Monday, October 20, 2014

Profire Energy ( Nasdaq - PFIE ) -- Oil Price Decline Masks Growth Potential

Profire Energy (PFIE $3.50) reported excellent better than expected Q1 (June) results.  The Wall Street analysts who follow the company pegged sales in the $10-$11 million range.  They actually came in at $13.1 million.  Further sequential improvement is likely in the September period.  Profire has been adding executive, sales, and engineering personnel at a blistering pace.  Margins likely will be affected in the September and December periods, as a result of those costs.  But sales promise to continue their explosive uptrend, keeping earnings intact.  Profire is the leading provider of automated burner management systems used by oil and gas producers in the U.S. and Canada.  The company holds an estimated 75% of the market.  And that percentage is expanding.  Competitors are exiting the business instead of moving in.  Profire has the industry's lowest costs, best technology, widest distribution network, and most dependable service operation.

The latest slide in oil prices caused a sharp selloff in the stock price.  Investors are concerned that drilling activity will moderate and that incremental spending on products like Profire's will be affected by declines in cash flow.  Those worries are likely to weigh on the stock until oil prices rebound or Profire demonstrates that it can sustain its growth despite the macro-economic conditions.

The company is confident it can keep its growth rate intact.  The sales force has doubled over the past six months.  New offices are being opened.  Additional services are being provided.  New products are in the pipeline.  And government regulation is growing.  Colorado recently mandated the use of automated burner management systems, following Canada's example.  Customers are thanking those regulators because the systems are generating payback periods of 6-9 months, while improving employee safety and sharply reducing the amount of methane escaping into the atmosphere.  Methane control could become a larger issue as the federal government expands its battle against global warming.

A majority of sales are made for use in existing wells.  New wells comprise a significant but smaller percentage.  Less than 5% of the potential market has been penetrated to date.  Complementary markets for burner management systems promise to expand Profire's horizons in the future.  The total cost per well is approximately $6,000 including installation and related equipment.  About half of that goes to Profire.  It's not a capital intensive sale.  Payback is achieved by reducing the amount of fuel spent to run the burner systems.  Those systems heat oil and gas coming out of the ground to remove impurities.  Non-automated systems run at full blast all day long.  Profire's are modulated according to how much oil or gas actually is going through at a given time.  Additional savings occur when the flame goes out.  Non-automated systems require an employee to visit the site and re-light the unit.  Profire's units just turn the flame back on.  The well operates continuously.  The revenues keep flowing.  Employee safety is a key issue, as well.  Two dozen oilfield workers died last year re-lighting non-automated systems by hand.

We think the price of oil will bounce back as the worldwide economy improves.  The United States and Saudi Arabia may remove their choke hold on Russia, as well, provided President Putin agrees to a realistic peace settlement.  Even if the price remains low, however, Profire is likely to keep thriving by providing systems with high rates of return to a huge industry without any real competition.  In theory, if prices do remain low oil for an extended time demand will increase and production costs will decline, laying the foundation for a stronger industry over the long haul.

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