It’s no big surprise that most on Wall and Bay Street are squarely focused on profits and earnings per share when evaluating the worth of a company. There is a school of thought, though, that those numbers can be skewed through accounting and that analyzing free cash
flow can paint a clearer picture as to a company’s ability to generate profits. Free cash flow is the cash that a company generates after costs associated with growing an asset base, often calculated by subtracting capital expenditures from operating cash flow.
For those that subscribe to this philosophy, company’s like Pulse Seismic Inc. (TSX:PSD) (OTCQX:PLSDF) are considered attractive because the Calgary-based company churns free cash flow at a high rate. For example, on revenue of $7.3 million in the latest reported quarter ended June 30, free cash flow was $5.2 million, an amazing 71.3%. Pulse still reported a net loss of $612,000 for Q2, but that is largely because of non-cash amortization expense that is naturally part of the company’s financials as it writes down its data assets. Even with the net loss on the books, Pulse Seismic still paid a dividend of two cents per share.
The reason Pulse can convert such high percentages of revenue into free cash flow is its business model that requires low maintenance. Pulse owns the second-largest licensable seismic data library in Canada, currently consisting of approximately 28,300 net square kilometers of 3D seismic and 340,000 net kilometers of 2D seismic covering the Western Canada Sedimentary Basin. Oil and gas companies license data sets for their exploration efforts, saving considering time and money for the vital components to discover and delineate drill targets and hidden resources.
If the second quarter was sluggish in revenue, the third quarter ended strong. After the markets closed Tuesday, Pulse announced that it signed a $10.3 million seismic data licensing agreement with an undisclosed company. The licensed data is located in the Kakwa area in the Deep Basin of west central Alberta.
This deal pushed total seismic data library sales to $14.5 million for the third quarter and year-to-date seismic data library sales to roughly $27.4 million. In 2013, revenue from the seismic library totaled $27.1 million. Pulse specifies this data as it does because it also generates revenue through "participation surveys." Participation surveys are exactly like they sound.
Pulse partners with companies to conduct seismic surveys, splitting the costs of the research and retaining ownership of the data for its library. This is where financial calculations can make Pulse’s quarterly results look worse than they really are because the entire cost of the survey is logged as a capital expenditure, although they pull back in the majority of the expense as "participation survey" revenue.
"Although the seismic data library business continues to face a challenging environment, Pulse's low fixed cost business model, results in the generation of substantial shareholder free cash flow. The significant cash margin associated with a deal of this magnitude contributes greatly to improving our financial position," stated Neal Coleman, Pulse's President and CEO, in a statement Tuesday.
The company added that they expect to release results from the third quarter and nine months ended September 30, on November 7.
Toronto-listed shares of Pulse Seismic are down 38% in 2014, closing Tuesday at $2.91.
