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One of our longer term holdings, Enteq Upstream came back to life with a bang during April.
The Company, an oil services business, released an upbeat trading statement during April that has since caused the share price to jump by 73% based on the closed price at 21st May 2018. In this statement, management stated: ”The board is pleased to report that both full year revenues and underlying EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) are expected to be significantly ahead of its expectations”.
The company has been listed since 2014, and the highly regarded management team had expectations that Enteq Upstream would become a consolidator in the sector by buying smaller oil services companies, a process they had previously, very successfully, undertaken with a different company. Enteq Upstream is this management team's second incarnation and the aim was to repeat a very successful operating model.
Due to the collapse in the oil price, the company struggled to execute this strategy, so management instead concentrated on protecting the business during the downturn and not committing funds while the market was in free-fall. Apart from one purchase, it continued to protect cash reserves to such an extent, that at the low point, cash in the balance sheet was greater than the company’s market capitalisation.
By this stage it could be said that the company was truly cheap, albeit operating in a very, temporarily, difficult sector. Fast forward to April 2018 and an encouraging trading statement was all that was needed to propel the shares to higher levels. With profitability expected to make an appearance and an improving oil industry outlook, we should expect the shares to move to higher levels in the future.
This is a great example of value investing. We buy shares that appear to be deeply depressed, but on balance sheet terms they are very cheap and there is a clear expectation that better business performance will emerge in the not too distant future.