January 26th, 2012 
Category: 
The oilfield services industry provides investors with exposure to the oil and gas commodity sector minus the inherent risks associated with exploration and development drilling. These companies mainly offer contract drilling, directional services, wireline technologies, equipment rentals and frac fluids management. Besides the current strength in oil prices, why would anyone want to invest in this sector? Let’s look at a few reasons.
In the Western Canadian sedimentary basin drilling activity jumps as the winter season settles in. Given the current strength in oil prices, activity will be largely focused on light oil and liquids rich resource plays. Furthermore, 2011 saw a land rush as producers and land brokers paid $4.13 billion in Western Canada to secure land rights, the 3rd highest in history. This is land that will be drilled sooner or later and as long as oil prices are strong the momentum is going to carry into 2012 and beyond.
These however are not the only determining factors responsible for an expansion in drilling which brings us to a major variable. The shale revolution brought by the advent of horizontal drilling and multi-stage fracturing have not only made it possible to tap new hydrocarbon zones, they have created a need to keep the momentum going due to the high decline rates of unconventional wells. Tight oil plays can see up to 70% in production decline in their first year pushing producers to run the treadmill faster in order to make up for the decline AND grow their production on a yearly basis. This is a gold mine for all the companies involved in drilling services and well completion thanks to the growing demand for horizontal and directional drilling. The wells are reaching deeper, drilled with longer laterals and the fracturing jobs are increasing in size!
Growth in HZ drilling in the US & CA - CET presentation
The following table presents a host of Canadian listed drilling and well completion companies operating in Canada and across the world. Before you start looking at who pays a dividend and who doesn’t keep in mind that if you’re going domestic with your selection, you have to pick the companies that have the most exposure to key and emerging light oil and liquids resource plays such as the Cardium, the Viking and the Bakken. In my opinion, natural gas prices won’t see a sustained recovery before North American export terminals become operational.
|
Company Name |
Ticker & Price |
Dividend |
2012E Yield |
|
Akita Drilling |
AKT-A.TO 9.99 [+0.09] |
$0.28 |
2.8% |
|
Calmena Energy Services |
CEZ.TO 0.27 [0.00] |
||
|
Calfrac Well Services |
CFW.TO 28.16 [+0.95] |
$0.15 |
0.5% |
|
Canadian Energy Services & Technology |
CEU.TO 12.25 [-0.35]
|
$0.54 |
4.9% |
|
CanElson Drilling |
CDI.TO 4.89 [+0.32] |
||
|
Canyon Services Group |
FRC.TO 13.26 [+0.87] |
$0.25 |
2.0% |
|
Cathedral Energy Services |
CET.TO 7.26 [-0.03] |
$0.24 |
3.3% |
|
Ensign Energy Services |
ESI.TO 16.27 [-0.07] |
$0.38 |
2.4% |
|
Estrella International Energy Services |
EEN.V 0.13 [+0.005] |
||
|
Flint Energy Services |
FES.TO 24.83 [+0.04] |
||
|
Gasfrac Energy Services |
GFS.TO 7.49 [+0.39] |
||
|
Logan International |
LII.TO 4.50 [+0.10] |
||
|
Pason Systems |
PSI.TO 14.40 [+0.36] |
$0.36 |
2.8% |
|
PHX Energy Services |
PHX.TO 10.05 [-0.01] |
$0.48 |
4.8% |
|
Precision Drilling |
PD.TO 12.09 [+0.17] |
||
|
Pure Energy Services |
PSV.TO 9.00 [+0.16] |
$0.36 |
4.5% |
|
Savanna Energy Services |
SVY.TO 7.42 [+0.17] |
||
|
Total Energy Services |
TOT.TO 18.46 [+0.40] |
$0.16 |
1.0% |
|
Trican Well Services |
TCW.TO 17.10 [+0.13] |
$0.10 |
0.5% |
|
Trinidad Drilling |
TDG.TO 7.61 [+0.11] |
$0.20 |
3.1% |
|
Tuscany International Drilling |
TID.TO 0.87 [-0.01] |
||
|
Western Energy Services |
WRG.TO 9.05 [+0.03] |
||
|
Xtreme Coil Drilling |
XDC.TO 3.07 [-0.08] |
Furthermore, while all of the companies listed above are Canadian based, many amongst them will provide you with a varying degree of exposure to international markets. Latin America’s energy services sector for example is in growth mode and companies such as Calmena Energy Services, Estrella International Energy Services and Tuscany International Drilling run their operations largely focused on South America where there’s no “spring breakup”, no natural gas glut and where oil fetches prices closer to Brent rather than WTI. But the upside to emerging markets is also balanced by political and economic risks beyond a company’s control.
When you invest in the oilfield services sector you remove a lot of risk but not all the risk as a sharp decline in commodity prices for an extended period of time will impact the capital spending of E&P companies. Moreover, it should not come as surprising for energy services stocks to mirror market volatility when oil and gas commodity prices wildly fluctuate. Finally, every one of these companies reporting in Canadian dollars is exposed to foreign currency risk if they have operations abroad. If the Canadian dollar rises substantially for an extended period of time, revenue and margins will be negatively impacted as these companies are paid for their services and products in a foreign currency.
Who would be your top pick from the table above and why?
Related posts:
My DIY stock portfolio is overweight in Canadian oil producers for a reason. I believe Oil consumption is on the path of growth for the next decade and I intend to take every advantage possible of it:
Wow, detailed post with lots of investing options here Mich.
I’m going to have to bookmark this post and do some research on these companies, mainly dividend histories and cash flows
I thought PD used to pay a dividend?
Will include in my Weekend Reading roundup tonight.
Mark
Thanks Mark!
PD paid their last dividend in 2009 before they converted from a trust structure to a corp.
Cheers!
Looks like they paid out their last Div on Jan 28th 2009.
That is correct Doug!
Good stuff, Mich. Like MOA, I’m going to have to bookmark and do a little reading. I like services companies. With good management, they tend to get paid first.
Thanks 101 and good luck with DD
[...] Mich from Beating The Index wrote about investing in Canadian well completion and drilling companies. [...]
Very detailed post indeed. Thanks for sharing it. It will be a valuable resource.
you’re welcome Miss T!
Oil is still Greek to me, but love seeing your detailed breakdowns and your passion in full force! How’s 2012 going for you?
Can’t complain so far, need some breathing space for Q1, if the market give us some stability it will be great for the portfolio!
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Mitch,
It’s about time you jumped on this. It’s unbelievable how cheap this sector is and the potential for upside in most of these stories. This should become a regular segment on your blog. I was golfing in the summer with a veteran oilman who has done extremely well over the years and he mentioned that if he could go back and do it all over again, he’d have been way more involved in the services sector because of it’s profitability…anyways, I digress.
I was at a CFA luncheon just before Christmas and they had 3 analysts from the energy sector. They presented an interesting analysis that showed the cheapest entry points into the services sector over the last 15 years. There were 4 of them. They were 1998, 2002, 2008 and today. Usually these trade at 5.5x EV/EBITDA, today they’re almost half that. I put together a comps table using analyst estimates to show what the metrics look like. You can access it here: http://wwbfd.org/image/beatingtheindex_3.pdf
My only suggestion is you’re all over the place with the above post, you need to break those down because they’re huge differences between drillers vs. rentals companies vs. directional drilling vs. downhole tools and instrumentation vs. transportation, etc…. Btw, you probably want to include IROC Energy Services (ISC) and Poseidon Concepts (PSN).
Anyways, the 2 best picks, bar none, right now are CanElson (CDI-T) and Trican (TCW-T). Look at the valuation table. I could go on at great length about my reasoning, but for those of you who don’t know, CanElson has also introduced an innovative and possible game changing technology to energy sector. Watch this clip. (may have to cut and paste)
http://www.globaltvcalgary.com/video/minding+your+business++jan+27/video.html?v=2190728481#minding+your+business
Bud,
Thanks for the great feedback!
Do you think the market is taking into account the collapse of NG prices in valuing these companies? It seems to me, NG prices will remain an overhang for many of these producers as sooner or later, the lower NG goes, the less drilling will go on which will have varying effect on the companies above.
Cheers!
Mich,
Imo, the market is definitely accounting the NG prices….and then some. There’s a material disconnect between the services shares prices and actual operational and financial performance. NG will probably bottom out at some point this year…hopefully…which bodes well for the industry. However, if it doesn’t, it’s of little consequence. Many of the mid-size drillers have moved to have full exposure to the oil side of the equation and do 10% or less of their operations on the NG side. If they’re drilling for NG, it’s liquids rich as that market is still highly economic for producers. The drillers are also chasing more stable areas (ie. SE Saskatchewan, North Dakota, Texas, etc…) where break up in the spring is minimal, if anything.
In my view, there’s a large misapprehension between the capital markets and the visibility and profitability of the oilfield services for this year. Which makes a great opportunity for those who want it.
Agree with you bud, this year offers a great entry point into these quality drillers. I think the market will remain wary until it is convinced a bottom has been set in for NG but then we have to account for the casualties the new bottom will inflict on those NG weighted companies…
They key here is to choose wisely by identifying who has the lowest exposure to NG plays and going with it.
Hey Mich,
Sorry to keep coming back to this but I saw this today on BNN which is relevant and substantiates some of the information above and brings some more clarity to the whole nat-gas dynamic for the drillers/services. Clip is here: http://watch.bnn.ca/#clip616413
Thanks for sharing the clip Bud! I am pretty sure other companies will surprise as well….
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