Titan Logix update – update at Q1 2021

Titan released Q1 financials on January 20th, 2021, and despite being fairly unremarkable, the shares hit a 52 week high of $0.54 on the same day. Titan now appears to have exited “the basement”, and even though the energy markets aren’t exactly strong, Titan shares have seen an increase in trading volume over the last month. While Titan is definitely not as inexpensive as it was a month ago, we believe it should still trade beyond these levels, and with that in mind, we take a look at the Q1 results using our usual green, amber, and red format to highlight Titans bullish, neutral, and bearish points.

We have liftoff…. In our December update, we indicated that the chart was improving, and it has continued to do so. From the time of writing our December update, Titan has managed to rally another 25%, some of which can likely be attributed to general market optimism. When we summarized our December update, we also suggested that the “low hanging fruit” was in the $0.55 range, and recently (January 20th), Titan hit a 52 week high of $0.54. So, from a technical perspective, with the shorter term MAVGs having crossed over on reasonable volume, we are no longer plumbing the depths. Folks that favor the technical over the fundamental will now be looking more closely at Titan, as it will have provided the necessary validation for them to move money off the sidelines.

The quarter was bad. The balance sheet hardly changed. Make no mistake, the quarter was still ugly, as any improvements in the energy sector have not yet translated through to companies like Titan. However, if one looks at the balance sheet, you have to squint hard to see how this quarter impacted it. The short story is that there is virtually no change in the balance sheet. Cash holding are actually up, total assets have decreased by $286K, total liabilities have also decreased by $143K, and net tangible equity (excluding the value of intangibles) decreased by about $72K, which suggests an actual per share reduction in book value of less than $0.01/share. Tangible book value was $0.516/share, and as of November 30th it’s $0.513/share – not exactly the stuff of materiality. There isn’t much more to say, as the balance sheet continues to provide a solid foundation for Titan, and buyers of Titan today are still able to purchase the company at a discount to tangible book value, and the company is still sitting on $0.33/share in cash.

The income statement is much worse on a YoY basis. As mentioned previously, the quarter was ugly, and the numbers bear this out. Whereas a “normal” top line (in an already depressed market) would be about $1.4 MM, Q1 2021 was down about 40% from these levels, at $850K. These results, while clearly “bad”, are not surprising given that the energy sector is only recently seeing slow improvement. These results were also buffered due Titans participation in the CEWS program, which provided approximately $90K of relief. In any case, the income statement does not raise any eyebrows, and at a net loss of $142K ($0.005/share), the results, while poor, are well within expectations.

Cash flow from operations is still negative. Cash flow is negative both before (-182K) and after changes in working capital (-34K), but again, this is within expectations, given the current business environment. Overall, cash flow is actually positive, as Titan finance income totally offsets negative cash flows from operations. Perhaps of more interest is the fact that if Titan did not receive the ~ $90K CEWS benefit, finance income would still have offset the negative cash flows from operations, and Titan would still have increased its cash balance. Overall, the cash flow statement is solid, given the poor operating environment, and the fact that the company managed to be cash flow positive is a testament to their planning earlier in this commodity cycle.

Insider ownership is unchanged. As of January 21, 2021, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” is still the largest shareholder, with 10.5 MM shares, or about 37%. Additionally, a review of SEDI information indicates that there has been no insider selling.

News continues to be sparse. As indicated in prior posts, the company has by no means “inflated” the share price via press releases, as given the thin following of the company, it’s likely a misplaced priority. While the shares have rallied (along with the rest of the market), we would hardly say the shares have been “talked up”. This means the shares, although more expensive today, are still on the cheaper side of things – for now.

We continue to hold Titan, and increased our position. In our fiscal year up update, we suggested that the price could see more weakness at the end of December due to tax loss selling, and while the shares got as low as $0.36, the overall trend was “onward and upward”. We managed to increase our position, but not quite as cheaply as we had hoped. In any case, we continue to hold a larger Titan position, as we believe that while the energy sector slowly improves, Titan is one of the best capitalized companies within the sector. Realistically, not much has changed since our December update, and for investors holding (or looking at purchasing) Titan, we would say this:

  • The chart is definitely looking better: From a technical perspective, the market is suggesting that better days are ahead. Investors who tend to allocate capital based on technical factors will likely look at Titan more favorably, which may explain the increase in volume and liquidity over the last month.
  • The commodity price is improving: The overall consensus is that demand (and prices) are slowly improving. Any improvement in the overall global economy will translate into increased activity levels in the energy sector, which will filter down to companies like Titan.
  • The number of active rigs continues to increase…slowly. Related to the above, the Canadian rig count continues to slowly increase, which also suggests business should improve for Titan.
  • Titans balance sheet continues to be solid: As stated before, where other companies are folding up or scrambling to stay afloat, Titan remains comfortably above water.
  • Titan continues the work to diversify their revenue stream: At this time, the bulk of Titans revenues are still driven by energy – but they realize this dependence can hurt, and continue to investigate other sectors where fluid hauling is commonplace.
  • The low hanging fruit may be gone soon: In our December update, we suggested that a simple reversion to more a more normalized price to book ratio would bring the shares up around the $0.55 range, which occurred on January 20th. Based on the solid balance sheet and technical strength, we expect the shares to continue their ascent.

Questions or comments ? Feel free to send them to mark@grey-swan.com. 

Titan Logix – update at fiscal year end 2020

Titan released full year financials on November 26th, 2020, and as expected, the market reacted with a big fat yawn. While the shares are up slightly ($0.365 as of December 10, 2020), they are still inexpensive, given that the company is sitting on $0.33/share in cash, has no debt, and has skated through the pandemic with only marginal balance sheet impacts. Titan is currently still in a “holding pattern”, as it is not benefitting from the “Vaccine trade” that is pushing Canadian energy companies to recent highs. So, without further ado, we delve into the good, the immaterial, and the ugly parts of Titan Logix.

The chart is improving. As mentioned, the shares are up a bit, and this is reflected in the chart. That being said, the energy sector is still decidedly “unsexy”, so we would not be surprised if the current share price strength waned somewhat. In the very short term, the bottom line is that some of the easy money has come off the table, but it would not a total surprise to see the shares fall back down to $0.32 – $0.34. If the market is a beauty contest, Titan is still perceived as ugly, albeit with a bit more lipstick as of today. Bear in mind that we have been long on Titan since late 2018, so for those that are out of the money – we feel your pain.

The balance sheet is virtually unchanged. There is really not much to say here, as the balance sheet is only slightly changed from Q3. Once the dust settles, there is a $110,000 deterioration in net equity from Q3, which translates into a loss (in book value) of approximately $0.001 – not really something that’s going to move the needle. In short the balance sheet is the same – lots of cash, no debt.

The income statement is worse than last year – as expected. Not surprisingly, revenues are down (-26%), COGS are down (also -26%), and the company declared a net loss of $578K vs a small net income of $50K last year. To be fair, Titan was the recipient of a total of $440K of Government wage subsidies, which cushioned the impacts of the COVID slowdown, but virtually every organization that was paying attention managed to participate in such programs. While it’s true that if one adjusts for this amount, then the net loss (and the balance sheet) would be worse, but exclusion of this amount would not be a game changer. All things considered, the income statement story isn’t that bad. Gross margin held steady at 53% on a YoY basis, G&A is actually down 4% even after adjusting for the impact of the $440K wage subsidy, and the only noteworthy increase is a 62% ( + $410K) increase in Engineering expense. In the MD&A, this increase is addressed, as the MD&A states:

“….during the fiscal year, the Company incurred engineering expenses of $1,067,211 compared to $658,711 in fiscal 2019. The Company developed software and cloud based applications for its first IIoT products, the Titan Data System (TDS) and the Titan API plug-in for its guided wave radar gauges. The increase in engineering expenses was offset with wage rollbacks, discretionary expense reductions combined with benefits received from the CEWS program...”

In a sea of bad news, statements like this are a solid indication that the company is not sitting back and hoping – they are actively making the effort to come out of this very dark period with a better product offering. So, in closing, while the income statement is ugly, it could be a lot worse.

Cash flow from operations is negative – as expected. Not unlike the income statement, cash flow isn’t great. However, in light of the fact that revenues YoY were down by almost $1.5 MM, what can we expect ? The way that one views the cash flow statement is a matter of context. Yes, in absolute terms it’s bad, as cash flow from operations are negative, and would be negative to the tune of -$1.11 MM if one adjusts for the $440K of Government assistance. If this were representative of cash flow in a normal year, this would look very bad – but in the context of one of the worst years ever, it’s expected. It would be very surprising if Titan revenues continued at the same muted level in fiscal 2021, so while this cash flow statement isn’t “good”, it shares the same thread as the income statement – not good, but not surprising, and very likely to get better.

Insider ownership continues to increase. Since the Sep. 30th update on Titan, the largest shareholder, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” has continued to increase their position, purchasing an incremental 119,500 shares at an average price of $0.33. This means that the Trust now owns a total of 10.5 MM shares, or about 37% of the total shares outstanding. The consistent purchase of shares may suggest that the Trust has an interest in taking the company private, but this is conjecture at this point. Whatever the case, the Trust sees value in the company, as they would not continue to purchase in the open market if they felt the upside wasn’t significant.

The news cycle continues to be dormant. This is not a company that is shouting from the roof tops – they are simply trying to execute as best they can. Given that Titan is associated with the energy sector (for better or for worse), and the fact that they utilize media on a bare bones basis, the shares are not enjoying any sort of “hot news” premium. In fact, for those wishing to acquire shares, tax loss selling season may prove to be lucrative, as some investors who have short time frames may start selling as the end of the year draws near.

We continue to hold Titan, and continue to buy at the low end of the price range. The Titan story hasn’t changed much since the last update, and realistically, expectations were low. In closing, we would reiterate the following points:

  • The chart is definitely looking better: While there hasn’t been a sustained upward move, this is still a good place to accumulate cheap shares. Aside from tax loss selling, it would seem unlikely that the shares get much lower.
  • Tax loss selling will provide patient investors with opportunity: For those that would like to get in “really cheap”, it probably makes a lot of sense to put in some laddered stink bids. There are always some sellers out there who have either lost patience or aren’t sure why they bought in to begin with.
  • Titans balance sheet is very solid – many competitors may not be: An oft repeated theme on these pages is “there is no bankruptcy risk”, but the other side of that statement means that competitors who are poorly capitalized are dying a slow death, and new entrants are certainly thinking twice before competing in this decidedly “unsexy” space.
  • When activity picks up, Titan will be one of the few left: Commodity sectors (and those industries related to commodities) tend to endure long hot & cold spells, but when they do turn around, it can get busy – very busy.
  • The fact that Titan is diversifying their revenue stream is not priced in: At this time, the market is pricing Titan as a “pure energy services” firm. While it remains to be seen as to whether or not they can truly diversify their business model, it’s clear that this possibility is not priced into the company today.
  • This is a value play – patience is required: If your investing time horizon is short, then maybe this isn’t the right place to be. While a quick bounce in price could happen, a longer recovery is more likely.
  • The low hanging fruit is around $0.55: If nothing else, it would seem quite likely that the shares at least trade at the 2016-2019 average of the price/book ratio (1.07x), which would imply a price of $0.55, or upside of 50% from current prices.

I am long on Titan, with an average purchase price of ~ $0.45 CAD, and will continue to purchase at the current levels.

As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com. 

Titan Logix – update at Q3 2020

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.

Titan Logix – revisited….

Titan Logix

Following my original post about Titan Logix, I received an email that questioned the thesis of the post. I’ve extracted an excerpt from the email, as follows:

“…sure the company is cheap, but aside from book value, what makes you so sure the price will go up ?”

That is a totally valid question, and I’ll try & address the “whys” here. To (very quickly) recap the original post, there were a number of things that indicated to me that Titan was a relatively low risk buy. Note that I use the same green, amber, & red format, and that I simply list the points rather than going into a detailed explanation. Anyone that wants to review the original post can simply take a look at the prior Titan post to get the details. The distinct areas that I highlighted were as follows:

  • Attractive technical chart
  • Lots of cash & low debt
  • Reasonable cash burn
  • Clean earnings
  • High insider ownership
  • No institutional ownership & no analyst coverage
  • No self promotion
  • No share buyback
  • Out of favor sector
  • Business is easily understood
  • Potentially disruptive technology

One can quickly see that the positives outweigh the negatives. However, not every investor is the same, and not every reader of this blog will have the same understanding of investing, or of this particular sector. This is where I may have come up short in my last post, so I’ll try to flesh things out a bit more here.

The price of a commodity distracts us from what is really happening. We are bombarded by price information all the time, because people can easily identify with the concept of paying too much or getting a bargain. However, when it comes to investing in companies that produce commodities, or companies that are affected by the commodity price, it’s often better to look behind the scenes. The good folks at the U.S. Energy Information Administration must have anticipated my post, because they just updated their forecast for liquid fuel production & consumption, which is shown below.

prod vs cons eia

The first thing that should become apparent here is that production and consumption are always dancing with each other – sometimes one gets ahead of the other, but not by much. The two lines are tightly interwoven, constantly moving in & out of synch. That being said, while consumption & production tend to be intertwined, price is the signal that screams at us that one of them is slightly out of whack. Or, to put it succinctly, the price of crude oil is very sensitive to slight changes in either production or consumption, and therefore can be very volatile.

We have all seen this, as anyone who watches the news is constantly told that WTI is either up or down, and only a few years ago we cursed high oil prices (and high gasoline prices), whereas now we are less likely to do so. To highlight this, a 2nd chart from the EIA illustrates my point:

EIA WTI price 2013-2017

If you look at the first chart, the difference between the production & consumption isn’t particularly striking. However, you can still see that the blue line (production) gets slightly ahead of the khaki line (consumption), and that this gap persists into early 2016. During this time, excess production was likely put into storage, to be slowly worked off later. However, the impact on price is far more volatile, as the 2nd chart indicates. Even though the excess production isn’t enormous, it eventually craters the price by ~ 50%.

So, while both production & consumption tend to move up over time, one is driven by millions of people who tend to consume at a fairly even pace every day,  whereas the other is driven by exploration programs that take a long time to analyze & execute. For instance, if a major project is announced today, that production may not make it to the gas pump for a number of years. In essence, while consumption continues to slowly ticks upwards, producers may slow down or halt production entirely when prices are weak. 

OK. So producers slow down or stop production. What does this mean for Titan ?  A producer company is always trying to balance how much it produces and when. Although many companies employ hedging to get away from the price roller coaster, rarely are companies 100% hedged, and some can be totally unhedged. A quick look at the price cycle since the year 2000 allows us to walk through what happens with both producers and service companies.

Phases of price cycle.PNG

  • During the “low, flat price” part of the cycle: 
    • Producers are keeping a lid on costs, as price signals aren’t so strong that they are clearly signalling boom times. They are likely trying to keep service costs as low as possible, because price can’t cover up poor fiscal discipline. Additionally, because producers are so cost conscious, they are hesitant to spend to bring on new supply. At the same time, demand continues to grow, setting the stage for a demand-supply imbalance, and sowing the seeds for higher prices.
    • Service companies are reasonably busy. However, because prices are relatively flat, there are likely no new entrants into the marketplace. The number of competitors is probably fairly static. Anyone considering entering the market to compete is either well capitalized or has a strong business plan in place, as they know they will have to compete with existing service companies in an environment where producers are cost sensitive. Service companies are, for the most part, price takers.
  • During the “rising prices” part of the cycle:
    • Producers slowly start to see stronger price signals, and become more aggressive. Since they are always compared to their competitors, they are keenly aware of whether or not competitors are producing more than they are. Eventually, this combination of stronger pricing signals and “not wanting to be left behind” causes them to expand activity and bring on more production. In turn, their need for services increases, and they become less cost sensitive, as they can justify paying more given that the commodity price offsets increased service costs.
    • Service companies see their business increase. New service companies may enter the market, seeing increased activity and increased prices. Costs for services may go up, as the equipment of existing services companies is likely seeing higher utilization. New entrants may provide the incremental equipment required by producers, as existing companies may not be able to expand their fleets as quickly.
  • During the “rising & sustained high prices” part of the cycle:
    • Producers are all making money, as the sustained high prices hide all cost overruns. The most poorly capitalized/managed producers (usually chasing the highest cost projects) enter into the market, as with strong prices in hand, they can more easily sell their story in order to raise capital. With all producers running at “full tilt”, competition for services becomes fierce, and the most poorly managed producers drive up the price of services, as they likely lack fiscal discipline. The “produce at all costs” mentality sets the stage for oversupply.
    • Service companies likely have difficulty keeping up, and can therefore become price makers. Sensing the frenzied level of activity, they can effectively name their prices, knowing full well that producers have little choice. Like their producer brethren, even the most poorly managed service companies can turn a profit.
  • During the “low prices..again” part of the cycle:
    • Producers are likely stuck with high cost structure projects that were initiated during the high price environment. Saddled with the costs of these projects (that are not easily shed), they look for any costs they can easily and quickly reduce or eliminate. Negotiations with service companies become an exercise in “passing down the pain”, as they again become price makers out of necessity. New projects are either pushed off into the future or shelved entirely. Inventories of oversupplied commodity are slowly worked down.
    • Service companies see revenue declines and margin compression. Well capitalized service companies whose management (likely) have long tenures and anticipated the end of high prices are prepared, and can weather extended periods of low revenues. Poorly capitalized & poorly managed service companies exit via bankruptcy, or are swallowed by competitors. The pool of available companies shrinks, with only the strongest and best managed companies surviving. Once the cycle begins again, they are the ones that producers will turn to.

So, to answer the question “…what does this mean for Titan ?”, the answer is that the slowing (or stopping) of crude oil production means three things for Titan:

  1. Titan is surviving because of its strong capital structure.
  2. Competitors are leaving (or have left) because they are poorly managed or have a weak capital structure, or both.
  3. When the sector starts to turn, there will be less companies to compete with, which means a higher concentration of business will fall into the hands of Titan.

So these are the reasons, in conjunction with those factors I indicated in the prior post, that make me reasonably certain that Titan will see increased business as the sector turns around, and that in turn will lead to an increase in share price.

As always, I can be reached at: mark@grey-swan.com.

Titan Logix – a sleepy small cap wakes up.

Titan Logix.PNG

Anyone that has visited this blog before knows that I’ve provided some detailed analysis on positions that I’m already long on, and my thoughts on why I might be staying long (or not). However, in this post I wanted to go through the process as to why I initiate a long position in a company at all, and what factors get me to that point. While I’m sure that many of you are seasoned investors, I thought that some of you might not have as many wrinkles as myself, and therefore might be interested in what I call “the weeding out” process.

That being said, I should probably issue a caveat, in that I have already been long on Titan for a while – specifically, I built my position in Q1 and Q2 of 2018. Therefore, depending on what type of investor you are, you may view this post as entirely educational, given that “the price has moved, and it’s too late to buy into this story”, or you may view it as an opportunity, since “the technical chart is better today than it was back then”. Whatever your perspective, my intent is not to convince you to buy into the Titan story, but rather to “show you the tools I use and how I use them”, for those that are interested. Note that once I start describing the detailed process, I color code the headings green, amber or red to indicate how a particular part of the data influences my decision. 

With that out of the way, let’s get started….

Who is Titan Logix, and what do they do ? Titan, headquartered in Edmonton, Alberta, falls into the category of  “oil & gas services”, so they don’t actually produce any oil or gas, they help the producers in that process. As per their website, their mission statement 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.

How did I find them ? I’m not sure when I first became aware of Titan, but since I allocated capital in Q1 of 2018, I’m guessing I probably found them by around Q2 of 2017. In this particular instance I found an article written by Bob Tattersall, a mutual fund manager who tends to focus on small caps. The article made a compelling case for Titan, so I wrote up a note to myself, and Titan was formally placed on my “watch list”. So, the “finding” process was simply a function of me doing what I usually do, which is reading – the paper, magazines, or online content. Most of the time the headlines (or articles) don’t result in any good ideas, but occasionally one will see something interesting, which is exactly what happened in this case. 

OK. So you found them. How do you make the decision to allocate money ? I look at a number of different factors, which I’ll dissect here.

Attractive technical chart. OK, this is perhaps a bit misleading, because I’m not really a technical kind of guy. However, I have learned that when buying into a position, getting in at the “bottom of the saucer” is often a good place to start. The chart below illustrates what I’m talking about, and was what I was looking at in February of 2018. From this I could make a few observations, specifically:TLA chart Feb 2018

  • From mid-2016 through to February of 2017, the chart was almost flat, which told me interest in the company was low. Most investors that were in for a quick gain were long gone, so the shareholder base should be less flighty.
  • For the most part, volumes traded are also low, which is consistent with the idea that few investors are interested.
  • Low interest typically means low expectations. Low expectations mean that any positive news can potentially move the share price significantly higher. On the other hand, since most everybody has already given up on Titan, negative news probably won’t drive the share price much lower.
  • The moving average prices, in this case the 10 week and 30 week moving averages, had pretty much converged. However, there was no clear breakout to speak of. The share price was drifting along, neither moving up or down much.

So, at this point I established that Titan looked appealing from a very basic technical perspective. From here, I move on to fundamental analysis.

No debt, lots of cash. In most cases, my next stop is almost always the balance sheet. What I’m typically looking for is either no debt or manageable debt. Obviously, no debt is preferable, but if the company has debt, and it’s reasonable given their total cash available or their cash flow, then I’ll still consider them. In this case, the most recent financials available were for the 3 months ended November 2017. A quick look confirmed what I had already read in the prior article – that Titan was sitting on $6.4 MM of cash with no short or long-term debt. Titan 3 months.PNG

On a book value basis, this was equivalent to about $0.22 per share in cash, and total book value (excluding intangibles) was $0.51 per share. At this point, I knew that Titan had potential, but I needed to find out how long this cash might last, as it was clear that they were still losing money. So, my next stop was the cash flow statement.

Reasonable cash burn.  As I indicated, cash on the balance is nice, but if all of it is consumed within one or two quarters, it doesn’t do much good. In this instance I looked at not only the 3 month statements, but the years ended August 2017 and August 2016, as I wanted to get a range of what could happen.  Cash burn from operations ranged from a low of $118,000 (fiscal 2017) to a high of $1.9 MM (fiscal 2016). The 3 month cash burn for Q1 2018 came in at $74,000, implying a full year value of approximately $300,000.

Titan cash flow.PNG

While I couldn’t predict where it would fall in the future, I could safely assume that even the worst of these ($1.9 MM) suggested that the company could operate for up to 3 years, during which time they would be looking for ways to not keep burning cash. This provided further “de-risking” information, as I was comfortable that the company couldn’t be called on outstanding debt, and was also unlikely to spend themselves to death. Additionally, the cash position and the reasonable cash burn gave me some comfort that there probably wouldn’t be a share issuance on the horizon that was going to dilute existing shareholders.

Clean earnings. Once I’m comfortable with the debt and cash situation, I take a look at the income statement to determine how “clean” the earnings are. What I’m looking for is either a lot of change in how revenues & expenses are classified on a year over year basis, or revenues & expenses that are difficult to understand. A quick look at the Titan income statement confirmed that things were pretty simple: Titan 3 month Inc.PNG

Nothing on this income statement screams “this is strange”. Costs are easily understood at a glance, and a deeper dive provides some glimmers of hope. While revenues are only up slightly, gross margins are significantly improved, & total expenses (excluding FX) are only up about 3% YoY. All in all, the income statement doesn’t offer up anything out of the ordinary, so at this point I can move on to qualitative factors.

High Insider ownership. After viewing insider holdings on SEDI, I came to the conclusion that the insider part of the puzzle was neutral for a number of reasons:

  • Directors and Officers do own shares, but not a large amount. Specifically Greg McGillis (CTO – 555,891 shares or ~ 2%) & Angela Schultz (CFO – 374,473 shares or 1.3%) hold shares. Alvin Pyke (CEO) was hired as of February 23 2018, so he obviously held no shares at the time I made my first purchases.
  • Other significant individual shareholders on SEDI hold approximately 5.4 MM shares collectively, or about 19%. These are either shareholders that are identified on SEDI as directors, but are not identified as such on the Titan website, or persons who still hold shares but are flagged on SEDI as someone who has “Ceased to be Insider”.
  • The “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” holds 7.2 MM shares, or about 25%. This is what puts the insider picture firmly in the “neutral” camp. I could make no assertions about the motivations of this entity. Are they actively seeking to maximize the value of Titan ? I hope so, but I honestly can’t say, so the insider shareholder story flashes amber for now.

No analyst coverage or institutional ownership. I could find no evidence of any recent analyst coverage, or that any mutual funds held a position. The lack of analyst coverage is consistent with what I was expecting, as I would find it unlikely that a company as well capitalized as Titan would need to do a capital raise, which in turn would go hand in hand with analyst coverage. Additionally, the lack of any institutional holdings (outside of the Zucker estate) is a plus, as this means that there is no potential for a large block of shares to be sold off if a mutual fund manager decides to liquidate. The flip side of this is that there is the potential for the shares to get repriced if a mutual fund decides to buy in once results improve.

No “self promotion”.  Quite often, a company will become aware that nobody is interested in them. Lack of interest usually means a depressed share price, which some companies can find understandably bothersome. So, in order to “create a buzz”, they may hire an IR firm to engage the public, or the company itself will start issuing press releases which sound exciting, but simply inflate normal events. A classic example would be “Widget corporation completes sale of widgets to Multi-national accounting firm”, which sounds great. However, at the end of the day, isn’t every company supposed to be trying to make big sales – isn’t that their job ? In the case of Titan, all I found were “business as usual” types of press releases, which confirmed that there wasn’t any artificial inflation of the share price. 

No share buy back.  I could find no evidence of any share buy backs, and the fact that total shares outstanding had remained fairly static confirmed this. This being said, a share buy back is a vote of confidence by management, but lack of a share buy back isn’t necessarily a lack of confidence. If that were the case, this would mean that the vast majority of firms listed publicly would be broadcasting a lack of confidence by virtue of the fact that there was not a share buy back in place. So, rather than being red, this section ends up amber.

Out of favor sector. I think this is fairly self-evident. The energy sector in Canada, and the associated service companies, had been out of favor for a while. One might argue that this is a redundant statement, given the flat chart of Titan. In any case, the fact that the sector was clearly out of favor meant less eyeballs (and money) to compete with.

The business is easily understood. Again, this is a fairly simple concept. If I was on a plane, and had to explain to the guy next to me what Titan did, could I ? I’m fairly confident I could. While I can’t say that I’m an expert in how their monitors (or gauges, or whatever) work, the concept is easily communicated.

Potentially disruptive technology. Lastly, I’m always on the lookout for something that will shake up the marketplace. In this case, I was not aware of anything that Titan was doing that could be called potentially disruptive. That being said, if this was a prerequisite for every investment, I wouldn’t be investing in anything. So this is amber rather than red.

The final verdict – A buy at an average price of $0.52. As I indicated, I ended up buying Titan. While some parts of my research turned up a few amber lights, there was nothing that screamed “run away”. Also, I should be clear about my expecations about Titan:

  • I’m not expecting a 10x return on this. What I am expecting is that the oil & gas sector will recover, as cyclical sectors always do. When that happens, in 3-5 years, Titans revenues will increase, and their valuation and share price will follow.
  • I am expecting an annualized return of somewhere between 15% and 20% over a 3-5 year period. This means a recovery in the Titan share price of somewhere between $0.90 (20% annually over 3 years) and $1.05 (15% annually over 5 years).
  • I believe that this a relatively “low risk” opportunity. Professional money managers will beg to differ, citing the small market capitalization of Titan. However, this is what creates price inefficiency – the perception of “because it’s small, it must be risky” vs the fact that the company is debt free and cash rich, which mitigates a large degree of risk.
  • As of the writing of this (September 14th 2018), Titan has flirted with prices as high  as $0.65, and has closed fairly consistently above $0.60. While these both suggest returns north of 15% over a very short hold period, I believe the oil & gas sector is slowly on the mend, and am willing to hold given the limited downside.
  • Lastly, commodity sectors are cyclical, and the purchase of Titan occurred nearer to the bottom than the top. Energy demand tends to grow slowly and steadily, whereas energy production is driven by skittish producers who often shelve projects until market signals are as obvious as billboards. Although I don’t know when that time will come, I know it will, and in the meantime Titan can weather the storm.

As always, these are only my thoughts and opinions. Let me know if you found this post informative, or if you just have questions or comments.  I can be reached at: mark@grey-swan.com.