Yet Another Value Podcast - Ave Maria Focused Fund's Chadd Garcia on misreading waste-focused $SES.TO as energy services

Episode Date: November 15, 2024

Chadd Garcia, Portfolio Manager and Senior Research Analyst at Schwartz Investment Counsel Inc. - Ave Maria Focused Fund, joins the podcast for his third appearance to share his thesis on SECURE Energy Services Inc. (TSX: SES), a leading waste management and energy infrastructure company. Chapters: [0:00] Introduction + Episode sponsor: Daloopa [1:48] What is Secure Energy Services $SES.TO and why is it interesting to Chadd [4:56] What is Chadd seeing with $SES.TO that the market is missing [6:46] $SES.TO's recent run-up, catalysts, acquisitions [15:53] Risk that Western Canada is drilling a lot less oil in the future [19:15] Capital allocation / changing the corporate name [24:58] Continue aggressive buy-backs or focus on tuck-in acquisitions [29:30] Customer insourcing potential [31:40] Waste processing facilities, waste businesses; why haven't people picked up on this aspect of the story thus far [36:00] Bought a lot of assets in distress; what has happened that drives those assets in distress that's not a risk here? [37:46] Separation of businesses argument [40:55] Scenarios for why $SES.TO thesis doesn't work out / final thoughts Today's sponsor: Daloopa Hey there, fundamental analysts - Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let’s talk about something that could transform your workflow—Daloopa. Daloopa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance—all at your fingertips. And here’s the best part: Daloopa updates your models in near real-time, which is especially important during earnings season, tailored to your modeling format and style. Imagine never having to update your models again. With Daloopa, you can reclaim your time and focus on what really matters—analysis and research. Want to learn more? Create a FREE account at Daloopa.com/YAV

Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again.

With DeLUPA, you can re-clean your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash y-A-V. That's Delupa, D-A-L-O-O-P-A- dot com slash Y-A-V. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean, a lot if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on for the second time.

My friend, Chad Garcia, Chad is Portfolio Manager at the Alve-Maria Focus Fund. I think, if I remember correctly, co-portfolio manager at another fun, but, Chad, great to see you. How's it going? Third time. This is the third time. Is it really? Yeah. Yeah, digital bridge, eDreams, and now...

That's right, that's right, that's right. And digital, I mean, Chad, you can look at the Avi Berea Focus Fund. It's been a great year, and I know eDreams is still there. But, Chad, we got a lot to talk about today. Before we get started, a disclaimer to remind everyone that nothing on this podcast is investing advice, that's always true, but maybe particularly true today because we're going to be talking about a Canadian domiciled security so people should just remember, you know, not domestic. It's not like we're pitching something in sub-sayer and Africa carries some.

crazy amounts of risk, but, you know, international stocks that carries extra complexities, extra risk. So please do your own work, consults, financial advice, and everything. Chad, soccer we're going to talk about today is Secure Energy. The ticker is SES. I think they rue the energy piece of that. That might change in the near future. But I'll pause there and toss it over to you.

What is secure energy and why are they so interesting? Well, I think you need to go back into the history of secure energy services. And so the company was founded in 2007. it was half an infrastructure waste business, and so infrastructure being oil-gathering pipelines, so where if you have an oil well in Western Canada, they would have gathering pipelines that would go to your facilities, and that would transport oil to markets or much larger pipelines or terminals. And then they had a waste component, and so oil production produces wastewater, and that water needs to be treated and processed. Also,

there's some, if you spill any of the wastewater or spill any oil, you need to clean up what you spill. So there's some solid waste processing as well. And so that was about half of the business when the business was formed in 2007. And the other half was energy services businesses. It was a small portfolio of energy services companies that were really tied to new drilling activity. And that worked really well for the company. It went public in 2010. the oil prices continue to go up in Canada. The company hit its all-time high as far as a trading price, a price that it hasn't yet seen again.

And then 2015, the oil prices declined, and about half of their EBITDA at that time was tried to new drilling activities. And a lot of those businesses, the EBITDA went to zero. And so, you know, they got themselves in a bit of distress. they were able to pull through, and I think management looked at themselves and said, well, you know, that was a fun run, but we don't want to live through this again. So how do we change it? And they spent the next decade reshaping the business. They either shuttered or sold a lot of the energy services components of the business and focus more on the recurring revenue, which would be the pipeline and waste component of the business. And so if you look at it today, 30% of their business, pipeline, which is mostly take or pay contracts, about 40% of the volume that goes to the pipeline is stuff that's sourced from their waste business. And so as they process wastewater, they can

extract oil from that water, and that oil is recycled and taken to market. And then, you know, the remaining 70% is their waste business, of which it's water processing, landfills, they have a small metals recycling business and they have a specialty chemicals business and that business is tied to neutral activity but the bulk of the waste management business is ongoing production which is very steady state perfect that's great uh got a lot to ask you here but let's start it's fun because this one has several different angles especially the financial angles but let's start with the question i like to start with everyone market is a competitive place uh you know everybody's always competing for alpha, looking for it. What are you seeing that you think the market is missing that

makes this kind of a risk-adjusted alpha opportunity? Well, if you go through the history of the company, the GICS code of it has it as an energy services firm. Their name is, as of right now, is secure energy services. Energy service companies trade it three to five times EBDA because everybody knows that it's volatile and when you get into a bad situation, you know, if you go bankrupt, nobody's going to buy your, the assets that you have because everybody else is in the same, is in the same place. Right. But waste businesses trade at, if you look at Clean Harbors, which is an industrial energy company, it trades at 14 times EBITDA. If you look at waste connections, which is also in this space that Secure is in,

you know, they trade it 18 times EBITA. And so waste is a much, you know, is a much, you know, different business. And if you look at the research analysts that cover secure, they're all energy services analysts, they're not waste analysts. They picked up a couple new analysts in the last month that are waste focused, but that should change over time. And so I think that for a long time, this company was viewed as an energy services company. Traditional waste investors you know, probably didn't think to look there. And, you know, with a recent transaction, there's a forced to vestigeor, which we can get into, waste connections bought a piece of their business.

And now the market is starting to wake up to the fact that you've got this waste business that everybody thinks is an energy services company that today is trading at nine times, that really should be trading in the mid-teens. Let me start with today trading at nine times because you threw up, and I completely with you. Energy service companies tend to trade at three to five. And I love how you framed it because what happens is there's no downside perception because when you go bankrupt, everyone goes bankrupt and everyone can buy any assets they want for basically. But you framed as, hey, this was trading three to five, waste management trade mid to high teams. I think the first thing a lot of people

are going to look at it are going to say, hey, Chad, Andrew, you guys, you know, they don't know this. We started planning this podcast in late September. And the stock has been on an absolute it's here since then, you know, and the multiple's probably gone from 8x to 10x EBIT. You can correct me if I'm wrong. I'm just using rough numbers off the top of my head. But I think a lot of people are going to look at that and say, hey, it started to get there. Have we missed the train? So I kind of just want to ask that because that's the first question anyone's going to have when they see a stock up into the right over six weeks. I think it takes people's time to realize what's going on, particularly the large,

large funds that are the traditional waste investors. I know that the company has been having conversations with these investors, particularly after the Waste Connections transaction, a lot of the people that were legacy Waste Connections investors called to call them to learn more about the business that their company is buying. And while you're looking at it, might as well, you know, take a look at Secure as well. So I don't think they've missed the train. But, you know, let's go back to the changes that they've had in the last couple years and then like what's coming up. So Secure in 21 bought a company called Trevita and that gave them 90% of all the

wastewater processing capacity in Western Canada with 10% owned by large integrated companies. The government you know well 90% you control an industry but then if you if you dial down into the different locations you know you really have local monopolies, you know, it's like a landfill, right? So if you have, you can, if you look at their water processing capabilities, you draw a circle around it of 60 miles, you know, anything within that 60 miles you're going to treat, right? And so you have a portfolio of little local monopolies, right? And when they acquired Truvita, they had 90%. They're basically the only independent waste processor in Canada, and then, you know,

the integrates had 10% of it. The Competition Bureau on Canada says, well, you know, we need to take a look at this. They sued to undo the transaction, or at least change it in part. The company fought it for a couple of years, and the resolution was the company had to sell 20% of the 90%. So they went from controlling 90% of the capacity down to 70%. And this is the sale you've mentioned a few times with them selling the... That's a sale to waste connections.

And if you want to look at the capital allocation prowess of the management, they bought this asset for $1.4 billion coming out of COVID. They made $350, $400 million in EBIT during the time they owned it. They sold it for $1.15 billion a couple years later, and then they kept 70% of the assets. So, you know. That's a pretty nice trade, right? You get 70% of your competitor for free, and you end up controlling 70% of the market. And by the way, that competitor was distressed prior to you buying them.

And, you know, distress, distressed competitors may make uneconomic decisions in order to bring cash through the door. maybe they'll lower the prices so people can ship in outside of, you know, the 60, 100 mile radius. And now you sell to waste connections, which is a pretty reasonable economic operator. You know, just one more under stress. I mean, I've seen these pipeline companies and addressed for it's not just that you might make on economic decisions to kind of try to get some cheap revenue in the door to leverage your fixed costs a little bit. But it's also, you know, I'm not crazy familiar with this, but there's the field over there and they call you up and they're like, hey, well, you guys spend $10 million to get, you know, a guarantee, take or pay,

$2 million per year for the next 10 years. Like, that's a great IRA. And anyone would do that except a distress company. You say, hey, even if it's a 20% IRA, we're in complete distress. We can't send $10 million out the door. So it's not just on the, take the competitor out on the pricing side. It's also there's generally some pretty low-hanging fruit in terms of cap-x when that happens. I don't know if that's here or not, but just throwing that out there.

So, you know, come, come by. They closed the waste connections deal. They had all this cash come in. They had NOLs from built up from their prior struggles in the industry. And so a lot of the cash that came in the door was theirs to use. The business got de-levered down to, you know, now it's at 0.9 times EBDA leverage ratio. And they had ample cash to do a substantial issuer bid. And so they have like their normal course issuer bid, which they're buying back stock every quarter.

But when you do something substantial, just go out and do a tender offer. And so they did that. And if you look today, they've bought back 19% of the company's market cap, you know, this year. And that they'll probably end the year. They'll probably buy back another 2% in Q4. So they'll be above 20% bought back. You know, and while they're doing that, the company, if you look at the growth prospects of business. So just from the water alone, the water volumes grow about 5% a year.

And then you have some solids that go in there. And so like once you mix the solids in the mix, let's say their volume growth is about 3%. They think they can get about 5% on price every year. So their same store sales, you take that up to 8% growth. And it's worth noting that the water processing cost is only about 1% to 2% cost of total oil production. And so it's pretty de minimis to the to their customers. They can probably spend about a hundred million a year over the next few years in growth capex that'll add another 5% earnings growth to it.

So on an organic basis they're growing about 13%, you know, throw in a couple tuck-in M&A here and there and that gets you about 15% earnings growth. You know, these tuck-ins are doing like four to six times even though, which in my mind when you're spending that low of an amount, it's on almost like organic growth. Let me ask one quick question, because we mentioned they buy the assets in the stress in 2021, and we talk about how nice these assets are, how nice these acquisitions are. But then, you know, I always have this problem.

When you're saying, hey, we're going to go to talking acquisitions at four to six times, but we think our core business, you know, it's growing mid to high single digits organically, great cash flow, really nice. I always have this problem. Like, why is somebody selling you at four to six times on a talking act basis? if these assets are so nice. So just trying to score that peck. A lot of the tuckins they're doing right now is in the metals space.

So they have the metals recycling business. It's highly fragmented. And the industry is changing where the capital costs for these businesses are going up. So, for example, the product is shipped out on rail cars. And you used to be able to lease cars. And so the small businesses would lease rail cars. And now that ability is going away. and so Secure just bought their own fleet of cars.

So the smaller players aren't able to do that. And plus the logistics matter. And so, you know, if you're a larger scale, you can better handle the logistical complexities of the business. And so it just makes sense that that's going to consolidate over time. But they're not doing anything in their, within their, not doing tech ins within their waste process. because that's already, you know, that's done.

It's, it's, it's, they integrate, it's, and, and connections. Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part.

Delupa updates your models in near real time, which is especially important during earning season, and it's tailored to your modeling format and style. Imagine never having to update your models again. With DeLupa, you can reclaim your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash y-A-V. That's DeLupa, d-A-O-O-O-P-A-V. A lot of this is coming off of, as you said, it's water coming off of the excess water supply that's coming off of Canadian people drilling, putting that excess this water out and that's what they're getting. So I guess one other question that's going to jump to people's mind long terms is, hey, this sounds great, right? Like, if you're drilling for oil,

you're going to get rid of this water supply, whether oil prices are 50, 100, 150, 25. You're going to get rid of it. I guess, and they've got a great chart. I'm looking at their investor deck at slide 7 that shows, hey, you know, water, oil volumes have gone up in Western Canada over the past 10 years and their forecast it continues to go up. I guess my question is, hey, we're talking about a 15 times even out multiple on this, which implies substantial terminal value. Is there any risk here that five years from now, seven years from now? We're talking about saying, hey, for some reason, Western Canada is drilling a lot less, a lot less oil. That could be because oil prices are lower, that could be because of regulatory concerns, or it could be because of, you know,

the famous concern people have about the Permian, oh, the shale is turning over, which, yeah, the shell, it's getting tougher and tougher, but people just continue to drill down there. So I guess him just thinking about the terminal value there. I'll pause there and hear your response. There are several plays within Western Canada. A lot of the capital that has went into oil development in Canada has been focused on the oil sands. And so there's been an underinvestment with respect to some of the vertical and horizontal plays that secure serves. And so I think that the, I think there's a big Cappex cycle coming to exploit it.

So I can correct the earlier days in the Permian. But, you know, I had the same concern. I went up to visit the company this summer. And while I was there, I met with Prairie Sky. Prairie Sky owns 70% of all the royalty interest in Western Canada. And so if anybody knows what's going on in the market. I'm actually just laughing because if there's a royalty play, Chad has looked at it.

Chad has talked to them. Chad has done it because I know we talked Blame for TPL. Yeah, we own a little bit of Prairie Sky. But so, I mean, it's, yeah, we own, my TPL is the biggest position of my, of my firm, firm wide. And, you know, if you put secure together with, with Prairie Sky, you get like a, you know, kind of replicate a TPL, I guess. But, um, I asked, I asked them that same, same question. And they said at current technology, they have 45, 50 years worth of oil, I'm into, at current technology, and the technology gets more advanced and more oils recoverable.

I mean, I think if you look at some of the deals that were happening in the Permian, some of the larger transactions, I think people were underwriting like 5% of recovery of the minerals, and maybe they can take that to 10%. And so there's a lot of minerals even within the Permian that is not being recovered given current technology, and then as technology advances, maybe a little bit more. perfect but you know I said you know 45 50 years I said okay that's that's that's that's terminal value not for me so I like that yeah I don't

maybe maybe we'll be on the tail tail end of our careers at 45 50 years but yeah terminal value will be someone else's question to worry about at that point let's talk capital allocation here so I I was reading the Q3 call which obviously happened after we scheduled the podcast before we recorded the podcast and the thing that made my eyes jump out is I think an analyst says, hey, your leverage target is 2x. Like, what's your plan? And they said, well, our leverage target is 2 to 2.5x.

You guys can do the math. We are levered one times right now. And we're going to do two things. We think we, as Chad is saying, we think we trade for a below peer multiple. So we're going to keep buying back stock. But they also say, hey, we want to continue to buy inorganically, as you said with the tuck in acquisitions. So I guess I just want to ask two lines on that capital allocation. And he's spiked the football or anything, because I love that capital.

allocation thing. But let's talk about share repurchases going forward after they bought back 20%. And then I do want to dive a little bit further into the M&A opportunities. Yeah. Well, I think they could, I think they said that they could fund their dividend, which right now is above 3% dividend yield. I love the analysts who just keeping like, when are we going to raise the dividend? When are we going to raise the dividend? And the company's like, hey, we're trading at eight times EBITDA, you know, like double digit implied free cash flow, probably going to buy back shares and the dividend will just be a little chair on top for I told them in March that they should cut their dividend to one and a half percent dividend yield to get it in line with waste connections and some of the other waste companies. And they said they would just double the stock price to get the dividend yield down.

They've basically done it at this point. But he said that he could fund the dividend yield. He can fund their normal course, issue a bid, and they can fund their organic growth, capex, and their, you know, their M&A needs. I don't think they're going to have to raise capital for the tuckins that they're doing. And by the way, you know, that 100 million of growth capex, their customers come to them and say, will you add on to this area, as you pointed out? And the cash on cash returns that they're getting is probably a 20% cash on cash return for the pipeline and a 25% for the waste business.

And so, you know, they're getting great returns from this capital that they're redeploying back in their business. But they said that they could fund that with their internally generated cash. And so you do that, where does that leave you with respect to, like, levering up a bit? And so if I was management, here's what I would do. I mean, you've had this period where you've been introduced to a new shareholder base, you know, the large funds that have historically invested in waste companies, they're changing their name, which should take effect on the first of the year. The Giggs Code's probably in process. They've attracted two new cell site analysts that are waste analysts. They're probably

going to leverage those two new initiations with their current analyst based and go to the banks and say, hey, you're covering me under the wrong, you have the wrong guy cover me. You know, that was just, that was appropriate in the past, not anymore. Switch me over to your waste guy. You may pick up some more waste coverage, race, waste coverage. Can I apologize you on that? I've definitely had this before where a company is covered by, in my opinion, the wrong people, right? Here you've got energy people covering them, energy services and waste services.

And as you lit up, the energy service guy trade for five, the waste services trade for 15. But if I was just going to push back on a market efficiency argument, I'd say, hey, does sell side research, does it matter that much that they're getting covered by energy services guys instead of waste services guys? Because they can go to the energy services guys and lay out the same math. They can say, hey, look, we're 70% waste. You guys cover one or two things that have higher multiple businesses than, you know, just owning old drillers.

So I guess it is a nice storage cell, but does that really impact market efficiency? does that really depress the valuation here? I don't know. I read some cell side research, but not too much. You know, we do all our own. I'm the same. That's why I wonder, because I'm pretty dismissive of sell side, but look, I make the same argument too.

I'll be like, this company deserves to trade for a gold multiple, but it's trading for bronze because these dumb sell siders are the wrong people. Well, when the market's not efficient and your stock price isn't trading where it's at, then you can take steps to fix that. And so, you know, I would, if I would, if I would, if I, were them, I would give, I would give the new, the, I would give new investors some time to do some work on the business, you know, get them out there. They did, they did have, they did have an analyst day of the summer, but they did have a site tour, you know, give them some time to get

some work, give them some time to get in, and then, you know, see what happens and come Q1, you know, if the stock hasn't materially re-rated, now, if you look at, you know, we talked about the waste companies trading 14 to 18 times EBITDA, but the pipeline businesses that they compete with two, trade it 10 to 12 times. So they're at nine times today. So they're both. They're beneath both. My next step would be to lever up to two and a half times and go back, go buy 15% of the company back. I love it. No, I believe that. I think they're kind of leading you that. That's what they said in the call. I mean, I haven't spoken to them specifically about that, but he's like, you know, we're not going to increase our dividend. Our stock is undervalued.

We have all the cash we need internally to fund growth. And, you know, we're at 1.6. times of leverage beneath our target leverage ratio, you know, and our stock is really cheap. Let me ask you a leading slash softball question. The company was hugely aggressive buying back the stock under 10, right, into single digits. Great for them. They've made a great return. Hopefully they make a great return going forward. I have definitely had management teams who will show me some of the parts and the stocks at 10 and they'll be like some of the parts stocks were 30. We're going to buy back stocks of the cows go home. And they start and then the stock goes to 15 or the stock goes to 20.

And they're like, hey, you know, why aren't we buying back shares or, and they'll say, oh, we want to be opportunistic, you know, just like investors do, they'll wed themselves to a prior price. And here it could be even worse because, you know, you're, you can get locked up as a corporation. You can get locked up. And if you set your 10b5 automatic repurchase plan at up to 12 and then the stock goes to 15, even if you want to, you might not be able to. So my question to you is, do you think the stocks run 70%?

since the last earnings call. Do you think they're going to be as aggressive or aggressive going forward? Or do you worry, A, they lay off just because they get married to share price. Or B, they might honestly look and say, hey, when the stock was at eight, this was the best opportunity. Now that the stock's at 10 times EBITDA, it's too cheap, but maybe we focus a little bit more on tuck in acquisitions that we think generate a better IRA. I think they're working really hard on tucking acquisitions.

I just don't think that it's going to, I think they've tugging acquisitions moves the growth two to three percent a year. I don't think there's really anything they can do that's up size. And if you want to look at the, I mean, the waste business, they're not getting any bigger via acquisition. They've already got to the attention of the competition bureau. The opportunity there would be to go out of basin, but I think you kind of lose some expertise and some knowledge, and that might be hard to do. I mean, are they going to come down to the permeant and, you know, go after assets there? Probably not. They don't have the expertise or the, or the, uh, the, uh, the network there. So I think that leaves them to

grow internally, grow via acquisitions, some of the, some of the, some of the, some of their non, um, energy waste businesses. And, and, uh, that's it. So like, where's the cash going to go, right? You may, great point. The waste processing business, they, they just cannot do in basin emanate there, right? Like, that, that is settled decided by the cost. competition authority unless things dramatically, dramatically changed. Yeah, I think you go it organically. Yeah, absolutely. But there's only so much, it's one of those things you wish you could write a $500 million

organic check into that every year. You simply cannot, right? You're talking 30 million, 50 million of organic capax or something every year. I think the 100 growth gap X that they're spending is going to be split between that and their pipeline business problem. But there's just the limits that. So where I was going is the token acquisitions going forward. it seems like it's going to be focused on the metal recycling business, right? And my other question

would be, in my mind, you know the company better than me. I've spent, you know, on and off a day and a half, two days on it. The metal recycling business, when I look at it, it doesn't share to me a lot of those great, a lot of the great characteristics that the pipeline and the water business do. So I guess I wanted to ask you, am I right that the metal recycling business is likely where the inorganic growth comes forward? And am I wrong to think, hey, that's probably a lot lower multiple, it's not as sexy story as the rest of it. Yeah, it's probably not as sexy, but

they're picking this up for four to six times and they're extracting synergies. And I mean, Trivita had had a metals portion of it too that they picked up. And, you know, they increased the inventory turns and inventory turns

really drives economics that business. They increased at 10x. It was like 1.2 times in Urtivita and it's 12 times turning now. And so how they, how'd they increase the, I'm just trying to get an understanding of the synergies, how'd they increase the inventory returns so much? Oh, I just think it was poorly managed. Okay. So a lot of, a lot of, you know, do things better, blocking, tackling, you know, tribute as financial issues, probably had attention focus elsewhere.

Yep, that makes total sense. And you think going forward future acquisitions, because, again, correct me wrong, it seems like that's where the acquisitions are coming from, you think they'll be similar kind of, uh, opportunities for self-help and future deals. Probably when you're buying something, you know, family, family run, small business, and you bring real capital and professional management to it, I think you get it up left. On the water side, I had a lot of people ask questions about, hey, there's worry, these guys own so much in the water basins. Yes, it is a small piece of the cost of extracting oil,

but they're getting great ROEs, great returns on these. I had a lot of people ask questions, hey, what about customer insourcing potential here? You know, if you're a major player, you're drilling, you look at the same, why don't I build my own infrastructure and kind of make that 20% plus return for myself? I think that the, when the solids are separated from the water, they have to go somewhere and they go to a landfill. And I think to get a landfill permitted, you know, first you need the right geographic formation. It has to look like kind of a bathtub where the water, the liquids,

will flow down to one small point that's going to be plugged at the bottom. You have some geographic constraints on an industrial landfill, and then the regulatory process is huge. That's a fantastic answer, but it's not just for the people who are thinking, oh, you know, oil side drill for oil, you take the water and separate it out. It's not just getting that permitted. You actually need to have a landfill on the back end, and because secure controls the pipelines of the landfill or the landfill itself,

it's not for someone thinking it's not just building that pipe you have to get the landfill access build the landfill and everything and that is just going to be a no-go for just about everyone and why would you and then you throw up a landfill now you have a competing business and so now knives come out because you know you have a

you may have two competing landfills also one of the nice things with landfill pipelines all these things let's just hypothetically say there are five big buyers in a market right you can spread the fixed cost of the landfill, the pipeline, and everything over those five buyers. So even if you're charging them a large premium, because you spread it over five buyers, they all get a better deal than if they went in-source and do it all themselves.

Now, I guess you could say maybe three of the five could combine, but what three of five competitors are going to talk to this? It's just a very moody protected business. You can tell me if you want to add anything or disagree on any of that. No, I think you got it. Perfect. Waste processing facilities. I think they say they're operating at 60 to 65% utilization.

How long does it take for them to kind of grow with customer demand and get that closer to 80, 85, 90% where maybe they think about doing a new facility or, you know, at 80, 90%, you're leveraging your fixed cost much harder? Yeah, I think the utilization is at landfill, is the landfill 6% utilized. And so what they're saying is that they have a lot of life left in them. but you can always, it's hard to get a landfill permitted, but you can, it's easier to tack on new cells than the existing landfill, and that's part of their maintenance cap X. And so part of their ongoing expense is developing new cells within existing landfills. Gotcha. I just think, I didn't think they're saying, like, listen, like, we have plenty of room

up to grow. And, man, landfills, it's crazy that one of the best business I'm aware of is literally the trash business, landfills. And I know you know a lot about these businesses. Let's take a deeper dive into this. Waste businesses have made investors a lot of money for a long time. But if you look at the returns on capital, they're actually low. The trick is that they grow, so they're turning in the right direction. And why is it that their returns are low? First off, you have the big fixed cost of building a landfill, so that's, you know, that gets recognized over time.

but you have the asset, you have to put the asset in place up front. But the other part is collection of the garbage. I mean, municipal waste companies have whole fleets of heavy equipment that has a very limited life that they have to constantly replace, which drives down the returns. Here, with the water that's coming from the fraccony, either comes on a pipeline, but most of it comes via tanker trucks that's owned by their customers. And so they eliminated the whole capital, most of the capital expense of the collection of the waste.

That's great. No, it's an incredible business. Why do you think, this is a weird question asked, but this is a really good business. And you and I, we have some investors we know in common. We know some others. Waste businesses, like the strength of them is not unknown to investors, right? Like there are a lot of compounded bros who have 20% positions in things that are waste or waste. adjacent. I guess you're kind of the only person I've heard talking about secure,

not to toot your horn for you, but why do you think a lot of our mutual friends or a lot of other, you know, people who are really familiar with waste businesses? You said when waste management bought their, the 20% of the business, you got some in bounds, but why do you think people haven't picked up on this story so far? Well, when I first started looking at waste, I started first with waste connections, which is a fantastic business. And at the time, They owned about 5% of their business was in the Permian doing stuff like this. But it was small, so why even spend too much time on it? And if you look at what was great about their business on the municipal side, they had,

on the West Coast, 45% of their business was a monopoly where the government gave them a franchise. And then everywhere else in the country, they were the largest player in a small market, which gave them the low-cost mode because if you're a large player, you have the best utilization. So there's so much interesting stuff going on in the waste companies. And, you know, Connections was really the only one doing too much in the energy spot of it and was small. So I think people just kind of ignored it. And I think now with connections buying the secure assets, that's going to open up a lot of people's eyes to it.

And they're talking every time they have a conference call, they talk about how great the deal was for them, how great the assets are, how it's outperforming. In the last call, they talked about how the regulatory environment for municipal deals is getting tougher and that they think that their competitors are going to start looking outside of the municipal space to do them in A, just because the regulatory regime is easier to get deals through. It's a question that just helps me. We talked about how the 2021 acquisition that they did, that they end up having to the best 20% or so of. We talked about how great it was, right? And you mentioned, hey, they bought a player in distress. And I think a little bit of that distress was COVID-driven.

But I guess if I'm listening to this podcast with a critical year, one question I would have is, hey, Chad, you're talking about how great these assets are, you know, consistent, high returns on capital, all this sort of stuff. They bought a lot of these assets in distress. So what happens that drives those assets in distress that's not a risk here? I think Trinita was a resulted from a merger of two companies that were both over-lovered at the time. If you look at the biggest shareholder insecure right now, it's Angela Gordon. They got in through the distrust debt in Trevita. And so Trevita had done an acquisition.

They over-levered to do it. You had COVID hit. I mean, I don't think there's too much risk with energy prices moving the volumes here. But if you get into a situation where the world's shut down, then oil is not going to flow and that's what happened there you know i do hear you though and maybe they're playing games with it or but even in 2000 the difference if you kind of look at their charts this is for people who are looking at their october investor day relations it's slide seven you know waste oil volumes go from like just over four billion to four i think that's a million

barrels per day to just under four like it actually doesn't drop that much during covid in 2020 so They flow better than you expect, but that was also kind of a flip. These businesses, you know, when I look at this, obviously I think waste and landfills belong nicely together. But when I look at metal recycling, which we said might be the future of inorganic growth here, I kind of look at that. I wonder, does that belong with the rest of the businesses or how much do all these businesses belong together?

Because they have been separate before. Is there a separation argument? I mean, it's 10% of, of. the 70% so it's right and so I would think that if I was looking to divest something and do some financial engineering the one that makes more sense to me from the perspective of getting the appropriate valuation for the for the waste business would be the pipeline business because pipeline business obfuscates the true financials of the business so secure screens poorly they don't take any price risk on the oil but they're they're forced to

have the oil pass through at, you know, as a sale, as a sale. And so their revenue is, is, you know, artificially higher than it. Oh, is that? So, oils 100, they make a dollar per barrel no matter what, but oil is 100. They have to pass it through at 100. Oil is 50. They have to pass through at 50. So it looks like one year their revenue is down 50%. The next year it's doubled. It might make that correctly. Yeah. It looks like their margins are horrible. It looks, It looks like their revenue is more volatile than it is. And so it just screens horribly. And you have to dig into the MDA and kind of model that out in a spreadsheet yourself to start to get comfortable with it.

But I could see them selling off the pipeline business. Now, they're 40% of the volume, but you can just deal with that with the contract. Okay, we're going to sell you the pipeline, but we're going to be a big supplier. Here's our contract and let's go. And then we'll take that cash. I mean, 30% of EBADOS, so there are 500 million of EBITAS, that's 150. You know, you get 10 to 12 times for that in the pipeline business. That's a hell of a lot of money to buy back stock with.

Yep. And I mean, as you said, it is certainly not a heard of in the world of financial engineering because pipelines are such a mission critical, stable business, unless your supplier literally goes hell. Every MLP in the United States was basically built on, hey, we take the pipelines out. of the contractor, put them on a 10-year contract, fixed costs, and the pipelines are about 40% take or pay contracts, too. Yeah. It's very, very stable. Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that

could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again. With DeLupa, you can re-clean your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash y-A-V. That's DeLupa, D-A-O-O-O-P-A-O-P-A-O-P-O-P-O-A-V. I think we've covered a lot here. Last question for me, and then I'll turn it over to you

in case we didn't hit anything, but I mentioned a few ways, but one question I always like to look at is, hey, Chad, you and I are sitting here five years from now, right? We're on our 14th podcast, and I'm saying, hey, Chad, that one you pitched back at the end of 2024 secure energy, it didn't work for some reason. Maybe it's down 90%, maybe it's down 9%, who knows, but didn't work. What keeps you up most at night that worries you about this company, or why do you think that kind of it didn't work five years from now scenario would have played out? I mean, operationally, they're dealing with some hazardous materials. You know, they have some operations where people can get injured.

I mean, there's definitely maybe a pipeline breaks or you have an environmental to get scared. There could be some anti-oil regulatory regime in Canada, but, you know, the Trudeau's in there now, so I don't think it's any worse than that. That's kind of why I didn't even ask it. I was like, I don't know how much worse he couldn't get up there. But I asked the same question to the CEO and the CEO's, he's been with the company for, you know, since it's founding, but he has recently been the president and just took over as a CEO this year. The legacy CEO who founded the business is the vice chairman stayed on the board and he developed the CEO.

But, you know, I think the newer CEO is young and he sees all the growth. opportunities and he wants to take the company to the next level. And, you know, the first risk on his mind would be a safety concern, you know, because of his people. And the second is that he's not going to have the time to realize his vision. Because, you know, people recognize how great this asset is. I mean, when I was at the Raymond James large conference that they have in March, it was as the connections deal was about ready to close. I sat in the GFL breakout session. People asked if they participated in the bids for the assets that connections got. And Patrick DeViggy said, yes, these are great assets. And if I would have bought him, I would have been pillored, but connections bought him and now they're heroes. And I think he was talking more about the concerns that people have had for the leverage in his business,

which is probably why he wasn't that aggressive in buying it. but he certainly recognized the quality of the assets. And then if you look at what's happening to his business, subsequently, he's selling off his environmental services business, which is a liquids business. It's a different type of liquids business than what secure is, but it's a liquids-based business that is geographically overlaps and is ran by a former secure employee.

And that business is up for sale right now. The rumor price is around 15 times EBITDA, which would be another good comp for secure. but if that gets taken out by a large infrastructure fund or somebody without any issue getting another deal done through the Canadian Competition Bureau, I mean, why wouldn't you just look at Secure next? Great. We have covered a lot here.

Is there anything we didn't hit on secure that you think we should be hitting or anything you think we should hit harder? I think, you know, 3% dividend yield. seven and a half percent free cash flow yield growing at 15 percent you know buy back 20 percent of their stock back 20 percent of stock potential to buy back another 15 to 20 percent in six months i think i think we covered it perfect well chad this has been great i'm happy having you on for uh podcast number three ovi maria focus fund a v ae a yes am i remembering that correctly a v e a yes yeah i i look at the fact sheet every every month and say oh no it's still the same

big holdings, but anytime a new holding pops up, I like to steal it because, you know, Landbridge, completely different story, but I mentioned Chad is involved in every royalty play seemingly. Landbridge, it IPO, and I think I first saw it. I missed the IPO. I think I first saw it when it was like a one and a half percent position. I was like, oh, what's, what's a new position doing on there? And that has just been a killer. I don't want to have a percent position anymore. No, it's not. Well, yeah, because the stock is up, what, like 150 percent in six months since IPO? It IPO June 28th, and it's up over 4X. It's unbelievable.

But Landbridge has an affiliated business called Waterbridge. Water Bridge is the secure in the Permian Basin. There you go. And that company should IPO this coming summer, which would, and I imagine it's going to get a lot of attention given the success of Landbridge, which is going to be yet again another good comp for secure. Perfect, perfect. Hopefully it doesn't take the little summer for this to, you know, to keep us. When you're coming out, I guess you're coming up for the RBC conference again next year

since these guys will be there. We'll meet at, where did we go last time? One of the places, we'll grab a tea, we'll grab a Greek yogurt and all that. But, Chad, it was great. Thanks for coming on for the third time, and we will chat soon. Back to later. A quick disclaimer. podcast should be considered investment advice. Guests or the host may have positions in any of the

stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.