C & J Energy Services Powering Through Difficult Times With Quality
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C&J Energy Services (NYSE: CJES) is making a name for itself in the Eagle Ford, Permian and now the Bakken Shale areas as a fracking service provider with top quality service. Active rig counts are so low that industry leaders Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL) are watching profit margins erode as they scramble to undercut each other. C&J Energy Services is sticking to its strategy of providing higher efficiency for its customers without lowering prices significantly.
So far the strategy is working. For Q3 2012 Schlumberger and Haliburton’s TTM operating margins were 16.30% and 17.42% respectively. C&J’s TTM operating margin for the same quarter was an impressive 29.84%, although it has receded somewhat this year from 34.57% in Q4 2011. Over the past two years revenues have steadily risen a whopping 266.8%. The company boasts a return on invested capital of 38.34%, the highest in the North American equipment and services industry.
Despite its ability to remain profitable in a difficult market, C&J Energy Services appears incredibly undervalued with a PE ratio of 5.34. Among Equipment and Service providers, only the struggling Forbes Energy Services’ PE Ratio of 4.02 is lower.
Expanding While Rig Counts are Declining
C&J Energy Services was somewhat geographically limited to the Eagle Ford and Permian basin until its acquisition of Casedhole Solutions. With Casedhole’s existing customers in the Bakken Shale the company is expanding rapidly, but borrowing relatively heavily to do so. If those plays dry up before the company expands significantly there could be liquidity issues. Overall the company’s balance sheet is strong with a current ratio of 2.2 and a debt to equity ratio of 0.36.
My main concern for C&J Energy Services is not a problem specific to the company, but the industry as a whole. The number of natural gas rigs in operation is at a 13 year low. Many rigs have been moved to oil rich plays, but not enough to make up the difference. A combination of depressed prices and highly effective extraction methods are hurting the entire industry.
Opportunity for Rapid Expansion
The Casedhole acquisition has allowed C&J Energy Services to expand north into the Bakken Shale area. The company said goodbye to Chief Operating Officer Brett Barrier during the third quarter and brought in the former President of Casedhole, Don Gawick to take his place. Gawick has 32 years of experience in the oilfield services industry, much of it with international player Schlumberger. Hopefully his geographically diverse experience will help the company expand into lucrative international markets.
There is a hunger for fracking know-how and C&J Energy Services provides a very attractive complete package of services and equipment. So far, the company hasn’t released any specific details about their planned international expansion. During the last two earnings calls there has been mention of unnamed Middle East producers expressing interest in C&J Energy Services. A large contract overseas could be the catalyst the market is looking for to bring this company’s price in line with the rest of its industry.
International expansion should be very profitable for C&J Energy Services since it can provide most of its own equipment. The company has a wholly owned subsidiary, Total Equipment, that is now capable of providing the company with wireline auxiliary units and advanced fluid ends giving the company greater flexibility in the field at lower costs.
Running With The Big Dogs
C&J Energy Services is a relatively small company eager to expand. The company’s debt level should be manageable if domestic gas prices remain level or rise somewhat. An international expansion is exactly what the company needs, but with a market cap of only $1.07 billion, I’m nervous that they might bite off more than they can chew. Baker Hughes and Schlumberger don’t provide growth prospects as exciting as C&J, but their larger balance sheets make them considerably safer alternatives.
Just keep it Steady
A high growth rate and low valuation make C&J Energy Services one of the most attractive fracking service providers in the industry. The trouble is, in the US, the industry has outsmarted itself and competition is now fierce. The company’s ability to provide a highly efficient service from start to finish gives it a unique advantage over its peers. Its customers don’t seem to mind paying C&J a premium over its competitors. In house manufacturing and storage of equipment will allow it to offer high returns while continuing to expand, hopefully overseas. My biggest fear for C&J is that the company might attempt to expand faster than it can afford to.
crenauer has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.