Special Free Report From The Motley Fool

The Motley Fool’s #1 “HIGH ENERGY” Play Right Now

Thanks for taking the time to access my report. My name’s Iain Butler and I’m the lead Advisor of a service called Motley Fool Stock Advisor Canada.

In a moment, I’ll show you how to claim a heck of a deal on a subscription, should you be curious. Stock Advisor Canada is full of vital information and investment ideas that I believe will help you significantly grow your wealth over the long term. It takes you just a few minutes to read each monthly issue, but it could prove to drastically change your financial future.

But first, I want to reveal my favourite energy play right now. I believe these shares may represent an opportunity for 70% returns, if our thesis plays out like we expect. There are no guarantees, but I can tell you we certainly like the odds.

So, without further ado…

The Motley Fool’s #1 “HIGH ENERGY” Play Right Now

Pulse Seismic, TSX: PSD

Company snapshot

Market Cap: CAD $164m
P/E: 11
Yield: N/A
Recent Price: $3.05
Data as of: 1/04/2018

Why Buy?

At The Motley Fool Canada, we’re generally not big fans of oil and gas exploration and production (E&P) companies, given their constant need to spend excessive capital to replenish depleting resources.

However, good businesses tied to the energy industry do exist.

Meet our current favourite – Pulse Seismic, TSX:PSD, a pure-play seismic data library company and, dare we say it, hidden gem. The business model is straightforward. Pulse makes money by repeated licensing its data library to various E&P companies to aid their resource replenishment quests. That’s it. No equipment fleets or field crews. No mess. Just data.

In a nutshell…

  • Given the company’s strong balance sheet and limited operating costs, downside from here is fairly hard to imagine.
  • Upside, however, is easy to picture. The current price of 11 times earnings seems more than reasonable for a company that has no financial risk but is highly variable.
  • In fact, we believe this company is worth about $300 million in more normal times. That’s about $5.20 per share given current shares outstanding. Yet the shares have slid to $3.05 (as of 1/5/2018). All this translates to a potential profit of 70%, if everything goes right and our thesis plays out as we expect. Not too shabby!

A deeper dive into the business

Pulse’s data library represents a firm competitive advantage. If it’s known that seismic data for a desired area already exists, it’s not cost effective to re-shoot it; licensing from Pulse makes far more economic sense. Effectively, Pulse owns a non-replicable asset, with a competitive edge that grows as the library expands. The potential economics of Pulse’s business model are, frankly, staggering.

Yet even with its competitively-advantaged model, Pulse hasn’t been untouched by the downswing in the western Canadian energy space. It’s hard to keep powering ahead when your customers all run into a wall simultaneously. Total revenue, which exceeded $86 million in 2012, fell to just over $14 million in 2016.

But perhaps the most impressive thing about Pulse is its extreme shareholder-friendliness and management’s focus on the long-term health of the company. Consider how, as the oil patch decline set in, Pulse battened down the hatches and positioned itself for the possibility of an extended low-commodity-price environment. All debt was repaid. All capital spending remains 100% discretionary and aimed at growth.

The valuation and the investment case

The annual cash operating costs to keep the company’s lights on are approximately $6 million. Contrast that last point with the worst twelve-month period the company has faced during the current downturn – the $14.3 million revenue produced in 2016. Even during that worst of times, Pulse produced $9.1 million in cash EBITDA and $9.0 million in shareholder free cash flow (SFCF) – metrics that the company focuses on every quarter ahead of more traditional accounting-based metrics like earnings per share.

Pulse has two traditional licensing revenue tracks – “traditional sales” and “transaction-based sales.” The former tend to be roughly spread across the year and have averaged $10.6 million annually over the past three years of extreme downturn for the Western Canadian oil patch. Note that even this lowered level of activity is well more than the annual cash operating cost of Pulse’s business. Transaction-based sales can happen at any time and are generally triggered by corporate mergers, joint venture activity, or asset disposition activity by Pulse’s clients.

The energy downturn has seen transaction-based sales fall off as well, at least, that is, until last August when Pulse announced that it had signed a $29.5 million seismic data licensing agreement, surpassing its previous record individual data license of $27.8 million set in 2012 during the height of the last oil boom.

Given the “hunker-down” mode in which Pulse has been operating, this revenue largely dropped unencumbered to the operating profit line. From there, $7.5 million was apportioned for the taxman, $10.9 million was paid as a $0.20 per-share special dividend, a few million was added to the regular share repurchase program, and the rest piled up on the balance sheet. As of the end of 2017, there was roughly $20 million in cash (after taxes were paid) in the company’s coffers – nearly 1/8th Pulse’s market capitalization.

So you begin to see why we’re so convinced this company faces little financial risk – while the shares may appreciate as much as 70% if we’ve got this right. However, do keep in mind that there are risks. More on those, now…

Assessing the risks

The biggest risk we see in Pulse is the possibility of management abandoning the practices and methodology that have worked well so far.

If the company starts reaching for growth, levering-up and over-paying for seismic datasets, then fails to monetize, our investment thesis would be seriously threatened. Additionally, such behaviour would represent such a culture departure for management that we’d wonder what had flipped their switch (and we would ask them, too, since the company is small enough that we can just phone them up).

This risk, however, isn’t something we’re terribly worried about. Management’s long record of being conservative is reassuring, with past performance being a presumably reasonable indicator of the future.

An area of greater concern, perhaps, is if the possibility that Pulse could become a takeover target before we can fully benefit. Pulse is the second-largest owner of seismic data in the Western Canadian Sedimentary Basis, after privately-held Houston-based Seitel. If, for example, Seitel were to make an “offer they couldn’t refuse,” we might miss out on a significant part of the next industry upswing.

Finally, realize that Pulse is in a cyclical industry. When the next upswing does arrive (no predictions) and Pulse presumably rises in-line with the industry, be sure to keep one eye on valuation versus the oft-stated metrics of Cash EBITDA and SFCF. During the last run-up, these valuation ratios topped out at the 14x-to-15x level. It might be worth lightening up if similar levels are reached again, but only if such a valuation coincides with an industry run-up (in other words, don’t get faked out by such valuation levels if the industry stays in a slump).

The Foolish Bottom Line

With the presumed worst of the industry downturn now past us, expect Pulse to continue to generate significant cash flow above its bare-bones operating costs, with unpredictable “transaction-based sales” from time-to-time. Further, expect management to maintain its conservative stance and to continue using the company’s resources in the service of shareholders.

But then, what if something actually goes right and the industry picks up sharply? We don’t need that to happen because Pulse is worth buying today purely on its own merits. If it does happen, however, it’ll be all gravy.

I hope you’ve enjoyed this special report.

Now let’s discuss that special offer I mentioned at the beginning. Because if it’s high-growth, high-return stocks you’re looking for, my Stock Advisor Canada service might be just right for you.

We even let you try it with a full membership-fee guarantee, which lets you ‘test-drive’ everything we have to offer, then get your money back if you’re not delighted with what you find.

It’s true. Let me quickly bring you up to speed on the details…

LIMITED TIME OFFER: Access Canada’s Best Investment Research WITH NO RISK TO YOUR MEMBERSHIP FEE for 30 Days

As you may know, every day at The Motley Fool Canada, I scour the market for the very best shares… Shares that can earn you multiples of your original investment.

You don’t need ME to tell YOU that a few smart investments now could even mean an extra ten, twenty, thirty thousand dollars a year in your retirement.

Getting in on the right stocks at the right time can change your whole future… leaving you in position to really enjoy your golden years the way you always hoped. Money to live the way you want… A holiday house… trips to exotic countries overseas… spoiling the grandkids… maybe even helping your kids get their foot on the property ladder… heck, you might even be able to quit the rat race a decade early!

The only thing standing between you and this kind of comfortable retirement is knowing exactly which shares to buy.

That’s where I come in.

As I’ve mentioned, I’m the lead advisor of what is arguably Canada’s most popular investing service…

It’s called Motley Fool Stock Advisor Canada. In the last few years, we’ve led thousands of investors just like you to winners such as…

  • Tucows, TSX: TC… up 143%
  • Kinaxis, TSX: KXS… up 67%
  • Milestone Apartments REIT, TSX: MST.UN… sold for a 61% profit
  • Finning Intl, TSX: FTT… sold for a 53% profit
  • Sandvine, TSX: SVC… sold for a 46% profit

Not to mention U.S.-listed winners such as Cognex (Nasdaq: CGNX), up 198%… and MercadoLibre (Nasdaq: MELI), up 241%!

In all, Stock Advisor Canada has more than doubled the return of S&P/TSX Composite Index, just since we opened the doors back in 2013.

That’s why I’m so pleased to extend you an invitation to join us right now. And to make you feel truly welcome, I’m even going to give you a limited time, exclusive discount!

Here’s the very best part of this offer. Your subscription to Motley Fool Stock Advisor Canada is backed by our ironclad 30-day membership fee-back guarantee.

In other words, you get a full 30 days to review everything Stock Advisor Canada has to offer you. You get access to every BUY recommendation and our full research archive. You’re welcome to put money on any of the stocks, or simply paper trade them first.

Then after 30 days, if you’re not convinced that Stock Advisor Canada can make a real and lasting difference to your wealth, simply get in touch with our friendly customer service team and we’ll refund you every cent of your membership fee.

It’s really that simple and easy. At the end of the day all you’ll sacrifice is a few minutes of your time looking through our research.

But I can say with all confidence, I believe this service WILL likely make you money for decades to come.

That’s why I want to invite you to get in on this tremendous wealth-building adventure today.

Sign up now and you can start enjoying these exclusive benefits of membership right now:

  • Two new stocks pick each month – with every single stock a high-conviction play delivered to your inbox like clockwork, month in and month out.
  • Exclusive access to our members-only website, where you’ll find our “Best Buys Now” stocks and every other Motley Fool Stock Advisor Canada stock pick we’ve ever recommended.
  • An online scorecard that lets you see the performance of ALL our stock tips, in one convenient place.
  • Breaking alerts by email with important market news that impacts your portfolio, including weekly updates on our picks.
  • PLUS, 24/7 access to our exclusive member-only online discussion boards.

And did I mention your 70% OFF “welcome, new member” discount?

It’s true. Respond to this offer now and you can save as much as 70% OFF the retail price.

Usually a subscription to Stock Advisor Canada costs $299 a year. That’s already dirt cheap for the kind of in-depth research and high potential recommendations you get.

But since you’re a brand new reader, if you act right now, you can lock in a membership to Stock Advisor Canada for as little as $99…

Click here now to secure your subscription at this low, low price.

Meanwhile, you can rest assured your 100% protected by our 30-day, no questions asked, membership fee-back guarantee of your subscription fee.

That’s right. As I’ve mentioned, you’re entitled to take a FULL 30 DAYS to have a good look at everything Motley Fool Stock Advisor Canada has to offer.

In other words, you have the chance to see every recommendation ever made inside Stock Advisor Canada – names, codes, the full investment analysis for each…

AND see for yourself what Stock Advisor Canada members really think of the service, with ‘no holds barred’ discussion on our proprietary message boards…

Then get all your membership fee back if you so choose.

All you have to do is let our friendly customer service team know that you’d like to cancel any time within your first 30 days.

You’ll receive every cent of your membership fee back. No hassle, no fuss.

But there is just one catch…

If you’d like to take advantage of this very special offer, we need to hear from you right away.

Your membership offer – complete with this special low price – is available for just a short time only. Blink and you’ll miss it. And who knows when this opportunity will come again?


Yours Sincerely,

Iain Butler, CFA
Lead Advisor, Motley Fool Stock Advisor Canada

P.S. Keep in mind: This NO RISK to your membership fee TRIAL lets you sample everything Stock Advisor Canada has to offer and potentially pay nothing at all. Simply click here to get started and lock in your “welcome, new member” special discount.

Disclosure: The Motley Fool owns shares of Pulse Seismic. Returns as of 2 May 2018.