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ValueNAV (64.43)
Submitted March 24, 2008

Intrinsic Value $13.72Current Price $2.05Exceptionally strong management, a bright future, and a flawless record at a “bargain basement price” Since being listed, Divestco (DVT) has been profitable every quarter, grown quickly, and increasingly… More

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Member Avatar ValueNAV (64.43) Submitted: 3/24/2008 1:18:42 AM : Outperform Start Price: $2.02 NASDAQ OTC:DVTIF Score: -282.42

Intrinsic Value $13.72
Current Price $2.05

Exceptionally strong management, a bright future, and a flawless record at a “bargain basement price” Since being listed, Divestco (DVT) has been profitable every quarter, grown quickly, and increasingly improved already great metrics.

___________Avg Peer__ DVT est.___DVT ($/shr)__DVT ($/shr)
___________Multiple____Multiple____TTM (2007)___FTM (2008)

(not including part. survey)

Even if NOTHING beneficial happens in 2008, the stock is sorely undervalued based on trailing numbers. The stock is currently priced as if no value was created in 2006 or 2007, despite both years being record results in many respects, and as if no value will be created in 2008.

Divestco is trading at discounts to its peers in every respective multiple. The current valuation multiples are (based on $2.05 of Mar 24 market open):

TEV/EBITDA_____3.20___1.54 (not including part. survey)
EBITDA Margin___51%___60%
Profit Margin_____15%___20%

Revenue Growth (wgt avg CAGR since 2004) is 120%
EPS Growth (wgt avg CAGR since 2004) is 39%

Divestco has a healthy balance sheet (<31% debt/cap, total debt/EBITDA <0.9) and good liquidity ratios. It has a long term credit facility, which is under-drawn, from Wells Fargo.

Above metrics have been extraordinarily consistent and strong since the company listed in end of 2003 after its reverse takeover of a tax loss vehicle.

Beware Faulty Comparisons
1. Directly comparing 2007 to 2006 is faulty. 2006 was the oil and gas bubble peak (anomalous numbers). If 2006 can be met or exceeded, as Divestco has done, it is a great feat. DVT’s performance should be viewed over the last few years at the least.

2. Net income appears to decrease from 2006 to 2007. When non-recurring 2006 income of $2.1MM is removed, NI does not decrease.

3. Participation surveys depreciate 40% first year, remaining next 9 years. Competitor and DVT actual sales, show data libraries generate 90% margin revenue for 30 years. Most seismic used is of the 1980-1990 vintages, speaking from experience. Participation surveys payout in <3 years, with recurring revenue at 26% of assets. Thus, initial 3 years of investment can deceptively seem to have low net income, while actually the project will have 27 more years of 90% margin sales that requires no capex.

Competitive Advantage and Its Results

1. EPS growth from 2004-2007
Dawson Geoph___2233%
Kelman___________ -64%

Divestco valued less than its peers; regardless of EPS growth.

2. DVT has a monopoly over 3-D in British Columbia (BC) where major explorers like Encana and EOG are finding world record discoveries. 3-D is the highest margin seismic, and BC is one of the highest growth areas, particularly given the Alberta royalty change. EOG’s BC shale gas discovery is may be one of the largest discoveries in history; which could have 2x the gas in place of the Barnett Shale in Texas. The play will have rapid expansion until 2010 with ultimate recovery of 9 Tcf. As with the Barnett, 3-D seismic is used intensively. These discoveries have spurred a land rush in BC; which requires large seismic purchases. With Divestco’s trajectory of intelligently selected participation seismic and accretive acquisitions, it is on track to quickly go beyond its BC dominance and overtake Seitel as Canada’s leader.

3. Divestco has the sector's only integrated product bundle; which acts an order winner, an exit barrier, and has cross-selling benefits. From firsthand experience when working for EnCana in the past, Divestco’s integrated product offering and strategic seismic is a compelling buy. This diversified product portfolio, with good margins and sales, helps it succeed in a difficult market while others are struggling.

Strong Tail Winds
1. A stock buyback for 5% of the stock was initiated on Jan 24, 2008. CFO indicated that they can begin buyback this week as the TSX blackout period will have ended. For the past buyback in 2007, DVT was able to make only a few purchases at $2.18/share before investor interest increased prices, thus making DVT’s internal projects more attractive than a buyback. Typically the stock has risen by 45% within a month after buybacks were announced in the past (i.e. Jan/05 AND Jan/07). However, this time the stock has risen only 20% from its all time low, rather than rising to $2.58 as expected.

2. Oil prices are breaking records. Natural gas prices have been dramatically increasing and experts are bullish for 2008. Gas is expected to reach $11/GJ this winter (a 60% increase over 2007). This would increase capital spending on exploration and in turn be highly accretive to Divestco. A sector turnaround appears to be occurring, which is indicated by the fact that large E&P’s like Encana are having difficulty getting services in 1Q08 due to the heightened activity. Many service companies are now operating “full out” at higher margins.

3. Insiders own 19% of the stock. Only a few institutions have discovered DVT; smart money (such as Fidelity, TD, Pyramis, Mawer Investment) own only 30% of the stock. The stock has an 81% float and 42MM shares. The funds bought at $4/share only a few months ago. Divestco is largely undiscovered with only 3 analysts that cover the stock; all from local banks in Calgary. Divestco has now begun a marketing campaign to increase institutional awareness. Institutions will soon scoop up the undervalued stock, and demand along with share price will aggressively increase.

4. The higher capex investments of its growth phase during the last few years will be moderated in 2008 in order to boost FCF. This will make DVT’s strong business model much more visible to the market. Coupled with the trend of record breaking growth in high margin library sales, the FCF will be exceptional in 2008 and beyond. Both factors will significantly increase share price.

Extraordinary Results Ignored by Market
1. In Bank of Montreal’s O&G services coverage universe, their metrics indicate that no other company is as mistakenly undervalued as Divestco.

2. Peer stock prices have went up >45% relative to the TSX Energy index while DVT has decreased 41% since last march; despite a history of the peers having relatively worse ROE, ROA, margins, and growth. DVT’s price is roughly the price it was 3yrs ago, which ignores the last 3yrs of profitable growth and exceptional financial achievements.

3. Over the last 5Q’s of library sales have been breaking records and have been double analysts’ expectations. Even 2007 is a full 66% higher than 2006’s record numbers. As most know, library sales are the key to any seismic business model. This consistent and strong growth demonstrates that management can pick extremely profitable and high sale volume areas to conduct participation surveys; which later generate high margin library sales.

4. All segments posted record revenue and EBITDA growth with CAGRs increasing. Only segment to show slower growth is the sub-segment of participation data; despite the overall “data segment” increasing which attests to the strength of the library sales. The lower amount of 2007 participation surveys is good as it shows management’s prudent judgment regarding discretionary spending in 2007, which was a slower part of the business cycle.

5. Segments are posting record margins: Q4 Library sales 91%, software 49%, services doubled to 32%. With library sales increasingly a dominant portion of data sales, corporate profit margins and FCF will be increasing significantly.

6. Excellent acquisition record. Purchased industry icons at deep discounts resulting in accretive metrics. Bluegrouse increased DVT’s data assets by 50% but cost 1/3rd the average metric price. DVT has successfully integrated acquisitions with no turnover of any consequence, and significantly improved the profitabilities within a few quarters post-purchase.

7. Many underestimate library sales growth and capex deceleration over the next 3 years; which will result in significant FCF. A large UPWARD price correction is likely. Management said FCF is a 2008 focus; they have consistently honoured their word.

8. Divestco is generating $1/shr Cash EBITDA (after removing participation rev and capex). This is ½ of DVT’s existing price.

9. DVT historically exceeded analyst estimates. Studies show correlation to price appreciation. DVT missed Q4 estimates by 6%, but stock still grossly undervalued.

Jonathan Blake, P.Eng, Cornell MBA (Dist.)
Candidate for the Level II Exam in the CFA Program

Experience: For over a decade, I have successfully worked in the energy sector developing oil and gas fields and valuing assets. I am intimately familiar with seismic, geology, and operations. In a previous role, I had used DVT's products.


Member Avatar macroscopic (< 20) Submitted: 10/26/2007 2:53:55 AM : Outperform Start Price: $2.81 NASDAQ OTC:DVTIF Score: -261.43

overlooked, underrated, extreme value. it has hit a rough spot in revenue growth, but let's face it: exploration is Canada's future, and this company has a good grip on it.


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Score Leader


NeedH2O (70.16) Score: +263.67

The Score Leader is the player with the highest score across all their picks in DVTIF.

Member Name Member
Call Time
Score Commentary
NeedH2O 70.16 9/20/2007 Underperform NS $3.05 -69.11% +194.56% +263.67 0 Comment
macroscopic < 20 10/27/2007 Outperform 3Y $2.81 -66.48% +194.95% -261.43 1 Comment
malkaven < 20 5/7/2008 Outperform NS $2.37 -60.24% +214.78% -275.02 0 Comment
mondosneako < 20 5/16/2008 Outperform 5Y $2.62 -64.07% +214.91% -278.98 0 Comment
ValueNAV 64.43 3/24/2008 Outperform 3Y $2.02 -53.37% +229.06% -282.42 2 Comments
SNEAKO < 20 2/9/2008 Outperform 5Y $2.00 -52.81% +232.63% -285.44 0 Comment
eimersd 28.42 4/12/2008 Outperform 5Y $2.41 -60.98% +225.91% -286.88 0 Comment
sbyers2 92.19 4/26/2008 Outperform 1Y $2.85 -66.95% +220.51% -287.46 0 Comment
Dreinn < 20 4/26/2008 Outperform 3M $2.85 -66.95% +220.51% -287.46 0 Comment
htbihtbi23 57.29 8/16/2010 Outperform 5Y $0.87 +8.60% +297.40% -288.80 0 Comment

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