We met some interesting companies at Planet Microcap, so we’ll share a few over the next week… starting with PHX Energy.

Payroll employment fell 0.3% in August, decreasing for a second straight month…

… driven primarily by public sector outflows, with federal government employment down 6% since June…

… while vacancies have been flat for months at ~507K, resulting in an elevated unemployment-to-vacancy ratio that could be higher if not for declining participation.

The BoC bumped interest rates by 25 bps after seven straight pauses, as the risk of elevated inflation outweighed macro uncertainty - with near-term inflation projections climbing…

… and expectations for a return to the 2% target pushed out until mid-2028, driven by upward pressure from energy…

… as well as stronger GDP growth on the back of higher business investment and government spending.

While today’s decision was well-telegraphed, we’ll be watching to see if the hike was merely “insurance” or if this could be the start of a tightening cycle.

PHX Energy Services (PHX) could be an interesting way to play the consolidation in energy, given the majors they serve (16 of the top 20 NA producers) are the ones doing the buying. With higher oil prices driving more aggressive capital plans…

… there’s structural demand for directional drilling services, with upside from increased adoption from its Rotary Steerable System (RSS) technology.

I’ll save the technical details and frame this in the context of M&A. A producer that’s landlocked (green) can only drill a lateral well to the edge of the acreage it owns…

… incentivizing the purchase of neighbouring assets so it can extend that well, increasing production and returns. When those wells get past two miles, RSS drilling dramatically outperforms older methods…

… and runs at much higher margins, with a ~$35K per day price tag versus ~$15K for non-rotary jobs. So to recap, consolidation → longer wells → RSS demand → improved cash flow generation for PHX…

… which is likely underpriced if it plays out that way over the next few years, with the current multiple sitting modestly above the five-year average at ~4x.

Allied Properties (AP-UN) closed down 19% after announcing a 90% distribution cut, which was a logical outcome given the magnitude of debt to roll in the next three years ($700M due in April)…

… an AFFO payout ratio that averaged 106% over the past eight quarters…

… and a stretched balance sheet at >13x leverage, which sits well above the sub-8x investment grade target. With the cut providing $126M of run-rate cash…

… management has freed up some dry powder to de-lever, but it could be a while before investors get comfortable stepping back into the name.

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