Unconventional Drilling Energizes Investment Opportunities
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Oil field services companies have been taking it on the chin for the past several years as demand for oil and gas has dropped and their margins have been getting squeezed. While the drilling methods have recently evolved to allow for more cost-effective extraction using horizontal drilling and fracking, the economics have not been favorable. Until now. I believe that several oil field services companies are poised to take advantage of the slow growth that we are now seeing in the US economy as well as the increasing global demand from China, India, and other developing nations.
One of the companies that has been impacted by this trend is RPC, Inc. (NYSE: RES). According to their most recent quarterly report filed May 2, the company offers some key points regarding the rise of unconventional drilling activity that has taken place since the most recent "cyclical peak" in drilling rig counts that occurred in Q3 2008. Since June 2009 the rig count increased by more than 130% thru Q4 2011. The price of oil fell from more than $140/barrel to approx $100/barrel. At the same time, natural gas prices declined by more than 80% (from approx $13 Mcf to about $2). Unconventional drilling activity, which requires more of RPC's services than conventional drilling activity, accounted for 71 percent of total U.S. domestic drilling at the end of the first quarter of 2012.
Oil-related drilling activity during the first quarter of 2012 increased to 64 percent of total domestic drilling, compared to 47 percent in the first quarter of 2011. This is an encouraging trend for RPC as they maintained a presence in unconventional basins where oil-directed drilling is the predominant hydrocarbon production activity. Their near-term plans include an increase in relative exposure in these areas.
Despite the downturn in demand for gas, revenues for the three months ended March 31, 2012 increased 31.6 percent compared to the three months ended March 31, 2011. International revenues increased 72.3 percent to $17.2 million for the three months ended March 31, 2012 compared to the same period in the prior year. As long as they can continue to remain profitable in the competitive environment that exists today the stock looks like a good value at the current price, and they pay out a 3% dividend to boot.
Newpark Resources (NYSE: NR) is another oil and gas services company specializing in unconventional drilling methods that has been negatively impacted by the drop in demand. In their most recent quarterly report, also filed May 2, they make the observation that although overall rig count in the US increased 16% from 2011 to 2012 there has been a significant regional shift in activity during this period. The shift from natural gas drilling to oil and liquid-rich drilling has resulted in a significant decline in several key natural gas basins. This shift has led to a corresponding increase in operational expenses as the company redeploys personnel and assets to meet the changing activity levels. In Newpark's case the company realized a 29% increase in revenues over the previous reporting period, however, earnings reported were only 16 cents per share while analysts expected the company to earn 21 cents per share. The market was not sympathetic and punished the share price, which is now trading close to the 52-week low.
Although the results were not great, the stock is trading at only 8 times trailing earnings and 6 times forward earnings. If you believe as I do that the worst is now behind them then this might be a good time to add some shares.
One relative newcomer to the fracking industry is C&J Energy Services (NYSE: CJES). C&J went public just last year and the stock's performance since then has been dismal. The company has six fracking fleets that it's expanding by 50% as demand from Anadarko Petroleum and EOG Resources, two of its biggest customers, continues to grow. Although they are profitable and growing, some investors and analysts are concerned with the business emphasis on natural gas extraction.
With plans to add 3 more fracking fleets in 2012 and growing demand from big players in the oil and gas industry, C&J looks like they could also be well positioned for a turnaround. They are due to report quarterly earnings next week and that should provide more insights into their current strategy for adjusting to the changing demands.
I believe that CJES has several competitive advantages in the fracking industry. For one, they have newer equipment which is better designed to meet the specific demands of the regions where they operate. Secondly, they have strong management experience in executing complex completions. Although the company is young, they are headed up by an experienced management team, several of whom have more than 20 years experience in unconventional drilling methods. The company's 5 year annual revenue growth exceeds 120% and they currently have no debt. There is some risk associated with a young company that has lots of competition but I believe that the stock has plenty of upside from current levels as long as they can adapt to the changing market conditions. I personally have a small stake in CJES which I may add to after next week's earnings report.
EnigmaDude owns shares of C&J; Energy Services. The Motley Fool has no positions in the stocks mentioned above. 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.