This small market cap firm could be a potential takeover target

Benj Gallander, Ben Stadelmann, and Philip MacKellar
August 2, 2021

In contrast to our last column on Mobile TeleSystems, a Russian telecom trading as an American depositary receipt on the NYSE with a market capitalization of US$7.5 billion, this time we’re going with a small fry, market cap about $21 million.

Based in Edmonton, with operations in 50 countries, McCoy Global has a long, rich history dating back to 1914. The company, whose shares Benj bought in 2019 at 67 cents, operates in the oil and gas sector and focuses on maximizing wellbore integrity and data collection so customers can make swift decisions with the best information.

In June, McCoy formed a committee to examine strategic options. While joint ventures and partnerships are possibilities, our assessment is that the preferred alternative is to sell the enterprise.

Management feels the business would be a good catch especially since it is now commercializing the automation of tubular running services, which include casing and tubing installation. This could increase demand as the technology should lower the cost of labour for drillers ready to modernize.

Right after the announcement the share price jumped from 70 cents to 90 cents, but it has since drifted back down to around 75 cents.

The first-quarter results, hurt badly by Covid-19, saw revenues shrink by 35 percent to $7.5 million, year over year. Cash flow turned slightly negative to the tune of $400,000 from a positive $1.2 million last year. The backlog dropped to $9 million from $9.7 million. At the end of the day, the loss was a double from the year before, but a relatively minuscule $200,000. The debt load is somewhat higher than we like to see relative to sales, sitting at $9.4 million, but it looks worse because of the diminishing revenues.

However, sales might turn around given the increased prices in the oil patch. In 2019, revenues were north of $53 million and although that seems like a long stretch from the current tally, returning to that level over the next few years is plausible.

McCoy’s management team is long on experience. Since 2002, Jim Rakievich has been president and chief executive officer. The chair, Christopher Seaver, has been on the board for more than a decade. He is experienced with selling companies as he was president and chief executive officer of Hydril Co. when it was sold in 2007.

Certainly, insiders are exceedingly motivated to receive a high price for the corporation. They own slightly more than 48 percent of the 27.8 million shares outstanding. Purchases over the past year have been a pittance, even as the stock dropped to lows in the 40 cent range, levels not seen since 2003.

One problem for investors looking to buy McCoy is that it trades an average of about 22,000 shares a day. Given the lowly share price, it makes it difficult for many people to acquire a meaningful position unless they’re patient. The stock traded at greater volumes in the fall of 2013 when the price was above $7. Oh, for those halcyon days.

The initial sell target on McCoy is $2.24 but if a takeover occurs in the near future, it will almost assuredly be well below that mark. A buck would be a significant premium from the current trading price, albeit less than the book value of $1.26. It would not surprise if there is a buyout proposal before the end of the year. Given how much insiders own and how well they know the company, the bid could even come from management.