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McCoy - The Fast Growing Canadian Energy Services Provider

September 01, 2008
Thomas Tan, CFA

Thomas Tan, CFA

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It was a great pleasure to meet Mr. Jim Rakievich, CEO and Ms. Milica Stolic, CFO of McCoy Corporation (MCB.TO) at New York City last Thursday (8/21). McCoy is a Canadian-based energy services provider headquartered in Edmonton, Alberta with operations in three major business segments: energy products & services (EP&S), trailer manufacturing (TLM), and truck & trailer products & services (TT&S).

EP&S segment manufactures computerized torque turn monitoring equipment, hydraulic power tongs for land and off-shore rigs, tong trucks, dies and inserts, trailer mounted hydrovac and vacuum tanks, specialized coatings, etc. McCoy is actually the largest independent worldwide manufacturer of hydraulic power tongs. The TLM segment produces lowboys, flat decks, step decks, oilfield floats and specialty trailers. It is also a market leader in quality manufactured logging trailers for Western Canada. The TT&S specializes in equipment installation, suspension work, welding, safety inspections, brake service, alignments, frame straightening, axles and hydraulics for heavy-duty and some light-duty trucks. This third segment is more locally GDP driven than by the oil and gas industry alone.

During the past several years, EP&S has conducted several successful acquisitions in the oil and gas services industry to grow its business, revenue and earnings. For example, McCoy acquired Superior Manufacturing & Hydraulics in 2007 to position itself as a global independent leader in hydraulic power tongs, and also became maker of dies and inserts for oilfield tools. In 2006, McCoy acquired Inotec to gain its foothold in the oil sands industry by providing coatings for oil sands equipment and tools. Inotec also provides wear-resistant coatings on directional drilling tools for the conventional oil and gas industry. In the TLM area, in 2004, McCoy acquired Peerless to become Western Canada?s largest custom heavy duty trailer manufacturer.

EP&S business has particularly enjoyed strong growth from its exposure to international markets and offshore drilling, as well as services for the oil sands market. For the latest reported results, Q2 2008, this business comprises 61% of McCoy?s revenue, almost doubled from 35% a year ago. Geographically, EP&S is also very diversified, with 45% of its business in Canada, 24% from the US, and 31% from the rest of the world which is a marketplace continuing to grow. Over 90% of sales from TLM and TT&S segments are from Canada. There is also tremendous opportunity within Canada, with over $110 billion expected to be spent over the next 9 years in the Canadian oil sands, in which McCoy, through Inotec, is well positioned to grow in concert with the increases of activity. On the TLM side, McCoy is also trying to diversify outside Canada. In May 2008, McCoy announced it had received a $4.2 million order for specialized oilfield trailers headed to the Middle East.

EP&S segment provides the best gross profit margin, about 43% of sales. The TT&S segment has lower but still decent gross profit margin of 35%, and the TLM has the lowest at 23%. TLM revenues have decreased from 2007 due to the reduction in oil and gas activity and logging activity in the WCSB (Western Canada Sedimentary Basin) due to low natural gas prices, also resulting in lower profit margin. However, McCoy expects a gradual recovery in this business, based on increased drilling rig utilization which has resulted in increased quoting activities and some improvement in the natural gas prices so far this year over 2007.

In general, McCoy has achieved growth in the last several years through acquisitions and rapidly expanding the EP&S business which has a great gross profit margin. Their TT&S business has also enjoyed gradual and steady growth. The growth in these two units with higher profit margin, has more than offset the reduction of sales and profit margin in the TLM unit. In fact, the overall profit margin of the Company has steadily increased. As a result, investors have seen growth in both its revenue and its EBITDAS margin (Earnings before interest, taxes, depreciation, amortization and stock-based compensation). In FY 2007, McCoy total revenues are $160M, with $75.7M from EP&S, or 47%, about half of its revenue. However, from EBITDAS standpoint, total EBITDAS in FY 2007 is about $18M, with $13.1M from EP&S, or 73%, almost ¾ of its earning power. We have seen steady improvement of EBITDAS margin for the whole Company from 7% in 2004 to 12% in 2007.

Financially, McCoy is strong, flexible and conservative. It has about $10M long term debt, but $5M cash reserves, using little leverage unlike some other energy services firms. This gives McCoy more financial flexibility in the future to execute on acquisition opportunities using debt leverage. With a good acquisition candidate, McCoy can leverage up to 2 times of its EBITDAS as done by others in the industry. It has an attractive dividend payout, with the latest announcement of 3 cents this quarter (raised from 2 cents early last year) and a yield of almost 4% at the current price. McCoy's goal is to be a $300 million revenue run rate company by end of 2009 by further expanding all its three business segments and through acquisitions.

Disclosure: I don't own McCoy yet, but I believe McCoy provides a good growth opportunity for a diversified energy portfolio for both long term capital gain and short term dividend yield.

______________________

Thomas Tan at Vestopia

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Thomas Tan, CFA
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