Energy Services of America Corporation【ESOA】株式ニュース

Seeking Alpha Article on ESOV, TEXT

Energy Services Of America - Energy And Infrastructure Upside At A Firesale Price http://seekingalpha.com/article/4035438-energy-services-america-energy-infrastructure-upside-firesale-price

Jan. 10, 2017 2:06 AM ET|1 comment | About: Energy Services of America Corp. (ESOA)
Forrest Wilson Forrest WilsonFollow(92 followers)

Trading below tangible book value with decent operational and growth trends.
Positioned for additional energy and infrastructure spending in the Mid-Atlantic region.
Undervalued due to minuscule ~$20m market cap, which makes it "uninvestable" for institutional firms.
Management has a large stake and a history of being shareholder friendly.
High potential for margin expansion, revenue growth, and increased shareholder returns.
Business Overview

Energy Services of America (OTCQB:ESOA) is a dirt cheap holding company with exposure to two different types of infrastructure. Based in Huntington, West Virginia ESOA operates two service companies, CJ Hughes for pipeline construction and maintenance and another, Nitro Electric, which handles electrical and mechanical services. Revenue split is about 50/50.

From the 10-K issued in December:

Wholly owned subsidiary C.J. Hughes is a general contractor primarily engaged in pipeline construction for utility companies. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. Nitro Electric, Inc. ("Nitro Electric"), a wholly owned subsidiary of C. J. Hughes, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro Electric operates primarily in the mid-Atlantic region of the United States.

CJ Hughes builds and maintains but does not own intrastate pipelines and sewer systems in the vicinity of the Marcellus Shale. So we're looking at a relatively asset-light, regionally focused subsidiary, which services some pretty big corporate energy, chemical, and utility names, as well as some (probably more predictable) municipal and state customers.

Energy Services' customers include many of the leading companies in the industries it serves, including:

EQT Corporation (NYSE:EQT)

Columbia Gas Distribution

Marathon Petroleum (NYSE:MPC)

American Electric Power (NYSE:AEP)

Toyota Motor (NYSE:TM)

Bayer Chemical (OTCPK:BAYZF)

Dow Chemical (NYSE:DOW)

Kentucky American Water

Various state, county and municipal public service districts.

Nitro Electric primarily services utility companies and municipalities.

ESOA overpaid for a pipeline company which it has since sold at a loss. In December of 2012, the company emerged from a forbearance agreement, and the company has executed nicely since then, with very high asset turnover >200%, growing EBITDA margins, and annual ROIs >20%.

Valuation

Price to tangible book value: 0.87

EV/EBITDA: 4x

Price to FCF: 7x

TTM dividend yield: 3.6%

The dividend is new as of this year, and is higher than all of the profitable energy service comps I could find. These metrics all indicate an undervalued stock relative to the oil services industry as a whole.

Energy Industry Outlook

I am not an expert on oil or natural gas fields, which is why I prefer to buy an energy services company with significant utility and municipal exposure rather than a pure-play owner of well or pipeline assets. From the research I have done, it seems that while energy prices will likely be lower than the past decade, we may be near the bottom of the industry trough. Marcellus/Utica specifically is established and has cheaper cost of production than other shale fields.

Over the past several years, companies operating within the U.S. energy sector, and in shale particularly, have continuously lowered operating costs. OPEC's recent agreement could further bolster the industry.

Management

ESOA is headed by Douglas Reynolds, the representative of District 17 in the West Virginia House of Delegates, and son of local Huntington business magnate Marshall T. Reynolds.

Since taking the helm at ESOA in December of 2012, Douglas Reynolds has increased tangible book value per share of the company from $0.43 to $1.43/share, a more than 3x increase. ESOA's share price has grown by 150% over the past 4 years, vs. the S&P 500 at 50% and the Russell 2000 at 64%. The CEO has also been modestly buying the stock, and issued this letter to shareholders explaining why he felt shares were presently undervalued.

I am extremely pleased with the improvements that have been made over the last four years with one exception: the under-valued price of our stock. In December of 2012, our stock value fluctuated wildly between $0.50 and $1.00 per share, and rightfully so, as we were under a forbearance agreement and were restructuring our balance sheet. On December 28, 2016, our last trade was at $1.38. This value represents less than the tangible book value per share of $1.58 at September 30, 2016. Our price to earnings ratio is 6.57 at December 28, 2016, and our backlog was $78.5 million at September 30, 2016 compared to $71.3 million at September 30, 2015. Members of the Board and management have been consistent insider buyers of the stock and hope that you will continue supporting us in what is poised to be a great fiscal year 2017."

His father Marshall Reynolds also happens to be the chairman of ESOA and CEO of Champion Industries, a printing company which has not had a great couple of years, but keeps the lights on. Mr. Reynolds also sits on the boards of several banks financing the debt portion of ESOA's capital.

Neither Douglas nor Marshall Reynolds appears to have significant experience in the energy services business. What they do both have is a significant personal stake. Insiders own >30% of the shares and Douglas Reynolds takes a modest salary around $100k/year. I would expect that both Doug and Marshall bring valuable Rolodexes to the business as well, both from local government and business connections. Additionally, they appear to be smart enough to leave the general management of both companies to experienced industry veterans.

Biggest Risks

Customer concentration risk varies by year and project with such a small company, but Marathon Petroleum and EQT Corporation represented >10% of revenue for ESOA in 2016.

The two customers, Marathon Petroleum and EQT, represented 18.2% and 17.6% of revenues and 40.6% and 11.3% of receivables net of retention, respectively. The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2015. These two customers, Marathon Petroleum and Rice Energy, represented 14.6% and 22.8% of revenues and 14.5% and 32.6% of receivables net of retention, respectively."

In a sector as wild as energy, accounts receivable write-offs are one way to look for issues with customer payments. Rising write-offs indicate that customers cannot afford to pay their bills. A/R write-offs have been negligible for the past two years. The company wrote off ~$11k in A/R in 2015, which increased slightly to $14k in 2016, on roughly $100m in revenue.

Days sales receivables is a metric which gauges credit risk from customers as well as project completion, with a lower number of days being better. Days sales receivables in the energy services industry ranges between 65-90 days for the largest energy services companies. We should expect a company this small to have higher DSR. Days sales receivables have declined slightly from 112 to 106 days for 2016 and are on track to decline further in 2017 due to sizable project completions in 1Q17.

The biggest A/R customer currently, Marathon, is highly levered, but does not appear to be in danger of bankruptcy in the near future. MRO bonds are trading at or around $100+, signaling that creditors are not worried about Marathon's ability to pay its bills. I could not find much on MRO's breakeven cost in the areas which ESOA services, but according to this, EQT is one of the lowest cost natural gas producers in the Marcellus field. EQT actually seems well positioned to roll up other operators, which could be a good thing for ESOA's backlog. Marathon's outlook seems a bit murkier, but neither EQT nor MRO shows signs of serious financial distress.

All employees of CJ Hughes are union members, which means some collective bargaining risk is baked-in. In total, ESOA employs 920 people. I would expect some pressure on SG&A in the form of wages.

The company's debt schedule shows $9.1m coming due in 2017, which could result in lower FCF compared to 2016. I expect some of the additional debt repayment to be offset by about $1m less in CAPEX; the company purchased a building which Nitro Electric had been leasing in early 2016. The 10-K also mentions that management expects to renew the current line of credit. Given the strong local banking ties and solid balance sheet, I would expect some revolver debt to be rolled over to 2018.

Outlook for 2017 and Beyond

Energy Services of America is well positioned to benefit from any increase in energy or infrastructure investments in the Mid-Atlantic region. The company reported a backlog of $78.5m as of the end of September vs. $71.3m in September of 2015. First quarter is typically when you can get a good idea of the expected annual revenue, but 10% higher y/y backlog sounds encouraging.

Year over year, the company grew revenue by 25.8% in 2015, and 32.5% in 2016, while at the same time improving operating margins and asset turnover. These improvements occurred in spite of a tough 2-year stretch for energy service companies due to the global collapse in oil prices. The company is trading slightly below net tangible book value, and looks cheap relative to cash flow and EBITDA, which are both under 5x. The company also maintains a modest debt/leverage ratio of 2x. I'm not betting on lower tax rates, but ESOA also pays a current effective tax rate >40%. Tax reform would be yuuuuge for this company.

While the company is not the sort to provide detailed guidance, I found the recent 10k management commentary to be interesting:

We were awarded several major projects in fiscal year 2016 that will be completed in the first quarter of fiscal year 2017. We will need to replace those projects in fiscal year 2017, but we feel the opportunities we are already seeing and our strong relationships with our customers will allow us to do so."

The atypical shareholders letter issued on January 4th, and recent insider purchases seem to indicate that management is confident that recent growth and operational trends will continue.

Conclusion

I like nano and micro-cap stocks lately for several reasons.

They tend to be much harder for big investors to put meaningful cash into without significantly moving the share price.
They generally don't have the same tax expertise as Apple (NASDAQ:AAPL) or GE (NYSE:GE), so they stand to benefit inordinately from lower tax rates.
They are often under-followed and consequently mispriced.
Due to an incredibly small market capitalization, ESOA is a difficult company for institutional investors to buy at any scale. The company has shown impressive operation improvements and has strong growth prospects. I believe ESOA is undervalued relative to the business prospects and to peers. The business fundamentals warrant another 2-3x turns in EV/EBITDA, which would put the stock price above $2/share in the short term. A nano-cap penny stock like this should continue to maintain a valuation discount relative to larger names, but I expect management to continue to return capital to shareholders or to achieve an eventual sale of the company. To me, this stock seems like a good long-term buy-and-hold prospect.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

ESOA just broke out of CEO letterTEXT

It went over $1.55 for a while today, 1.46 now up 6%

Dear Fellow Shareholder:

For the fiscal year ended September 30, 2016, our company improved on what was previously a record year for each of our subsidiary companies, C.J. Hughes Construction and Nitro Electric Company. To begin, we grew our revenue by $38.7 million to $155.5 million in fiscal year 2016 from $116.8 million in fiscal year 2015. The company performed well on our normal operations along with adding several major projects in fiscal year 2016. This enabled us to earn $6.1 million income before tax in fiscal year 2016 compared to $3.7 million in fiscal year 2015. While recording $2.9 million in tax expense, we exhausted the remaining portion of our federal net operating loss carry forwards during fiscal year 2016. The result was a $2.9 million net income available to common shareholders in fiscal year 2016 compared to $1.8 million in fiscal year 2015. We also earned an adjusted EBITDA of $9.4 million in fiscal year 2016 compared to $7.6 million in fiscal year 2015. Equally important, we paid our company’s first dividend, $0.05 per common share, in June 2016.

Since I became President of Energy Services of America in early December 2012, we have made incredible strides. I have enclosed a balance sheet and income statement from that year for comparison to fiscal year 2016. To start with, we generated almost the same revenue with two companies in fiscal year 2016 compared to three companies in fiscal year 2012. We obviously achieved much better gross profit, but we also only had SG&A expenses of $7.3 million in fiscal year 2016 compared to $12.1 million in fiscal year 2012.

While I have written about purchasing office and fabrication facilities for Nitro Electric and increasing our lines of credit for operating capital and equipment purchases, we nevertheless have reduced our liabilities from $53.3 million at September 30, 2012 to $33.9 million at September 30, 2016. That has resulted in interest savings of over $1.0 million, while at the same time, reducing our vendor financed payables by $4.9 million. Finally, our total stockholders’ equity has increased from $6.4 million at September 30, 2012 to $22.5 million at September 30, 2016.

I am extremely pleased with the improvements that have been made over the last four years with one exception: the under-valued price of our stock. In December of 2012, our stock value fluctuated wildly between $0.50 and $1.00 per share, and rightfully so, as we were under a forbearance agreement and were restructuring our balance sheet. On December 28, 2016, our last trade was at $1.38. This value represents less than the tangible book value per share of $1.58 at September 30, 2016. Our price to earnings ratio is 6.57 at December 28, 2016, and our backlog was $78.5 million at September 30, 2016 compared to $71.3 million at September 30, 2015. Members of the Board and management have been consistent insider buyers of the stock and hope that you will continue supporting us in what is poised to be a great fiscal year 2017.

Sincerely,

Douglas V. Reynolds, President

Energy Services of America

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2016 and 2012

2016 2012

Assets
Current assets
Cash and cash equivalents $ 3,815,790 $ 2,661,721
Accounts receivable-trade 24,059,432 18,485,166
Allowance for doubtful accounts (133,500 ) (240,071 )
Retainages receivable 5,810,474 2,477,903
Other receivables 106,837 340,876
Costs and estimated earnings in excess of billings on uncompleted contracts 5,953,818 11,260,254
Deferred tax asset 1,399,152 3,690,409
Prepaid expenses and other 2,485,101 2,026,514
Assets of discontinued operations 12,303 -
Total current assets 43,509,407 40,702,772

Property, plant and equipment, at cost 39,375,505 42,440,135
less accumulated depreciation (26,625,827 ) (23,387,158 )
Total fixed assets 12,749,678 19,052,977

Long-term notes receivable 137,281 -

Total assets $ 56,396,366 $ 59,755,749

Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt $ 2,867,898 $ 10,118,907
Lines of credit and short term borrowings 6,232,943 18,516,276
Accounts payable 5,006,427 9,917,085
Accrued expenses and other current liabilities 5,933,571 3,518,481
Billings in excess of costs and estimated earnings on uncompleted contracts 3,410,548 1,368,559
Income tax payable 1,076,440 -
Liabilities of discontinued operations 28,671 -
Total current liabilities 24,556,498 43,439,308

Long-term debt, less current maturities 7,390,099 1,623,771
Long-term debt, payable to shareholder - 1,223,325
Deferred income taxes payable 1,926,077 7,027,980
Total liabilities 33,872,674 53,314,384

Shareholders' equity

Preferred stock, $.0001 par value
Authorized 1,000,000 shares, 206 issued at September 30, 2016 and 0 at September 30, 2012 - -

Common stock, $.0001 par value
Authorized 50,000,000 shares 14,839,836 issued and 14,239,836 outstanding at September 30, 2016 and 14,458,836 issused and outstanding at September 30, 2012 1,484 1,446

Treasury stock, 600,000 shares at September 30, 2016 and 0 shares at September 30, 2012 (60 ) -

Additional paid in capital 61,289,260 56,107,650
Retained earnings (deficit) (38,766,992 ) (49,667,731 )

Total shareholders' equity 22,523,692 6,441,365

Total liabilities and shareholders' equity $ 56,396,366 $ 59,755,749

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For the years ended September 30, 2016 and 2012

2016 2012

Revenue $ 155,481,145 $ 157,738,736

Cost of revenues 141,283,142 156,056,529

Gross profit 14,198,003 1,682,207

Selling and administrative expenses 7,293,323 12,083,793
Asset impairment - 36,914,021
Income (loss) from operations 6,904,680 (47,315,607 )

Other income (expense)
Interest income - 3,034
Other nonoperating income (expense) (158,246 ) 140,115
Interest expense (875,254 ) (1,931,897 )
Gain on sale of equipment 268,448 45,930
(765,052 ) (1,742,818 )

Income (loss) from continuing operations before income taxes 6,139,628 (49,058,425 )

Income tax expense (benefit) 2,898,205 (536,248 )

Income (loss) from continuing operations 3,241,423 (48,522,177 )

Dividends on preferred stock 309,000 -

Income (loss) from continuing operations available to common shareholders 2,932,423 (48,522,177 )

Income from discontinued operations - -

Net income (loss) available to common shareholders $ 2,932,423 $ (48,522,177 )

Weighted average shares outstanding-basic 14,239,836 14,448,336

Weighted average shares-diluted 17,673,169 14,448,336

Earnings (loss) per share available to common shareholders $ 0.21 $ (3.36 )

Earnings (loss) per share-diluted available to common shareholders $ 0.17 $ (3.36 )

Please see the table below for a reconciliation of adjusted EBITDA for years ending September 30, 2016 and 2015:

2016 2015
(Audited) (Audited)

Net income available to common shareholders $ 2,932,423 $ 1,831,530

Add: Income tax expense 2,898,205 1,570,992

Add: Dividends on preferred stock 309,000 309,000

Add: Interest expense 875,254 761,079

Less: Non-operating (income) expense (110,202 ) (192,730 )

Add: Depreciation expense 2,503,471 3,291,386

Adjusted EBITDA $ 9,408,151 $ 7,571,257
Common shares outstanding 14,239,836 14,239,836
Adjusted EBITDA per common share $ 0.66 $ 0.53

Please see the table below for a reconciliation of tangible book value per share at September 30, 2016:

September 30, 2016

Total assets $ 56,396,366
Less: total liabilities 33,872,674
Less: intangible asset value -
Less: goodwill -
Tangilbe book value 22,523,692
Common shares outstanding 14,239,836
Tangilbe book value per share $ 1.58

Please see the table below for a reconciliation of the price to earnings ratio at December 28, 2016:

Closing share price at December 28, 2016 $ 1.38
Fiscal year 2016 earnings per share 0.21
Price to earnings ratio at December 28, 2016 6.57

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