I have done several write ups on different stocks in the oil services sector. I was motivated by a belief that many of these names are cheap going forward. When I say cheap, I mean inexpensive. The catalysts are the development of oil within shale plays in the United States and deep water drilling. Both of these, from a manufacturing and services point of view should see years and years of growth. The reason for this assumption, is the world could, in a short period of time, have difficulty producing enough oil. I am not saying we are in peak oil now, or even in five years, but we need new resource areas to produce oil.
Since much of the very large conventional oil deposits have been drilled, we need to find other areas to bring production on line. Two specific areas that can be explored are shale plays and deep water. There is one very important reason that oil service companies will benefit from this; both need specialized and technologically advanced equipment to recover the resource. In this case, I will identify a company well positioned for horizontal shale drilling.
Complete Production Services (CPX) provides specialized services to oil and gas companies with respect to completion and production services, drilling services and product sales. Put more simply, Complete is a play on shale oil. This stock is also inexpensive with respect to valuation. Complete currently trades at a P/E ratio of 26 with the forward P/E at 10. It is estimated that Complete will grow 134.3% this year. Over the next five years, Complete is estimated to grow 20% per year for the next five years. 16 analysts covering this stock estimate they will have earnings of $2.53 a share this year. This is quite good since this company made $1.08 per share last year.
Completion and production services comprise 88% of revenue as of the end of the fourth quarter of 2010. They do everything from preparing the well bore to stimulation to completion and production. Complete has market leadership in key basins. This company is focused on critical services. It has basin level experience and a modern fleet to handle those tasks. With respect to horizontal completions, this company can handle critical services like perforation, stimulation, drill outs and fluids management. Complete is specialized enough to handle projects such as those in the Bakken. These wells can have a vertical depth of 8000 feet and a 10000 lateral length resulting in up to 28 stages.
Complete's revenue by service line is:
30% Pressure Pumping
19% Fluid Handling
12% Well Servicing
10% Coiled Tubing
Pressure pumping is best in class performance and capabilities. Over 90% of HHP is less than five years old and configured for resource plays. Fleets are currently working 18 hours a day 7 days a week on average (from the second quarter of 2010). Three stages per day per fleet. 1.2 million pounds of proppant per day per fleet. That is the equivalent of five rail cars per day. Complete currently has several fleets working:
Barnett-6 fleets (121500 HHP)
Marcellus-3 fleets (94500 HHP)
Eagle Ford-2 fleets (63000 HHP)
Bakken-2 fleets (31500 HHP)
Pressure pumping is in high demand and Complete is trying to meet this demand by expanding its fleet:
First Quarter of 2011-31500 HHP Added
Second Quarter of 2011-49500 HHP Added
Third Quarter of 2011-81000 HHP Added
Fourth Quarter of 2011-49500 HHP Added
Contracts are currently in place for 67% of HHP capacity. The average contract has 2.3 years remaining. None of the contracts expire this year.
Complete also has market leadership in coiled tubing. Current United States and Mexico coiled tubing unit share is:
Complete (CPX) 11%
Baker Hughes (BHI) 11%
Halliburton (HAL) 8%
Superior (SPN) 8%
Cudd (RES) 7%
Key (KEG) 6%
Complete's coil tubing market share by basin is:
Complete's coiled tubing has extended reach and large diameter. Its United States fleet has 30 units, with 27 able to run 2 inch diameter tubing or greater. 7 units have large diameter extended reach capabilities. These have 2 inch or greater tubing and 19000 or more feet. Complete's management estimates that only 32 units are in the United States with this capability. Complete plans to add another five units with large diameter extended reach capabilities. Overall, its fleet has 57 units, 69% of which were built or refurbished in the last five years.
Complete has market share leadership in United States well servicing:
Complete's well service market position by basin is:
Niobrara (DJ Basin)-#2
Complete currently has a modern high end fleet with respect to well servicing. 59% of this fleet has more than 450 HP. United States competitors on average have only 30% of their fleet with capabilities over 450 HP. 80% of Complete's well service rigs are rated for greater than 14000 feet. Half of these rigs are five years old or less.
Complete's total fluid management system seems to have a great market opportunity. Water has become a scarce resource in some parts of the United States. Due to the increase in horizontal wells, longer laterals, more stages and larger stages, oil and gas companies need help acquiring that resource. Complete is realizing increased interest in this section of its company. Reasons being access, treatment and disposal options are unavailable to many smaller sized oil and gas companies.
Complete services many of the larger oil and gas companies. Names such as Chesapeake (CHK), Continental (CLR), and ExxonMobil (XOM) are current customers. Top ten customers, like these, make up 50% of Complete's revenue. As of the fourth quarter of 2010, Complete has been well positioned in the most active oil and gas resource plays. Revenue by region is:
South Texas 10%
Many of these locations are oil or liquids rich plays. Complete will continue to focus on North American resource plays. This company believes there is growth in this area for years to come. This company has every portion of the horizontal drilling process covered. Complete has stated they will acquire the competition to expand the business if needed, but believes they can grow organically if good deals are not there.
Complete will follow the system that has worked with respect to growth. This system has worked in the Marcellus and Eagle Ford. First they develop a base either throw acquisition or purchasing equipment. Then this company will expand that platform by adding additional services with companies it is working with in the area. This expansion is done over a time period and then added to as they develop more friendships/relationships with companies in the area.
There are several changes that have occurred over the past few years, that has increased interest in Complete. The first is this companies increase in revenue from 2009 to 2010. 2009 was a terrible year for many in this sector, and Complete was not immune. Modified EBITDA more than doubled in this time frame. Complete's debt to cap ratio has improved every year from 2005 to 2010. Net debt has reduced every year since 2008. Over this time frame, net debt was reduced by $323 million.
In summary, Complete looks to be well positioned going forward. This company has invested in the company and it has really paid off. Newer, high technological equipment provides a solid job, to help build relationships with companies that want service. Complete's large position in many of the largest basins should provide ample growth going forward. This growth will be handled in balanced and disciplined manor. Complete is a full service resource play provider.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: All estimates with respect to valuation such as P/E, Forward P/E, growth and analyst estimates are from Yahoo Finance.Source December 2010 American Oil and Gas Well Service Directory.