Badger Daylighting Shares Could Tumble More Than 30%

barrons.com/articles/badger-daylighting-shares-could-tumble-more-than-30-1477715103

By Bill Alpert

10/29/2016

Oct. 29, 2016 12:25 a.m. ET

A Badger Daylighting hydrovac excavation truck on the job Photo: Stan Fader
The investor presentation for Badger Daylighting shows a Canadian town shattered by the explosion of a gas
pipeline accidently struck by excavators. The calamity might have been avoided, Badger suggests, by renting its
trucks, which use water jets and vacuums to safely uncover buried pipes, a process called daylighting. The Calgarybased firm is North Americas biggest operator of these specialized hydroexcavation trucks, serving customers
mainly in the utility and petroleum sectors.
In the past 15 years, Badgers stock has flown high on the Toronto bourse (ticker: BAD.Canada), rising as much as
100-fold as the company grew its fleet from 162 trucks to more than 1,000, and its revenue from 58 million Canadian
dollars to C$405 million (US$317 million). Even after Badger shares eased back to a recent C$29.81 in the oil
patchs skid, the stock still trades at a handsome 22 times next years expected earnings, versus the mid-teens for
the industry. It also trades at four times book value, about twice that of its peers. Given a valuation closer to the
industrys norm, and the potential for soft revenue and earnings growth, Badger could easily trade below C$20.

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Hydrovac trucks proliferated at Badger and its rivals in recent years, just as oil prices tanked and cut customers
appetites. Badgers revenue has declined. On a per-truck basis, revenue is down by a third. The companys
receivables also show signs of age, so cash flow is sputtering. In August, Badgers longtime chief executive retired,
leaving his newly arrived successor to rebut stock-market skeptics who have sold short more than a quarter of
Badgers outstanding shares.
Badger agreed to speak with Barrons, but after receiving our written questions on these business issues and some
seeming incongruities in its financial reporting, the company canceled the interview. Many of the questions would
put me offside with respect to selective-disclosure laws, wrote Badger Chief Financial Officer Gerald Schiefelbein.
The company has told investors that its revenue will improve as its customers recover. It says thousands of miles of
gas pipeline still need to be maintained.
Hydro excavation started gaining popularity about 25 years ago in the
Canadian oil-and-gas industry. The process uses high-pressure water
to break up the ground, and in Canadas frozen soil, jets of hot water
can cut better than steel teeth. A vacuum hose then sucks up the
resulting slurry into a tank for removal. Holes and trenches cut by a
hydrovac are more precise than those dug by a backhoe. And its a safer way to uncover buried wires and pipes.
BADGER RACED AHEAD of rivals in building a fleet of hydrovac trucks under the command of Tor Wilson, the
hard-driving CEO who stepped down this year. It had more than 400 trucks by 2011, when Clean Harbors (CLH)
offered to buy Badger for C$20.50 a share. Wilson supported the deal, but institutional investors rebelled and voted
against selling Badger at a price they considered too cheap.
Wilson kept expanding Badger, covering the continent from coast to coast with some 1,000 hydrovac units by 2014.
The stock peaked that year above C$43, as Badger reported sales of C$422 million and earnings of C$53 million, or
C$1.43 a share. Rivals such as Clean Harbors and Lonestar West (LSI.Canada) continued growing their hydrovac
fleets, too, increasing supply. Then the market shifted into reverse, as falling oil prices forced North American
producers to slash investment.
Badgers reported revenue slipped only 4% in 2015, to C$405 million. But the quality of those numbers bears
scrutiny. Badgers revenue-recognition policy is unusual for its industryor any industryin that the company

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doesnt say its revenue needs to be collectable. A footnote in the latest annual report revealed nearly two-thirds of its
receivables were past due. Thats about twice the proportion past due at smaller rival Lonestar. Even so, Lonestar
beefed up its bad-debt allowance to 9% of receivables, while Badgers was 2.6%.
Badgers earnings dropped 28% in 2015, to C$38 million. The drop would have been steeper still if the company
hadnt claimed C$18 million in one-time tax benefits from currency translation and a recalculation of the transfer
prices Badger had charged its own U.S. units from 2009 to 2013 for trucks made in Canada.
One way Badger differs from its competition is that it builds its own hydrovac trucks. Its steady capital spending on
these trucks reduced Badgers otherwise decent operating cash flow to a more modest free cash flow that
amounted to 12% of revenue in 2016s first half.
Inconsistencies in the companys accounting for its equipment could make investors nervous. The December 2015
values of Badgers property, plant, and equipment in the U.S. and Canada each differed by some C$40 million from
values reported in that years annual report and in the March 2016 filings. We asked the company about this
anomaly and other accounting quirks, but, as noted, CFO Schiefelbein said Badger had decided not to talk to us.
Meanwhile, Badger shares have leapt 45% after a better-than expected June 2016 quarter gave heart to bulls. They
hope to squeeze the short sellers who have sold a remarkable nine million shares short.
Before either longs or shorts declare victory on Badgers stock, they may want to cast a little more daylight on its
business results.

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