A Trend That Created 2,300% Gains Could Be Happening Again…
As a business strategy, selling to your softball teammates really isn’t the best way to optimize profits.
But that’s exactly how things got done in the prairie climes of Alberta, Canada, where I grew up.
#-ad_banner-#In fact, a lot of start-up companies get launched around my hometown. They’re mostly from the oil patch, which is a multi-billion dollar business in that part of the world.
Of course, many of these are big-scale ventures — drilling companies with large fleets of rigs or oil exploration companies that control thousands of acres. Then there’s the law firms, accountancies and human resources conglomerates that support them.
But, surprisingly, there’s also room in this landscape for a totally different type of firm.
Amid the giant corporations that move to town to pump every drop they can from the wells they pay dearly for, mom-and-pop businesses often begin popping up.
They sell special sand to drilling companies for use in “fracking” procedures.
They sell specialty chemicals to exploration firms to aid in the development of effective drilling fluids.
There’s even an entire sector of oil field services known as “hot shots” — which consists of drivers who are ready, at a moment’s notice night or day, to drive hundreds or even thousands of miles non-stop to deliver a single spare part needed on a rig that has broken down in the wilderness.
Over the years, I’ve had many friends who got into these various facets — starting up their own companies to get a piece of the vast investments flowing into Alberta during the heyday of the petro-industry.
And the way they did business was peculiar.
Many of these oil field “start-ups” were little more than one or two people, a truck and some basic equipment. Really that’s all you needed to get started.
That meant overheads for such operations were relatively low. And with only a couple of mouths to feed at the company, a business was generally deemed “successful” if it brought in a few hundred thousand dollars in yearly profits — enough to give the founding partners a good life for themselves and their families.
And while a few hundred thousand dollars each year is nothing to scoff at, it’s really not that difficult for a firm to scrape together in a raging bull market like Alberta was seeing at the time.
In fact, most of the people I know were able to do their “business development” over a couple of beers at the end of an oil industry softball game. They simply asked their buddies if they could supply the next load of sand, frack fluids or the next hot shot.
That was enough to give them the lifestyle they wanted. And so they didn’t push much beyond such basic marketing, even when it was clear that a little effort would have opened up a much larger potential base of clients.
And that became a major opportunity for one enterprising firm — which turned these “mom and pop” businesses into a billion-dollar empire.
A Little Marketing Can Go A Long Way In Profits And Valuation
A few years ago, I was attending an energy conference where I met a company that had not only recognized the Alberta mom-and-pop business mentality — but had developed a strategy to reap big profits from it: Canadian Energy Services (OTC: CESDF, TSX: CEU).
The firm’s management told me they spent hundreds of hours looking over various small businesses across the province — mostly in the areas of drilling chemicals, transport and logistics and environmental services.
Through this review, they found a lot of great business potential: firms that had unique assets, proprietary formulas or unparalleled expertise in niche oil field markets.
The only thing missing was a platform for real growth. Most of these high-potential companies were content to tap their at-hand network for contracts, rather than aggressively seek new customers.
The CES management team realized that for many of these mom-and-pop organizations, the only thing better than making a few hundred thousand dollars was getting bought out and not having to work anymore at all, which didn’t take a lot of cash — a lot of Albertans were happy to take a cool million or two and retire to their lake homes or mountain cottages.
So CES began striking deals, buying prime businesses at low multiples to cash flow. It was much like Warren Buffett did at the beginning of his investment career, when he bought out homegrown firms like Nebraska Furniture Mart.
The best part was that CES had scale in marketing, having offices throughout western Canada and into the United States. Thus, it could take a great product it bought cheap and immediately ramp up revenues and profits by marketing it beyond the softball diamond to oil drillers across the continent.
The expense involved was minor, but the increase in profits was dramatic.
But the real winners from this astute strategy were CES. Rising profits from all the company’s acquisitions sent the share price of its Toronto-listed ticker on a moon-shot trip from below C$0.50 in 2009 to as high as C$11.68 in early 2014 — for an incredible 2,300% gain.
The ride in the oil patch may be over for the moment. But I believe a similar pattern is now setting up in another industry. And it’s one that could have even greater potential for unlocking profits through a wave of acquisitions that has started the last few years.
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