I dread filling in my tax return. You gather data from dusty files, crunch numbers and send it back to grimly await the bill. This exercise does, though, have one redeeming feature – it reminds me of a few old friends.
Part of the process, you see, involves going through my ever swelling file of contract notes from my share dealing. It brings back to mind a few names that I had forgotten. It is like reading the school magazine – a reminiscence of days gone by, of friend and foe, of happy days and not.
Here are a few of the old friends I rediscovered this time around: City of London PR, which soared during the dotcom boom owing to its ownership of a website. Then there was Reliance Security and Omega International, both delivering handsome profits. And there were the villains. Homebuy – a disaster! Aero Inventory – another shocker! Touchstone – what went wrong there?
Looking back, it is surprising how many of my biggest profits were reaped when the companies concerned were acquired either by larger rivals or by their own management. This is an added attraction of small companies. If they are any good they will be bought out, always at a decent premium to the market price.
One example was Sondex, which I bought for my ISA in 2006. Within a year it had been acquired at a nice premium by GE, capping a successful run by its Hampshire-based management. So I was very interested to see this same management team reappearing on the stock market with a new vehicle.
These managers have a superb record
This new vehicle is called Enteq Upstream (NTQ), and it came onto AIM at the start of July at a price of 100p. Already the shares have gained 24%, so investors are obviously expecting a repeat of the Sondex success story. Let me remind you of it.
Sondex was a UK company that designed and manufactured ‘down-hole’ products to the upstream oil and gas industry. These were used to maximise hydrocarbon recovery, extend the production life of established oil and gas reservoirs and improve the cost efficiency of the extraction process. Sondex made instruments that could determine what was happening down below ground. They could measure the scientific properties of reservoir fluids, assess the condition of tubing and casing and assist directional drilling. Sondex was built through a series of five acquisitions and, crucially, by devoting 10% of annual revenues to research and development.
The managing director was Martin Perry. And it is he and former Sondex colleague Raymond Garcia who are behind Enteq Upstream. At present Enteq has no operating business but the plan is to buy companies that specialise in geophysical equipment and services: wireline logging; drilling; and other down-hole tools.
Although the markets for these products are by no means small, together they account for just 10% of the vast $270bn global market for oilfield equipment. It’s hard not to be bullish for this sector. Not only does the hunt for oil become more urgent with each passing year, but the technical challenges mount as exploration advances into ever more hostile environments.
The question is whether Enteq can make attractive acquisitions in an industry that has some seriously powerful players such as Schlumberger, Halliburton, Baker Hughes and Weatherford. Perry and Garcia reckon that their experience and contacts will allow them to identify small companies ahead of these giants, while also supplying some of the smaller regional players in the oil services industry.
But the key will probably be to identify some genuinely innovative technologies that will command wide adoption. Enteq’s management has a well-earned reputation in the City and for this type of acquisition vehicle, that is what counts. I’ll be monitoring this group’s next moves very closely in the coming months.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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