Macro Enterprises Update

I only wrote about Macro Enterprises (MCR.V) six weeks ago but there has been quite a bit of news (both good and bad) related to the company since then. So far, Mr. Market has responded to this news by pushing the stock down to C$1.80 (so -16.3% since I posted the idea). They don’t report third quarter earnings until the end of this month, but I wanted to review what’s been going on.

A major focus of my initial write-up was the potential catalyst of an LNG export terminal on British Columbia’s west coast. This would massively increase pipeline construction where Macro operates and would almost certainly lead to a lot of business for them. As a reminder, the LNG terminal closest to coming to fruition is from Petronas. The others are probably at least a year from a final investment decision and some of them have been pushing that decision farther to the right thanks to the oil collapse.

Petronas had already issued a conditional final investment decision, but earlier this month rumors mounted that Petronas might delay their terminal as much as five years. The very next day the British Columbia government rejected those rumors and said Petronas is still on track. According to the rough timeline in the linked article, Petronas  could get final approval in a few months, maybe January or February at the earliest. Importantly, TransCanada received final approval just last week for the $5 billion dollar pipeline they’ll be constructing to connect the Petronas terminal to the gas fields. TransCanada is now waiting for the Petronas final approval before they begin construction.

Another drag on stock price was a Seeking Alpha write-up released earlier this month, ominously titled Macro Enterprises: A $36 Million Skeleton In The Closet? Even if that write-up is a little sensationalized, he does bring up a very legitimate concern about a large receivable. Macro filed a $36 million dollar lien against a client over a dispute as to what the client owes. $36 million is a big deal to a company that’s done $151 million in revenue the past twelve months. I spoke to Jeff Redmond, Macro’s CFO, to get a little clarification on the lien. Macro hasn’t publicly released information about the dispute so he couldn’t say much, but the conversation did confirm a few of my thoughts.

First, $36 million was the entire project but that’s not necessarily what the disputed amount is. As anyone with business experience knows, disputes between vendors and clients over what is owed at the end of a project is not uncommon. Client thinks the work performed is worth x, vendor thinks y, and they usually settle for something between x and y. The opposite of this happens as well—sometimes a project is larger than initially described and the vendor goes to the client after completion asking for more money. The author of the Seeking Alpha article strongly insinuates Macro will lose the entire $36 million. Is that possible? Sure, but it’s also possible the dispute is over a couple million and they settle at a number that doesn’t even affect Macro. Your guess is as good as mine. Importantly, this was a one-off project that was completed earlier this year, meaning it’s not related to one of their four master service agreements (one of which is TransCanada). Even a decent sized write-off related to this lien is unlikely to affect the longer term catalysts such as LNG export terminals.

Ultimately, I’d love to be adding to my position at these levels, but the lien does make me pause. Even though I think a negative result is unlikely to affect the LNG potential, the stock would almost certainly take a temporary hit if a write-off is announced. Jeff said they’ll give more details on the third quarter conference call so I’m a holder until learning more.

9 thoughts on “Macro Enterprises Update

  1. Had a chance to read the latest results yet? Does the 3.3m charge to accounts refer to the 36m issue you mentioned?


    1. Yes, management confirmed on the call that they settled the dispute for $3.3M and the rest of that receivable has already been paid. So that whole thing has basically zero effect on the investment thesis going forward.


  2. do you think LNG will be built in BC. I agree that if it is built this stock will do very well but the market is so down on energy right now that maybe they will hold off on building?


    1. I’m very confident LNG will be built eventually, but there’s a big difference between a final investment decision in 2016 vs 2020. Petronas is the furthest along in the process and it sounds like we’ll know more about that project in the next couple months. If they do delay, I wouldn’t expect any final investment decisions until 2017 (or even later). But I think Macro is too cheap whether LNG happens or not. I view LNG as a very large, but free, option.


  3. Research snippet from Cormark yesterday…

    Macro is arguably the most deeply valued name in our universe, trading at 1.3x 2018E EV/EBITDA and essentially in line with working capital per share of $1.40. Work under existing Master Service Agreements is expected to pick up in coming quarters, and bidding activity has seen a modest improvement since the second quarter. While longer-term growth is less visible with the absence of a major pipeline project moving forward, MCR will continue to see some level of repeatable business in facility maintenance and turnaround work. Looking through to 2018, we continue to forecast revenue levels below 2015, but margins returning to historical levels.


    1. Thanks, sculpin2. Is this a report that one could download? I don’t think Google knows about it. I wonder how did they come up with their view for 2018.


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