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  With Kelman, the waiting is the hardest part

BENJ GALLANDER and BEN STADELMANN

Friday, October 22, 2004

Oh, it's fun to look back on old articles. Our last piece on the oil patch was written in March 2000. At that point we opined that Federal Reserve Chairman Alan Greenspan and then-Bank of Canada governor Gordon Thiessen were misguided and that there was no need to raise interest rates "as the dramatic oil price escalation would soon begin to throttle business activity."

In addition, we stated that the "persistent focus on inflation will be regarded as the Big Oops." Hey, they didn't bother to listen to us, the economy tanked, they dropped interest rates like a stone, and soon the buzz was about the bugaboo of deflation. We yawned, and worried for less than a millisecond. No wonder economics is known as the "dismal science."

Our other concern at that time was technology, and we had been adamant about the way prices in that sector had formed a bubble just waiting to burst. This domain is currently far more reasonable, while housing prices have vaulted into la-la land. The valuations are not as absurd as Japan circa 1990, when the emperor's palace was said to be worth more than all of Canada, but evidence is piling up that prices are peaking.

In terms of oil, two companies were on our radar screen. One of our favourites was Gulf Canada Resources, then trading in the $5 range. It was taken over in 2001 at $12.40. Sweet!

Unfortunately, we get them wrong, too. Our other pick was Kelman Technologies, a company that specializes in seismic activities and archiving. Purchased at 40 cents a share, the stock was trading at 54 cents, and our target price was $1.60. Well, today the share price once again waddles in the 40-cent range.

As just about every investor knows, energy prices in the oil patch have skyrocketed, and consequently, so have stocks in this sector. Kelman has remained one of the isolated cases that have gone nowhere slow.

The company is mildly profitable on sales that, for the first six months of the year, registered just over $11 million. Performance from the Calgary office has been fair, while the U.S. operations in Denver, Houston and Oklahoma City remain long on promise and short on reward. Given that Kelman is relatively new to these climes, things could change as personal relationships deepen and the Kelman name becomes better known.

However, the corporation has decided that moving farther afield might be the ticket; Brian Link, who has been with the organization for 19 years, has been pegged to head up a new division, KT International, and seek out contracts overseas.

As with most new efforts, gearing up will take time, and cash flow will probably be negative, at least in the short-run. Fortunately, the Kelman brass is not quick to throw money around, so the foray will likely see the firm immerse only a couple of toes, rather than the whole body.

While Kelman has been a dud for the Contra portfolio thus far, the outfit is one of only two Canadian companies that are currently on our "buy" list. So our lack of success has not eroded our confidence, although our target price has been reduced to $1.20.

Let's see, what are oil prices doing now? Hmm, they seem to have gone up quite a bit. Deja vu economically? Constrictors do have to eat.


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