Computer Modeling Group is a leading software technology company focused on advanced software for modeling process reservoirs. It provides consulting, support, training and contract research services for the oil and gas industry.

From humble beginnings as a small Calgary-based research company in 1978, CMG has grown to become the world’s leading provider of reservoir modeling software for advanced processes. The company is known for its expertise in heavy fuel oil, reservoir flow and advanced process modeling.

The company has extensive R&D facilities. The majority of Computer Modeling’s revenue consists of software license revenue (annuity / maintenance and perpetual licenses) (accounting for ~ 90%), followed by professional revenue. Canada (22% of sales), the US (26%), South America (12%) and the Eastern Hemisphere (~ 40%) are the main markets.

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Investment data

Sales growth and market exposure

Computer Modeling is a leading provider of advanced process reservoir modeling software with a diverse customer base spanning more than 600 international oil companies and technology centers in 60 countries. CMG’s revenue consists of the sale of software licenses, which make up the majority of the company’s revenue (~ 90%), as well as fees for professional services.

The income from software licenses consists of annuity / maintenance license fees that are charged for the use of the software products. These are usually a term of one year or less, while a customer buys the software for perpetual software license sales. The annuity / maintenance license fees have a high renewal rate and provide a reliable source of income.

Computer modeling has a strong customer focus and has understood changing customer needs and priorities over the years. The company is known for providing technical solutions that enable its customers to build models accurately and reliably. CMG has more than 38 years of experience developing software for reservoir simulation and has in-depth expertise in the field of reservoir flow and advanced process modeling.

CMG reinvests 20% of its annual sales in research and development, which drives advanced reservoir simulation technology. It is leading the way in simulating new recovery methods. In collaboration with Shell and Petroleo Brasileiro, the company has developed CoFlow, the latest generation of simulation software for reservoirs and production systems.

As a leading provider of advanced oil recovery simulations, Computer Modeling provides customers with solutions that maximize production from their oil and gas storage facilities. It is recognized by oil and gas companies worldwide as a leading developer of reservoir modeling software. The user-friendly products, plug-and-play modules and workflows also contribute to customer convenience.

The decline in global energy demand and the uncertainty surrounding COVID-19 have negatively impacted demand for CMG products. Total revenue declined 12%, with annuity / maintenance license revenue declining 14% and perpetual revenue declining 26% over the past nine months. Because Computer Modeling is a technology-based company, it has quickly adapted customer training to online platforms. The company’s sales have grown by more than 5% CAGR over the past decade.

Dividends

Computer modeling has an attractive dividend yield of 3.4% and a payout ratio of 68%. The dividend has increased by more than 9% + CAGR over the past decade. CMG’s board of directors cut its quarterly dividend 50% from $ 0.10 per share to $ 0.05 per share in June 2020 to maintain liquidity and balance sheet strength. As of December 31, 2020, CMG had $ 39 million in cash, no loans, and access to ~ $ 1 million on a line of credit. The company has taken preventive measures to minimize the negative impact of the COVID-19 pandemic by reducing employee salaries.

The increasing digitalization trend in the oil, gas and energy sectors acts as a growth driver for the demand for E&P applications. The global E&P software market is expected to grow tremendously in the 2019-2025 period. CMG is a leading global E&P software company. CMG’s annuity / maintenance license fees ensure regular cash flow, and most customers who purchase perpetual software licenses then purchase CMG’s maintenance package for ongoing product support. Customers also enter into multi-year contracts with the company.

The company is expanding its global reach. It has a solid track record of running more than 500 consulting projects for over 200 clients in all countries around the world. A blue-chip customer base of international oil and gas companies and a broad global presence are the strong competitive advantages.

Computer modeling is well positioned to add long-term value to shareholders through continued investment in research and development as it provides solutions to complex customer problems related to new advanced recovery processes.

competition

The reservoir simulation software industry currently consists of two main suppliers (including CMG) and several small suppliers. Computer Modeling competes with Constellation Software, a leading global provider of software and services that appeals to both public and private customers.

Another leading competitor is Pason Systems Corp. There is a significant barrier to entry into the reservoir simulation software industry. It will be difficult for newbies to replicate CMG’s quality relationships with prospects, proven technology, and extensive product range.

Bottom line

The persistence of the COVID19 pandemic could adversely affect CMG’s business.

However, advances in the development and commercialization of the COVID-19 vaccine, as well as favorable foundations for the demand for CMG’s reservoir simulation software, should provide a tailwind for the company.

Reservoir software has a chance to become increasingly popular as companies today strive to optimize their production. The company saw an increase in support requests, training activities, and commercial customers running models related to enhanced carbon recovery, carbon sequestration, and geothermal projects.

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