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  NQL is a contrarian classic

BENJ GALLANDER and BEN STADELMANN

Friday, April 29, 2005

Given that all of the companies we buy for the Contra the Heard portfolio have seen their stock price beaten down at some point, they sometimes encompass dangers that lead some to suspect they will go bankrupt. One of our purchases, NQL Drilling Tools (in December), is an example of an outfit that teetered on the precipice of demise.

In 2000, NQL was a corporation on a tear; growth was the primary buzzword. The acquisition of Ackerman International and CanFish Services, along with an expansion into Dubai and Argentina, pumped revenues to more than $87 million from $51 million for a 16-month period in 1999. Earnings per share skied from $0.07 to $0.67.

In 2001, sales jumped further to almost $125 million, while the bottom line rose another 10 per cent with the purchases of Northstar Drilling Systems and Numeric Machine. A new service facility was opened in Mexico and the manufacturing facility in Nisku, Alberta, expanded.

While the company warned that caution was in the wind "to ensure continued stability for its worldwide group of companies," it also bragged about how "NQL consistently delivers value to the shareholders by creating superior returns on capital and equity." The stock price touched a high of $11.70.

The promise dissolved. By 2004, the company was larded with debt, chief executive Dean Livingstone was gone, and the stock price fell as low as 84 cents. Kevin Nugent was summoned to turn the company around. After he took command, we bought shares at $1.11.

Corporate changes last year were numerous. Two of the three operating divisions, Bits and Fishing, were sold for more than $43 million. Ackerman, a test rig, and the Mexican assets were disposed of for $3.5 million.

Litigation against the company of $40 million was settled for an unspecified amount. Restructuring and severance charges were taken. Consequently the annual numbers were ugly, as NQL lost more than $37 million.

Not all the news was bad, however. When offers for the Downhole Tools segment were deemed too low, management decided to refocus on this division rather than dump it. This appears to have been fortuitous, as in the fourth quarter the company posted income from continuing operations of $1 million on revenues of $17.6 million.

A stock buyback program led to 722,100 shares being purchased at an average price of $1.20. Debt was slashed to less than $6.4 million from more than $45 million

With the hard slogging done, the top brass plans to grow the organization. While this could happen, it would not surprise us that, now that the enterprise has been cleaned up, a buyer might step forward to acquire the corporation.

This would likely make our initial sell target of $5.50 unrealistically high. It is rare that we speculate on takeover possibilities, but this duck appears to be lined up at the shooting gallery.


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