The New Leader in Reservoir Simulation Software
Saul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Computer Modelling Group (NASDAQOTH: CMDXF.PK) is a little Canadian Company that you have probably never heard of, but it is one of the leading providers of simulation software used by petroleum drilling companies to model their underground reservoirs. What this means is that the oil companies rely on Computer Modelling’s software to evaluate a variety of different drilling and production strategies in order to identify what will work best to produce the most oil at the least cost. Computer Modelling sells the software as either a perpetual license or as a year-to-year license.
The software continually re-evaluates the oil field as a portion of the down-hole oil is withdrawn, since the withdrawal can cause conditions in the field to change and require new approaches.
The field of simulation software for underground reservoirs was long dominated by Schlumberger (NYSE: SLB) and Halliburton Corp. (NYSE: HAL) which, of course, are the two largest oilfield services companies in the world. However these companies put most of their effort into the large straightforward "black oil" reservoirs, such as those in Saudi Arabia.
While Schlumberger and Halliburton rested somewhat on their laurels, Computer Modelling has worked on the basis that the easy to get at reserves have mostly been discovered already, so they concentrated on harder to produce reserves, among them complicated fields, heavy oil, and tar sand projects. At first this was a niche market, but it is now becoming a larger and larger percentage of all oil produced.
Computer Modelling continues to produce new more advanced versions of their software, while the larger oilfield service companies, for whom this was a small part of their overall business, have not kept up. And Computer Modelling has been helped by Shell (NYSE: RDS-A) and Petrobras (NYSE: PZE) funding two-thirds of their research expense on their latest software. These arrangements have left Computer Modelling with full ownership of the intellectual property, which they can then sell or license to others, in exchange for giving Shell and Petrobras first crack at the software.
While Computer Modelling still has a minority share of the market, its market share is growing fairly rapidly as the easy to drill sites are exhausted and exploration moves towards oil deposits that are more difficult to drill.
Revenues can be lumpy as perpetual licenses mean a lot of money upfront, while year-to-year licenses mean less upfront income but much more recurring income. Thus a quarter with more perpetual licenses sold can appear to be a bigger quarter than one with more year-to-year licenses sold, and vice versa.
There have been 13 dividend increases and two stock splits since I began following the stock five years ago in the fall of 2007. (That time frame runs right through the “Great Recession,” and these are amazingly good results)
Quarterly dividends have more than quintupled from 2.5 cents to 16.0 cents (Canadian) over that time. That’s a current rate of 64 cents per year. Computer Modelling also pays an annual special dividend, which is usually roughly equal to an extra quarterly dividend.
The stock price has also roughly quintupled over the same time frame, from about $3.65 to the current $18.25.
Adjusted trailing earnings (adding back only stock-based compensation) are roughly 66.5 cents Canadian (67.3 cents US), which gives a PE ratio of about 27. Its trailing twelve-month revenues are $61.6 million.
The big oil field service companies may have given up trying to compete against Computer Modelling in this area. Schlumberger has apparently started giving away their own software for free, with little effect, while Halliburton has recently licensed Computer Modelling's software for gas shale.
This is not a sexy company, and it’s not that easy to buy, being a Canadian company, but it has done very well for me over the years and I keep it as one of my major positions.
I am long Computer Modelling and have no position in any other stock mentioned. I'd like to mention that I've learned a lot about this company from a free blog called Growth Stock Insider by Walter Ramsley. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.