Oil Service Companies to Buy on Pullbacks

Includes: BAS, CPX, RES, SLB
by: Michael Filloon

Oil and gas exploration and production companies have reported oil service cost increases. Equipment used in unconventional wells are in tight supply. Long waiting periods were extended in the Bakken as poor weather slowed mobilization of equipment and oil transportation. Long term contracts are required to ensure well services. Increased costs are being reported in:

  • Pressure Pumping
  • Oil Transport
  • Coiled Tubing
  • Rig Leases (1500 hp)

Pressure pumping is in great demand. In March, I stated the importance of pressure pumping to the service sector. There are several names that are looking good based on this specialty. Basic Energy Services (NYSE:BAS) provided a buying opportunity May 3rd, as its stock was down as much as 10%. Basic provides services not denominated by oil prices. Even if oil was to pull back to $100/barrel, it would still support higher service rates. Keep in mind, oil companies have found significant well cost production and reductions due to better techniques and technologies. Basic's pressure pumping segment has 142,000 hydraulic horse power. In the first quarter of 2011, it added an additional 32,000 hydraulic horse power. In the fourth quarter of 2009 revenues per truck was $64,000. In the fourth quarter of 2010 it increased to $85,000, and $88,000 the first quarter of 2011. On April 20th of 2011, Basic reported earnings. Its EPS was 20 cents. The street expected 3 cents. First quarter revenue increased 16% from the first quarter and 72% compared to the first quarter of 2010. Basic realized moderate growth in all segments from the fourth quarter of 2010:

  • Completion and Remedial Services-increased revenue by 20%
  • Fluid Services-increased revenues by 8%
  • Well Servicing-increased revenues by 17%
  • Contract Drilling-increased revenues of 14%

Basic is well positioned in several key plays. Basic stated its business should remain strong through the end of 2012, specifically pressure pumping. Basic had a great quarter. It has had 11 upward revisions to earning estimates over the past month.

RPC Inc. (NYSE:RES) derives 48% of its business from pressure pumping. On April 27th, RES reported earnings. Year over year revenue increased 79.1%. Net income increased 389%. Diluted EPS increased to 45 cents per share as opposed to 9 cents per share the first quarter of 2010. RES stated its record numbers for the first quarter of 2011 were helped by several variables:

  • 27.6% increase in US land rig count over the past year
  • 20.5% increase in the price of oil over the past year
  • 36.2% increase in unconventional drilling the past year

RES states they will continue to invest in expanding its pressure pumping business. Technical Services increased revenues by 82.5%. This segment is associated with pressure pumping and other services used to increase and maintain flow through the well. EBITDA per basic share increased by 165.8%. RES's earnings per share was 45 cents, compared to 42 cents estimated. RES has had 5 upward revisions in the past 30 days.

Complete Production Services (NYSE:CPX) saw an increase in pressure pumping, coiled tubing and fluid management. Complete stated they had significant problems with snow and shut downs due to bad weather, with North Dakota being the worst. Complete met expectations even with these difficulties. A second fraccing crew (50,000 HHP) was added to the Eagle Ford. When compared to the first quarter of 2010, Complete's consolidated revenue increased by 60%. Its first quarter of 2011 revenue breaks down into:

  • 30% Pressure Pumping
  • 19% Fluid Handling
  • 12% Well Servicing
  • 10% Coiled Tubing
  • 7% Wireline
  • 12% Other
  • 10% Other Completion Services

Complete currently has significant hydraulic horsepower in several of the leading shales. Like the two previous companies, it is adding pump trucks. By raising prices, Complete is able to take on debt to purchase additional hydraulic horsepower. The extra bottom line dollars allows Complete to increase its positions in some of the fastest growing areas. For a more in depth article please read, "Complete Production Services: A Full Service Play Provider."

Schlumberger (NYSE:SLB) missed its last quarterly earnings. It had an EPS of 71 cents versus estimates of 76 cents. In reservoir production, Schlumberger ranks in the top five of most categories:

  • Pressure Pumping Services #2
  • Completion Equipment and Service #4
  • Artificial Lift #2
  • Coiled Tubing Services #1
  • Specialty Chemicals #4

Schlumberger recently stated they were at record utilization with its pump trucks. Its North American business had a very good first quarter. Sales increased 56%, even with a decline in its eastern hemisphere business. Schlumberger is not only a leader, but has the means to increase the size of its fleet quickly. Reservoir production was very strong in the United States. Activity and pricing is continuing to improve. Schlumberger will continue to have a large part of drilling unconventional resource. Its new HiWAY flow-channel hydraulic fracturing technology is going well. It just completed its 1000 job. Its reservoir production group had first quarter revenue increase 44% year over year. Its operating income more then tripled.

These companies are well placed. Pressure pumping seems to be leading the way in oil service. Hydraulic horsepower is expensive. It takes time to build a fleet. These variables make it difficult to break into the business. I would watch these names closely.

Disclosure: I am long BAS, RES. Source: Basic Energy Services, Source: Schlumberger, Source: RPC Inc., Source: Complete Production Services. This is a list of stocks with large businesses in pressure pumping for horizontal wells. This is just a list and should not be used as a buy recomendation. Stocks can be volitile, and could cause significant losses. Be careful and study before making any investment.