Diary of a Dividend Diva: Poseidon Concepts

 | Nov 19, 2012 | 10:00 AM EST  | Comments
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High yield typically means high risk, so sorting through the "accidental high yielders" often means determining whether the dividend is safe and the market is over-reacting, or whether there is something you don't know (yet).

Frack-fluid provider Poseidon Concepts (POOSF in the U.S. on the OTC, PSN.TO on the Toronto exchange) joined this club last week, after posting a big earnings miss and lowering guidance. Fracking service providers had been on a roll until earlier this year, when natural gas exploration and production companies starting cutting back on drilling in the face of persistently low gas prices. Fracking is not disappearing, of course, and in fact is focused mainly on oil production, but all the service providers are seeing a softening pace of business. Although Poseidon is Canadian (based in Calgary), 85% of revenue is derived in the lower 48, so it is subject to the same forces affecting U.S. companies. The company says that the Bakken and Rockies were slowing substantially for their frack-water storage tanks, but southern geographies -- the liquid plays in the Permian basin for example -- held up.

Poseidon had been on track to post C$250 million in revenue and C$180 million to C$200 million in EBITDA for 2012. After the miss and lowered guidance, attributed directly to lower utilization and pricing pressure, Wall Street is now looking for revenue of C$185 million and EBITDA of C$125 million for the year. The slowdown in fracking activity is real, but in response, Poseidon has frozen its frack-tank fleet at 440, which reduces capital expenditure by half, to C$35 million per year, and reduced pricing to be equivalent to competitors' day rates. Between these changes and the introduction of new products such as tank warmers that can increase the revenue per tank, Poseidon can at least hold revenue steady as it waits for well-completion activities to stabilize.

Making that determination is critical if you want to own Poseidon for the dividend, which is substantial. The dividend costs the company C$85 million per year, and management specifically stated that it would continue the monthly dividend of C$0.09 per share. That equates to C$1.08 per share, which was attractive at the old stock price of C$12, indicating a 9% yield. At the post-earnings stock price of C$4.75, the dividend is a shockingly high 23%. Either the market massively overreacted by driving the stock down 60% on the miss, or it firmly believes the dividend is going to be cut by well over half.

I already own the stock, so I am taking a shellacking on it, of course; however, I bought it for the income, and I expect that my monthly check should continue to arrive. For new investors, the income seems even more attractive. Even if conditions deteriorate and Poseidon cuts the dividend in half, you would still be collecting 11% or more on your investment.

One key to buying accidental high yielders is to have a margin of safety on possible dividend cuts. Although still high risk, Poseidon seems to have a cushion that can give you confidence to commit new capital now.

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