When oil and gas production rise, this Canadian tech stock is frequently one of the first to benefit.
This company’s software helps producers get a complete picture of their reservoirs and extract the maximum amount of oil or gas. With a 98% renewal rate among its clients, no debt and abundant recurring revenue, the stock is in a strong position to rebound when production rises.
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COMPUTER MODELLING GROUP LTD. (symbol CMG on Toronto; www.cmgl.ca) offers software and consulting services to help conventional oil and gas producers create 3D models of reservoirs. That lets them squeeze more out of those holes using advanced recovery techniques such as injecting steam or chemicals. Without that help, typically only 25% to 30% of oil and gas is recovered with drilling.
Unconventional producers using hydraulic fracturing, or fracking, also use Computer Modelling’s software to determine the best drilling locations and depths.
In the three months ended December 31, 2017, the company’s revenue fell 10.4%, to $18.3 million from $20.3 million a year earlier. The fall was mainly due to the timing of payments from clients. Software licensing revenue makes up 92% of the total; sales from consulting and professional services comprise 8%.
In the latest quarter, Computer Modelling earned $5.1 million, or $0.06 a share. That’s a 29.8% drop from the $7.3 million, or $0.09, it earned a year earlier. The fall is mostly because of higher research and development spending in order to stay ahead of competitors. That spending rose 23.1%, to $5.0 million from $4.1 million. The company also incurred one-time costs when it moved into its new headquarters in Calgary.
Energy stocks: Company invests $16 million to put all operations under one roof
That new building features training facilities for customers and relocates the company’s entire team to one location. Computer Modelling invested $16 million over the past four years in the building’s infrastructure.
On December 31, 2017, the company held cash of $52.8 million, or $0.67 a share. It has no debt.
Computer Modelling’s sales are mainly recurring revenue from software licenses and maintenance contracts for its products. In the nine months ended December 31, 2017, 68% of the company’s software license revenue came from Canada, the United States and South America. But revenue from the Eastern Hemisphere rose due to increased licensing to existing customers in Asia.
The company’s overall renewal rate is just above 98%, and most of its clients are major oil and gas firms. That lends it stability even with low oil prices.
The stock pays a quarterly dividend; the annual rate of $0.40 yields a high 4.4%.
Recommendation in Stock Pickers Digest: Computer Modelling Group is a buy.
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