By Thomas Kerr, CFA

NASDAQ:OEG

Overview

Orbital Energy Group, Inc. (NASDAQ:OEG) is a diversified infrastructure services company serving a variety of customers in the electric power, telecommunications, and renewable markets. The company's operations are classified into three diverse segments: Electric Power, Telecommunications, and Renewables. Recent acquisitions have transformed the company into a full-service infrastructure provider which allows the company to transition to higher growth, higher margin end markets with strong secular tailwinds. The company is now able to offer a comprehensive suite of infrastructure related services includes specialty contracting, maintenance, engineering and procurement.

2022 is expected to be a strong growth year for the company with revenues increasing almost five-fold and EBITDA improving by well over $60 million from the prior year. Although, the company has a high debt load after recent acquisitions, it appears to be manageable based on a solid base of recurring revenues and multi-year contracts on certain projects as well as an improving cash flow profile.

Electric Power Segment

The Electric Power segment performs engineering, design, construction, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure. This includes substation facilities as well as emergency restoration services. Subsidiary companies include Front Line Power Construction, based in Houston, Orbital Power based in Dallas, and Eclipse Foundation Group based in Gonzales, Louisiana.

Orbital Power, one of the company's legacy businesses from 2020, designs, installs and repairs electric transmission and distribution infrastructure and emergency restoration services throughout North America. This subsidiary provides turnkey services including project management support, material procurement and management, quality assurance, and quality control. In addition, the company provides project closeout services to satisfy construction and maintenance needs for on time completions as well as safe and reliable performance.

Front Line Power was acquired in November 2021 and is a Houston-based full-service electrical infrastructure service company that provides construction, maintenance, and emergency response services for customers since 2010. Front Line specializes in installing and maintaining electrical distribution systems and substation infrastructure throughout Texas. The Company serves investor-owned utilities, electric cooperatives, telecommunications, and industry customers and has more than 200 employees.

Eclipse Foundation Group, which began operations in January 2021, is a drilled shaft foundation construction company that specializes in providing services to the electric transmission and substation, industrial, telecommunication and disaster restoration market sectors. The company has distinct expertise performing services in water, marsh and rock terrains.

Telecommunications Segment

This segment was created with the acquisition of Gibson Technical Services (GTS) in April 2021 and is a full-service provider of broadband and wireless infrastructure services. This includes engineering, design, construction, and maintenance services to broadband and wireless telecom customers such as Charter Communications and Windstream Holdings. Two other acquisitions were made in 2021 to round out the company's service offerings in this space. These includes IMMCO in July 2021, which expands GTS's engineering, design and drafting capabilities and customer base, and Full Moon Telecom, which offers an extensive array of wireless service capabilities, including RAN integration, small cell testing and distributed antenna systems.

Recent project awards and completions include 8,600 miles of full-service construction across three Southeastern states, construction of a 1,910-mile rural broadband network in Virginia, 700 miles of broadband construction in Mississippi for TEC, and completion of a 5G wireless deployment at Truist Park in Atlanta, home to the Atlanta Braves.

Renewables Segment

This segment is comprised of Orbital Solar Services (OSS) which provides engineering, procurement and construction services that support the development of renewable energy generation with a focus on utility-scale solar construction. The company had a difficult 2020 and 2021 due to Covid-19 driven project delays and reported operating losses. Recent highlights include the award of two 100mw projects through European solar developer LightSource BP and the creation of a joint venture with Jingoli Power. The company is evaluating more than $1 billion in future project values around the world. The U.S. Energy Information Agency believes that solar could account for approximately 20% of U.S. electricity generation by 2050 compared to low-single digit rates today.

Market Opportunity

Capital spending in Orbital's end markets are showing strong growth trends that may continue for quite some time. In terms of the electric power market, key drivers are aging infrastructure, electric grid security and redundancy, reconfiguration of fossil fuel assets to clean energy assets, and the transition to an intelligent grid. In the telecom markets, growth is driven by the need for ultra high-speed internet, rural access to broadband, the transition to 5G wireless, cybersecurity, big data management, and artificial intelligence. We believe the company can participate in these trends with higher margin, non-commoditized services, a stable based of recurring revenues, and a long-term runway of opportunities. The market opportunity for Orbital by size is expected to be $140 billion for electric power, $275 billion for telecommunications, and $755 billion for renewable energy (with solar comprising roughly $250 billion).

The company has a focused plan to drive long-term growth by applying multiple strategies. This includes a concerted effort to focus on these high growth markets of electric power, telecommunications, and renewable energy. In addition, Orbital plans on shifting to higher margin service revenues which also creates a stream of recurring revenues. The company can also utilize a company-wide suite of services to assist in projects across all major segments. Lastly, the company plans to pursue accretive tuck-in acquisitions that have a successful operating history and a long-standing customer base.

Orbital currently has a diverse customer base including established and prominent companies such as Centerpoint Energy, OGE Energy Company, American Electric Power, Charter Communications, Windstream Holdings, Cox Communications, Lightsource CP, and Jingoli Energy.

Sale of Orbital Gas

In December 2021, the company announced it was planning on divesting its Orbital Gas businesses. These subsidiaries provided proprietary gas measurement and sampling technologies as well as the integration of process control and measuring/sampling systems. These legacy businesses did not fit with the company's future strategy to build an infrastructure services company serving the electric power, telecommunications, and renewable markets.

In 2021, assets in this segment were written down to an expected sale price value of approximately $6.7 million. In May 2022, these assets were sold to U.K. based nZero which operated similar businesses for proceeds of 3,000,000 British Pounds. This sale is expected to improve overall profitability for the company going forward and improve the company's liquidity position.

Financial Review

Fiscal year 2021 was a year of acquisitions and integrations and was not reflective of the company's ongoing revenue generation and free cash flow capabilities. Total revenue was $82.9 million compared to $21.5 million in 2020. Electric Power segment revenue increased to $43.6 million compared to $8.5 million in 2020 which was primarily due to organic growth in Orbital Power and the acquisition of Front Line Power in November 2021. Telecommunications revenue for 2021 was $27.8 million reflecting the acquisition of GTS and two smaller tuck-in purchases, Full Moon and IMMCO. Renewables revenue was $11.6 million in 2021 compared to $13.0 million in the prior year. Gross profit in 2021 was $4.3 million compared to $1.9 million in the prior year period and adjusted EBITDA loss from continuing operations was $27.0 million.

In the 1st quarter of 2022, the company showed good growth and important milestones with revenues increasing to $70.3 million and adjusted EBITDA turning positive at $3.8 million. Backlog of projects increased 74% to $513.5 million.

CEO Jim O'Neil stated "Our first quarter results reflect the continued progress of building out our infrastructure services platform, and we accomplished a significant milestone in achieving positive adjusted EBITDA for the first time since I joined the company. Our backlog and end market drivers remain strong, as well as customer demand for our services and we believe we are well positioned to achieve our 2022 financial guidance provided on our year end call, which we are reiterating today."

Acquisitions made in the past several years have been financed by both equity and debt issuance. In 2021, the company raised $133.2 million in net debt and $78.1 million in common stock issuance. The company issued 23.6 million shares of stock during the year for acquisitions, debt repayment, and working capital needs. In May 2022, Orbital issued 16.1 million shares of common stock to an institutional investor at the effective price $1.30 per share as well as 16.1 million in warrants to purchase common stock at essentially the same price. Gross proceeds were $21.0 million.

As of 3/31/22, total outstanding debt was $222 million, the majority of which was used to finance the Front Line acquisition. $105 million of the total is syndicated debt with a maturity in November 2026 and carries an interest rate of 13.5% (as of 3/31/22). There is also seller financing associated with the Front Line acquisition totaling $86.7 million which carries an interest rate of 6.0% with the final payment due in May 2023.

In May 2022, the company provided 2022 guidance and expects full year consolidated revenue to be in the range of $375 million to $425 million and adjusted EBITDA to be in the range of $38 million to $43 million. At the mid-point of adjusted EBITDA guidance, this reflects an improvement of $67.5 million for this year compared to 2021. Gross margin goals for the year vary per segment and are over 20% for the Electric Power segment, mid-teens for Telecommunications, and mid-single digit for the Renewable segment. For the Renewable segment, the company's reports 100% of the revenues but has a profit-sharing arrangement with Jingoli Energy. The revenue and EBITDA improvement is being driven by strong double-digit organic growth in the company's electric power and telecommunications segments primarily due to projects under contract and the very strong demand for the company's services in those segments.

Management

Orbital is led by CEO Jim O'Neil who joined the company in July 2019 as Vice Chairman and was subsequently appointed CEO in October 2019. He is a veteran executive of the power industry and has been instrumental in formulating in overseeing execution on Orbital Energy transformation plan that reshapes the company into a diversified energy services platform.

Mr. O'Neil was previously chief operating officer, chief executive officer and president of Quanta Services from 2008 to 2016, an infrastructure solutions provider for the electric power, oil and natural gas, telecommunications and renewable industries. During this period, he grew the company into a Fortune 500 enterprise with over $7.0 billion in annual revenue at its peak through a combination of both organic growth and multiple strategic acquisitions. Mr. O'Neil holds a B.S. in Civil Engineering from Tulane University.

Nick Grindstaff is the chief financial officer and has more than 20 years of experience in the infrastructure services industry. Most recently, he served as Vice President – Finance and Treasurer at Quanta Services. Mr. Grindstaff holds a Master of Science degree in Accounting and a Bachelor of Science in Finance from the University of Houston – Clear Lake.

Summary

We believe Orbital Energy Group is well positioned for rapid growth in terms of revenues and operating cash flow. The company is at the forefront of emerging macro trends including the replacement of the aging electric grid, government subsidized fiber deployment in rural areas, and clean energy initiatives supporting the shift to renewable power sources.

The company has been able to create a significant amount of high margin recurring revenues due to the master service agreements that have been signed with many of their Electric Power customers. In addition, in the Telecommunications segment, the company has recently signed multi-year contracts with many of their customers. Lastly, based on recent acquisitions, the Orbital has now greatly expanded its engineering, procurement and construction capabilities and has one of the broadest offerings in the business.

We do not believe Orbital's current market capitalization of $57 million reflects the value that will accrue to equity shareholders when the company shows sustained cash flow growth or a reduction in debt levels over time. Further, a material decrease in the company's weighted average cost of capital through potential beneficial recapitalization efforts will also benefit equity shareholders both directly and indirectly.

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