200 million contract in the Mideast during 1Q21.
On September 23rd Exterran announced it was awarded another multi-year contract for its water solutions business to treat more than 150,000 barrels of water per day using its gas flotation technology. EXTERRAN has developed a Micro bubble technology enabling it to separate water from oil. Exterran did not disclose the terms of the contract but said it has a similar value to the $200 million water solutions deal the company announced in March.
With the new project, water will comprise more than 25% of the company’s total contract operations backlog, confirming that its transition from Oil and Gas to Water technologies is shaping up.
Although, the debt level of the company is a concern that has kept its valuation low, we expect the company to report better than expected results for the third quarter as well as strong guidance for next year.
Analysts are uniformly bullish on the company with a 12 months target price at USD 10 when compared to the current USD 4.31.
Technically, the stock is in the final stage of its consolidation after the severe bear market of 2018 and 2019, and has built a very solid base with little downside left. Conversely, the moving averages are delivering a BUY signal and any good news has the potential to send the stock sharply higher
We see this mid-sized engineering company as an interesting play for the transition towards a greener and cleaner world, with little downside.
New Asset Allocation
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