Pure Technologies’ Oil and Gas Business Could be Transformed by HM Acquisition, says Mackie

Mackie Research Capital analyst Raveel Afzaal notes that Hunter McDonnell Pipeline Services has more than 200 clients and very little overlap with Pure Technologies’ much smaller oil and gas client base. He believes that the pickup could prove transformative to Pure’s oil and gas pipeline inspection business.The acquisition of the oil and gas pipeline inspection services business and related assets of Hunter McDonnell Pipeline Services (HM) could be “transformative” for Pure Technologies’ (TSX:PUR) oil and gas business, says Mackie Research Capital analyst Raveel Afzaal.

Last Friday, Pure Technologies announced it would acquire the oil and gas pipeline inspection services business and related assets of Hunter McDonnell Pipeline Services and its affiliated companies for $8-million, $6-million of which will be cash, plus another $2-million in shares of Pure. In HM most recent fiscal year, the company generated more than $10-million in revenue.

“This is a highly accretive acquisition for the company and will serve as a catalyst for expansion into the oil and gas pipeline sector,” said Pure CEO Jack Elliott. “While we have been growing our presence in this sector over the past few years through the deployment of our SmartBall leak detection technology, the acquisition of the HM business will accelerate this growth. Similar to our own strategy for the water sector, HM has been at the leading edge of developing and enhancing a suite of premium technologies and asset management services, from pipeline surveys and remote tracking of in-line inspection tools to risk assessment and engineering. When combined with Pure’s existing services, the company will be now able to provide hydrocarbon pipeline operators with unparalleled information for use within their integrity programs.”

Afzaal notes that HM has grown its topline aggressively over the past few years and expects that that trend will continue. But even if that scenario does not play out, the analyst says the acquisition makes sense because Pure is currently trading at more than 25x 2014 EV/EBITDA and HM is expected to be acquired for approximately 4x EV/EBITDA.

The analyst says HM, which employs cutting edge pipeline inspection technologies, has more than 200 clients and very little overlap with Pure’s much smaller oil and gas client base. He believes that the pickup could prove transformative to Pure’s oil and gas pipeline inspection business.

In a research update to clients this morning, Afzaal maintained his “Hold” rating on Pure Technologies, but raised his one-year target on the stock from $8.00 to $8.70. He notes that rolling his valuation period forward at the end of this year should result in another target raise north of $9.50.