CMG.TO - Computer Modelling Group

[Foreign Tuffett]

One factor that could be depressing the price here is that the company was removed from the S&P TSX Composite Index last month, which means Canada's big index funds have sold.

https://us.spindices.com/documents/indexnews/announcements/20190308-887958/887958_2019-03-08compositereview-pr.pdf?force_download=true

That's interesting, thanks.

Has Burgundy Asset Management made any comments on why they like this name so much? Looks like they own almost 20% of the company.

[bizaro86]

One factor that could be depressing the price here is that the company was removed from the S&P TSX Composite Index last month, which means Canada's big index funds have sold.

https://us.spindices.com/documents/indexnews/announcements/20190308-887958/887958_2019-03-08compositereview-pr.pdf?force_download=true

That's interesting, thanks.

Has Burgundy Asset Management made any comments on why they like this name so much? Looks like they own almost 20% of the company.

You're welcome. I couldn't find anything on why Burgundy has such a big stake. Maybe they are just highly polished, successful, and scholarly investors like all CMG owners? 

Seriously though, I went through some of their writings https://www.burgundyasset.com/library/ and didn't find anything on CMG, although I thought they were interesting. It is a value shop.

[Foreign Tuffett]

Solid results from CMG this morning.

https://www.cmgl.ca/sites/default/files/sites/default/files/uploads/docs/CMG_Q4_19_Results_Press_Release.pdf

Also, here's an article from last month about how CMG is using AWS to move to the cloud.

https://aws.amazon.com/blogs/apn/solving-technological-limitations-of-complex-reservoir-simulation-with-cmg-and-aws/

[bizaro86]

Solid results from CMG this morning.

https://www.cmgl.ca/sites/default/files/sites/default/files/uploads/docs/CMG_Q4_19_Results_Press_Release.pdf

Also, here's an article from last month about how CMG is using AWS to move to the cloud.

https://aws.amazon.com/blogs/apn/solving-technological-limitations-of-complex-reservoir-simulation-with-cmg-and-aws/

I've been out of the simulation game for a few years now, but if that AWS article is accurate, CMG has had a significant breakthrough. Historically parallelization has worked for simulation, but only to a certain extent. When I ran simulations, my company had a group of virtual machines I could use for parallel processing of complex simulations. However, if you run with too many processors it hurts the accuracy of your results. I don't claim to understand this exactly, but it has to do with the math. By splitting the process of solving a very big matrix into too many processes, the rounding inherent in any computer solver affects the results. That limits the effectiveness of using many cores at the same time.

However, if they've come up with a more elegant/AI based method for dividing up the solver between multiple cores, then massively parallel computing becomes an option. With the much lower cost of renting processing from cloud providers, that could be a game changer for the cost/effectiveness of simulation.

I realize I'm doing a poor job explaining this, but I'm very excited about it. I haven't been able to find anyone in my network who has used this yet. Unfortunately companies aren't exactly spending money on upgrades right now, but I think this has the potential to be very material.

Their historical pricing has been based on the number of licenses, with each processor requiring one license. My work was almost never restricted by the number of computers available, but we had an internal process to prioritize  how many licenses one engineer could use depending on the priority of the project. This will increase internal demand for licenses among engineers, and if the cost of computing falls and productivity/value goes up, I could see companies significantly increasing the number of licenses purchased per simulation/reservoir engineer.

[Jurgis]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

[bizaro86]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

It might not be. But there end market has had a brutal cyclical downturn. Presuming that downturn doesn't last forever, I think they're well positioned to grow after it ends.

I would incidentally note that they will probably trail the commodity on the recovery, perhaps substantially. The market for software is proportional to the number of reservoir simulation engineers. Companies won't hire for that until they are sure they will have sustained increases in capex. And then they won't add licenses until it's a consistent shortage.

But I don't think their business is impaired.

[tenyearsout]

Also mentioned was that they had two more (short term) contracts with different companies for Coflow.  This is promising in that industry is at least trying out their new product.

[Foreign Tuffett]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

1) CMG has actually been a long term winner. IPO'd in 1997 at $3.50 per share. Once you adjust for 2-for-1 stock splits in 2008, 2011, and 2014 + dividends, the stock has performed very well.

2) Building on bizaro86's point: look at the train wreck formerly known as the four largest oilfield services companies:

SLB -- $104 to $37
NOV -- $81 to $22
HAL -- $65 to $23
Weatherford -- recently filed for bankruptcy

I think we will see the cycle turn at some point.

[DooDiligence]

I have looked at this. I see zero revenue growth in past couple years, zero income growth, and zero change in shares outstanding. It looks like all CF (and more) is paid out as dividends. So is the future going to be the same as past and there will be no growth + all CF paid out as divvies gonna be the only source of return? Why would the future be different from the past?

1) CMG has actually been a long term winner. IPO'd in 1997 at $3.50 per share. Once you adjust for 2-for-1 stock splits in 2008, 2011, and 2014 + dividends, the stock has performed very well.

2) Building on bizaro86's point: look at the train wreck formerly known as the four largest oilfield services companies:

SLB -- $104 to $37
NOV -- $81 to $22
HAL -- $65 to $23
Weatherford -- recently filed for bankruptcy

I think we will see the cycle turn at some point.

Those guys did big buybacks at the top of the cycle too.

Couldn't have planned it worse.

It was almost as if they didn't understand their markets at all.

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Can someone explain the difference between the modeling CMG does & that which is done by Core Labs?

Isn't CLB's production enhancement pretty similar with the inclusion of hardware & field service techs?

[Spekulatius]

Yep, these buybacks from SLB, HAL and others were quite nonsensical. I suspect is more benefiting management to push up stock prices  on the top of a cycle, so they can sell at even better prices than would’ve possible without buybacks, then to buy back stock when it actually makes sense forma perspective of adding intrinsic value to shares. I recall SLB having an great balance sheet with net cash in the 80‘s and 90‘s - then they spent the dough on low margin acquisitions ( pressure pumping and similar) and stock buybacks and now this company looks like a low quality operation with a matching balance sheet. I will guess the will take some dividend investors with it when they finally cut, because it does not look like they cannot afford to pay they $2/ share much longer.