Blessed by the Potato

Poseidon (PSN) got absolutely creamed this week after announcing its Q3 results. I was lucky enough to have taken my profits in PSN and managed to avoid the 65% drop, and let me stress that it was luck: I had no idea such a hit was coming. With my last sale in September, it was a near thing, too.

For those who don’t recall, their business is in providing fluid handling tanks for oil & gas fraccing operations. They make made ridiculous margins for what is ultimately a fairly low-tech business with low barriers to entry, and they were growing like stink. But, they were the first, and their solution offers more than enough cost savings to also make it attractive to their customers. For a long time running, many have expected that the margins would get trimmed as competition entered and that growth would stall as the market matured. I personally had thought that by the time that moment arrived their volume of business would make up for it, allowing them to maintain that juicy dividend with a stable number of tanks operating on a reduced margin.

Well, the margins contracted faster than many thought, and the growth has stopped. The company plays this up as a good thing: they’re flexible enough to stop producing more tanks very quickly, but the fact that they had to is what tanked the stock. If you go back to my old post, the most pessimistic scenario I ran was $200k/tank in EBITDA. They’re almost there already, with $26.5M of EBITDA in the quarter on 500 tanks. The margin squeeze is significant.

But that’s a company-specific issue, and doesn’t really worry me that much. I could puzzle over it and try to figure out how far down it would have to drop before becoming a good buy again, but that’s not going to keep me up at night. What worries me was this little blurb in the release:

Poseidon’s tank utilization and revenue in the quarter were further affected as we renegotiated terms on several long‐term agreements with specific, strategic customers due to changes in their project schedules and capital budgets. Meanwhile, several other long‐term agreements lapsed without renewal or were suspended as certain customers’ activities were reduced due to macro considerations or capital budget constraints. [emphasis mine]

PSN wasn’t the only company this quarter that found long-term contracts were not as secure as they thought. Fortress paper (FTP) has also been sold off on poor results, including a renegotiation of terms:

Dissolving pulp markets softened during the third quarter due to weak textile demand and increased supply of dissolving pulp from new entrants. Among other factors, the weakening viscose staple fibre market in China has driven down dissolving pulp prices to below US$1,000 as at the end of September 2012. Given existing market conditions and in order to maintain good customer relations, a significant portion of our sales orders for the fourth quarter is expected to be below the floor prices set forth in our supply agreements with our three major Chinese purchasers. These supply agreements are currently under review with the counterparties to reassess each party’s obligations going forward.

I had read somewhere (likely a secondary source) that this was because the partners couldn’t continue operations if they had to pay the contracted price. Is the economy even weaker than we had been led to believe? I only follow so many companies, so to see this happen twice in a quarter really threw me for a loop. Is it a more common occurrence than I’m aware of?