Monday, February 27, 2012

Computer Modelling Group ( Toronto - CMG ) -- Market Share Expands

Computer Modelling Group ( $16.00) reported excellent on target Q3 (December) results.  Revenues improved 32% to $15.9 million.  (All amounts in Canadian dollars.)  Earnings (excluding non cash stock option expense) rose 45% to $.16 a share.  Computer Modelling is one of the three leading providers of reservoir management software that allows energy companies to simulate different strategies for maximizing the return on their oil discoveries.  Schlumberger and Halliburton still dominate the so-called "black oil" segment, reserves that are relatively easy to retrieve.  Computer Modelling is the leader in hard to recover fields including tar sands, shale, deep offshore, and other heavy oil deposits.  Since most of the oil that's easily lifted already has been discovered most new discoveries fall into the company's bailiwick.  Rising worldwide oil prices are making it affordable to pursue those challenging fields, moreover.  Growing demand for petroleum, fueled by emerging markets and the economic recovery, is reinforcing the trend.

A new product line entered field testing in the December quarter.  The "Dynamic Resource Modelling Software" line has been in development for five years.  Computer Modelling split the R&D cost equally with partners Shell and Petrobas.  Those major oil companies now are testing the system on some deep offshore reserves.  Once the technology is finalized Computer Modelling will retain 100% of the marketing rights along with 100% of the profit potential.  The software simulates all of a project's above ground operations in addition to its oil deposits.  Commercial sales could start later in calendar 2012.

Meantime, demand for the core simulation products remains vibrant.  Revenues were bolstered in Q3 (December) by cash payments received from the Venezuelan national oil company.  That's a large customer that Computer Modelling has a long history with.  But payments rarely are made when invoiced.  So revenues only are recognized when the checks clear.  Bad debts never have been an issue.  This time the Venezuelans prepaid, so some revenue was borrowed from upcoming quarters.  Despite that revenue acceleration the outlook for further gains remains strong.  Computer Modelling broke into the Middle East market in Q1 (June) and while the company hasn't booked any additional business there, the pipeline of potential opportunities is large and growing.  Even in the Middle East new oil reserves are becoming more difficult to extract.  Tar sand demand remains solid in Canada.  Shale oil demand in the U.S. is expanding.  Foreign business is climbing, as well, both onshore and off.  And deepwater drilling in the U.S. could start to pick up again before long.

Our estimates are unchanged.  Income could reach $.65 a share in fiscal 2012 (March) and rise 23% next year to $.80 a share.  Computer Modelling sells its technology as either perpetual or annual licenses.  The latter typically earn the company more money over the long haul but produce less upfront revenue.  Exact financial numbers will depend on the split between the two pricing models.  The quarterly dividend recently was lifted 18% to $.13 a share.  In the past the company has paid an extra dividend during the first quarter (June).

( Click on Table to Enlarge )