A review of Titan is long overdue, so if you have been waiting (which I’m guessing is highly unlikely), this is your lucky day….

For those of you that are new to Titan, and are looking to do some catch-up reading, my first post on Titan can be found here. On the other hand, if you’re looking to minimize the required reading that you need to do, then we can sum up Titans business with the following statement from their website, which states that their mission is “….to provide our customers with innovative, integrated, advanced technology solutions to enable them to more effectively manage their fluid assets in the field, on the road, and in the office.”  Or, in really simple language, Titan provides state of the art technology (gauges & monitoring equipment)  for producers of oil to accurately measure, store, transport,  and safeguard their primary asset – the oil itself. While this doesn’t sound very sexy, producer companies face a lot of scrutiny in how safely they move oil from point A to point B, not only because of safety issues, but also because they want to make sure that every drop that’s in the tanker ends up in the storage tank, or pipeline, or refinery. Not only is spillage frowned upon from a safety & environmental perspective, it’s literally money that’s getting spilled on the ground. So, tracking, measuring, and moving it accurately is their primary service.

With that in mind, it would not be unfair to say the preceding few years have not been kind to companies within the energy sector. Low prices were already an issue prior to COVID, and with the onset of COVID, hydrocarbon demand evaporated – quite literally. No one was flying, far less people were driving, and with the world economy basically on hold, demand for liquid fuels fell off a cliff. In turn, this means that companies that serve the energy sector also got beaten up. Which brings us to the compelling question: is Titan dead in the water….or not ? I’ll get to the answer of that question, using my usual green, amber and red format.

An attractive technical chart – kind ofOriginally, this is one of the factors that drew me to Titan, as it appeared to have entered a nice, flat bottom. However, just like your summer vacation plans, COVID redefined what was (and was not) normal. Previously, you would have thought nothing of fighting your way through a crowded airport, only to sit for hours on crowded plane, happily breathing recirculated air. We all know that’s changed dramatically, and so did the Titan chart.

So, what once was a “nice bottom” around ~ $0.45 had the rug pulled out from underneath it, and fell into uncharted territory. Sure, the chart has flattened out since Q2 of 2020, but we will have put this chart into amber territory for now – getting better, but the 1st half hasn’t been pretty.

The balance sheet is still solid. Unlike most governments worldwide, Titan decided to not spend copiously during COVID, probably because it realized that, unlike political parties, they couldn’t buy votes, and nobody would care anyways. But I digress – Titan battened down the hatches and managed to preserve cash. The end result is that Titan is (as of their most recent May 31 2020 financials) sitting on $9.5 MM in cash ($0.33/share), no long term debt, a book value (excluding intangibles) of $14.7 MM ($0.52/share), and a net-net book value of $10.4 MM ($0.36/share).

For those of you that are looking really closely, you will notice that total liabilities did indeed go up, which is a function of accounting changes which have impacted all public companies, as per the note below:

The net effect is that there is now a “Right of use” asset and an offsetting “Finance lease obligation” on the balance sheet, but in terms of materiality, it doesn’t make a difference. At the end of the day, the balance sheet is solid – there’s still lots of cash, no long term debt, and book value is only marginally worse than the pre-COVID balance sheet of November 2019.

Revenues are down, gross margins are down, and expenses are up slightly. Normally, this combination should signal a whole lot of red ink. However, we have to view these outcomes in the context of what just happened – worldwide. With a few exceptions, most businesses suffered through the pandemic, as business activity was curtailed in an arguably draconian fashion. So, for most businesses, falling revenues were unavoidable, and Titan was no different. When compared with the prior period, it looks something like this:

  • For the comparative 3 month periods, revenues are down by $535,625, or about 40%. For the 9 month periods, revenues are down by $695,585, or about 17%.
  • For these same periods, gross margins are down to 49% (vs 56%) and 52% (vs 54%).
  • Cash expenses (G&A, Marketing & Sales, and Engineering) are up 8% and 7% respectively.

So, the fall in revenues and gross margins aren’t surprising, but the increase in cash costs is perhaps of more interest. On the surface, I would agree that an overall increase in cash costs isn’t good, but what is of further interest here is how these costs are broken up. One can see that G&A costs have actually fallen significantly, which signals “we are trying to be lean”. On the other hand, marketing and sales increased during the overall 9 month period but fell during the 3 month period, which makes sense. To me, this communicates “we were ramping up things, but had to pull back because of COVID”. Lastly, engineering costs have risen in both periods, which suggests that “we are working to improve and/or create new offerings”.

So while the overall theme of falling revenues and rising costs is frowned upon, in light of the situation and the way that costs have shifted in various categories, we would suggest this section is amber, and should be viewed with the backdrop of COVID as a factor.

Cash burn is low. In the context of the fact that Titan is probably seeing activity levels at historic lows, the marginal amounts of cash burned during the the 3 month period (-$357,256) or the 9 month period (-$313,033) are actually quite reasonable. I fully expected cash flow to be either very poor or negative, and at these rates, if one takes the worst of these (-$357,256 over 3 months) and assumes this will keep happening, then it suggests that Titan can last another 26 quarters, or about 6 1/2 years. Needless to say, they are a long way from blowing through the bank account.

Insider ownership is increasing. In my first post about Titan, I initially viewed the insider ownership as neutral. At that time, it was clear that various insiders had small positions, but the largest position was held by the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07”, which at the time held 7.2 MM shares.

Since that time, a few things have happened:

  • The insider positions of Angela Schultz (CFO) and Alvin Pyke (CEO) have increases as a function of an automated share purchase program – not much to see here.
  • The “Article 6 Marital Trust…” has acquired an additional 366,000 shares since May 2020, and total shares held has increased to 10.3 MM shares, most of which were purchased at prices significantly higher than todays price. To put this in perspective, the Zucker trust now owns 36% of the total shares, up from 25% when I first wrote about Titan.

This last point is the most interesting. To put it simply, if you had significant voting influence on a company which (a) wasn’t going bankrupt, and (b) had a reasonable shot at turning things around, given the balance sheet, would you be satisfied with a price that was dwelling in the proverbial basement ? I know that I wouldn’t. If I had that much influence on the company, I would be very involved with the direction of the company, and I would be doing my best to provide whatever support or leverage within my sphere of influence to make sure things get better, not worse.Which brings me to my last point.

They are actively seeking to diversify their business model. The folks at Titan can read the tea leaves as well as anybody, and they know that the energy services sector may or may not return to it’s former glory. With that in mind, they are actively seeking to diversify their business model outside of “just energy”. Indications of this are evident in the recent funding from Alberta Innovation, and in the closing paragraph on their Q3 results press release, below:

A simplified translations of this is “we aren’t waiting around for the price of oil to save us”, which is good news. Other energy services firms have done the same, such as Strad, and in doing so found a wider audience for their business offerings and an improvement in both market perception and company valuation.

The final verdict. Titan is a long way from “dead in the water”, but they are in that twilight zone of existing in a sector which is out of favor, while at the same time having enough cash (and cash flow), that they don’t have a need to engage investment banks. This “double barreled” lack of attention means that the shares will remain cheap for the foreseeable future. However, while there might not be any “market attention”, the executives at Titan and the majority shareholder have a vested interest in seeing the fortunes of the business turn around, while the squeaky clean balance sheet means that Titan has the flexibility to make wise long term choices. For the independent investor, this means there is opportunity….if you have patience.

As always, these are my thoughts and opinions. For those that have questions or comments, I can be reached at mark@grey-swan.com.

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